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July 2, 2009
Searching for Signs of a Recovery
We received a number of good questions from listeners to my “Searching for Signs of a Recovery” webcast last week, but time ran out before we could get to them.
Romeo Dator, co-manager of the U.S. Global Investors China Region Fund (USCOX), took a few minutes to offer up quick answers to a couple of questions relating to Asia.
What lessons could the United States learn from Asian countries to benefit its own economy?
The primary lesson the U.S. could learn from these countries is to use government policy to promote economic growth and prosperity. Right now, the United States is considering policies aimed at redistributing income and wealth—such an approach reduces incentives needed to grow the overall economy.
In China, by contrast, the government is promoting domestic growth with policies that get people to own housing and cars. This adds to the wealth effect.
When the infrastructure is improved in these Asian markets, will their economies improve by default?
Economic development depends on a reliable network of roads, bridges, airports, power generation, etc., so that goods and services can easily move from one place to another. Having them doesn’t guarantee growth, but without them, economic expansion is constrained.
Infrastructure’s impact can be seen in real-life examples from the past.
It was infrastructure, along with low wages, that allowed China to become the manufacturer to the world. Mexico, India and other emerging nations don’t have comparable manufacturing infrastructure and thus their economies aren’t as developed.
If you didn’t get the chance to tune in to the “Searching for Signs of Recovery” webcast or would like to view it again, the replay is here. To view the presentation slides only, click here.
Please consider carefully the fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. 09-440
Related Categories: Our Commentaries, Energy & Natural Resources, Infrastructure, Economy & Markets, Chindia
July 1, 2009
Obama and the Market’s Carnival Ride
We probably don’t have to tell you that being in the stock market in 2009 has been like spending six months on Coney Island’s Cyclone roller coaster—turn by turn a terrifying and exhilarating ride.
In the graphic below, the blue line shows the performance of the S&P 500 since Barack Obama became president on January 20, while the red line is the average performance of that index for each presidential term going back to Dwight Eisenhower’s first term in 1953.
The Presidential Election Cycle is one of the many commodity seasonal and other cycles that we monitor to help inform our investment decisions.
The typical pattern for the first five-plus months of a presidential term is mostly sideways as new administrations take shape and second-termers reshuffle people and set new priorities.
But President Obama didn’t have the luxury of an easing-in period, since markets were already in deep distress when he took the oath of office.
After a brief inauguration rally, the sharp downward trend continued until a bottoming-out in early March, with the S&P 500 falling more than 16 percent from the time the new president took his left hand off the bible.
I was in New York in early March, and never had I seen so much negativity among those in the investing world. Even members of the financial media, who are supposed to keep an arm’s length distance from the news, were openly in despair about the markets.
After the S&P 500 closed at a decade low on March 9, there came a series of events in Washington that gave me confidence at the time that we had finally seen the bottom.
On March 10, Congress let it be known that the uptick rule for short sales would be restored in some form. The same day, President Obama signed a $410 billion economic stimulus measure.
A couple of days later, at a committee hearing in the House of Representatives, the head of the board overseeing accounting standards said new guidance was coming on applying FAS 157’s mark-to-market rules—these rules compelled major banks and other financial companies to write down many billions of dollars worth of securities on their books, weakening them to the point that they required many billions of federal dollars just to stay alive.
Less than a week after that, the Federal Reserve announced it would buy up to $1.5 trillion in mortgage-related securities this year and another $300 billion in long-term Treasury debt. And soon after came the G-20 meeting in London, where the major countries of the world committed more than $1 trillion to a global recovery plan.
All of this good news injected optimism into the market. By the end of April, the S&P 500 was up nearly 30 percent from its March low and it gained another 8 percent by mid-June before flattening out at a level well above the average for this point in a presidential term.
Dramatic ups and downs can be exciting at an amusement park, but no one wants to see that kind of volatility in their investment portfolio.
More positive indicators are emerging, so as we start the second half of 2009, we are increasingly confident that the Cyclone-like thrill ride that has marked President Obama’s tenure so far will be replaced by steadier and more sustainable markets.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. 09-442
Related Categories: Economy & Markets
June 29, 2009
Ten Taxpayers Walk Into a Bar…
A friend recently sent me a story that does a good job of explaining the problem with our tax system in simple terms.
I did some checking and discovered that this story—and a similar one about ten guys at a bar—has been around since 2001 but it’s still a mystery where the original story came from.
Regardless of its origins, the piece is a thought-provoking look at our tax system.
Let’s put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men—the poorest—would pay nothing; the fifth would pay $1, the sixth would pay $3, the seventh $7, the eighth $12, the ninth $18, and the tenth man—the richest—would pay $59.
That’s what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement—until one day, the owner threw them a curve.
“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily meal by $20.” So now dinner for the ten only cost $80.00.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free.
But what about the other six—the paying customers? How could they divvy up the $20 windfall so that everyone would get his “fair share?”
The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would end up being paid to eat their meal.
So the restaurant owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59.
Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.
“I only got a dollar out of the $20,” declared the sixth man who pointed to the tenth.
“But he got $7!”
“Yeah, that’s right,” exclaimed the fifth man, “I only saved a dollar, too…
It’s unfair that he got seven times more than me!”“That’s true!” shouted the seventh man, “why should he get $7 back when I got only $2?
The wealthy get all the breaks!”“Wait a minute,” yelled the first four men in unison, “We didn’t get anything at all.
The system exploits the poor!”The nine men surrounded the tenth and beat him up.
The next night he didn’t show up for dinner, so the nine sat down and ate without him.
But when it came time to pay the bill, they discovered, a little late what was very important.
They were $52 short of paying the bill!
Imagine that!
And that, boys and girls, journalists and college instructors, is how the tax system works.
The people who pay the highest taxes get the most benefit from a tax reduction.
Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.
Where would that leave the rest?
Unfortunately, most taxing authorities anywhere cannot seem to grasp this rather straightforward logic!
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Related Categories: Odds & Ends
June 26, 2009
Investor Talk: Miners and the Dollar
Natural resource companies with global operations have no shortage of business challenges to deal with—supply and demand trends, political instability, regulatory hurdles, remote and dangerous working conditions, inadequate infrastructure and much, much more.
And even if they have managed all of these factors, there’s another variable that can have a huge impact on their success and yet is completely out of their control.
It’s the value of the U.S. dollar.
Commodities are bought and sold in dollars, so if you are a Russian manufacturer seeking to buy 1,000 metric tons of copper from Peru, you first have to get your hands on enough dollars to do the deal.
If the dollar strengthens against the Russian ruble, that 1,000 tons of copper will cost the manufacturer more because it will take more rubles to buy each dollar. Likewise, if the dollar weakens, the copper will be cheaper for the manufacturer because it will take fewer rubles to buy each dollar.
For the miners, a weak dollar is good because it stimulates demand for their output, but a strong dollar can also produce a benefit.
The chart above from PriceWaterhouseCoopers shows how the currencies of five key natural resources producing nations performed compared to the dollar in 2008.
The dollar gained value against all five to varying degrees—more than 40 percent against the South African rand, between 30 and 40 percent against the Chilean peso, Brazilian real and Australian dollar, and more than 20 percent against the Canadian dollar.
A strengthening dollar can help miners whose operating costs are in non-dollar currencies. These companies are paid for their production in appreciating dollars, while paying their labor, suppliers and other operating costs in depreciating currencies.
This explains in part why South African gold miners performed much better than their peers in late 2008—the rand depreciated 28 percent against the dollar in the fourth quarter alone. This lowered operating costs and improved relative profitability.
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Related Categories: Energy & Natural Resources
June 23, 2009
In Search of Promising Gold Prospects
U.S. Global Investors travels the world in search of new investment opportunities in the natural resources and emerging markets sectors. Often that travel is to remote provinces that also can present physical and political dangers. Jayant Bhandari, a U.S. Global consultant, recently visited gold projects deep in the interior of Colombia. Here’s his dispatch, along with photos.
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We visited Ventana Gold’s La Bodega project, which is a short helicopter ride from the city of Bucaramanga in the eastern interior of Colombia, not far from the border with Venezuela.
La Bodega is still an early stage project, but it has released some drill results that have attracted some attention. Adjacent to La Bodega is Greystar Resources’ Angostura project, which has measured and indicated resources of more than 10 million ounces of gold and 50 million ounces of silver, plus an inferred resource of another 3 million-plus ounces of gold.
Gold mining in Colombia has a history going back nearly five centuries, and the country is one of the world’s top producers. According to the World Gold Council, Colombia produced 40 tonnes of gold in 2007 (18th in the world), double its output in 2002.
In Bucaramanga, we were escorted by private security and the army provided protection when we were at the camp site of La Bodega. While the private security was an attempt to be extra safe, it was obvious that the security has improved very significantly. Those who have been to Colombia on earlier occasions attest to the fact that there has been a huge improvement in the security, as well as in the economic and social situation.
The bad stories of the past have still not brought the tourists back to the beautiful capital city of Bogota, where we needed no security and could walk around freely.
Alvaro Uribe, Colombia's pro-business and pro-American president, is currently serving his second four-year term, and a constitutional referendum effort is under way to allow him to stay for a third term.
During Uribe’s presidency, the Revolutionary Armed Forces of Colombia (FARC) and other armed rebel groups have suffered a series of military defeats. Polls consistently show him as very popular—his job approval rating as of last month was 68 percent. It had been as high as 91 percent in June 2008, after a military operation freed 15 high-profile hostages.
Uribe gives very high importance to creating an investment climate so as to create fiscal resources to invest in the welfare of the people and to eliminate social injustices. He has also sparked some controversy -- the army has been blamed for human rights abuses and his attempt to change the constitution to run for a third term is a hot topic.
Overall, however, we returned with a positive opinion of the situation in Colombia.
The following securities mentioned in the article were held by one or more of U.S. Global Investors’ clients as of 3/31/09: Greystar Resources, Ventana Gold. 09-431
Related Categories: Gold, Other Emerging Markets
©2009 U.S. Global Investors, Inc. All rights reserved. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The information posted above is dated material and was relevant on the date posted.