Share this page with your friends:

Print

Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Time to Take Trump Seriously on Infrastructure Spending?
December 8, 2016
 

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Cancellation new Air Force One project

Earlier I shared with you that when it comes to President-elect Donald Trump, the media takes him literally but not seriously. His supporters, on the other hand, take him seriously but not always literally.

We saw an example of this polarity Tuesday morning when Trump took a shot at Boeing, tweeting to his nearly 17 million Twitter followers that the jet-manufacturer “is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!”

When journalists sought clarification, Trump said he wants Boeing to make money, “but not that much money.”

As the Wall Street Journal pointed out, the current Air Force One has been in use for 30 years—since Ronald Reagan’s administration—and includes many cutting-edge modifications for communications and defense. It’s designed to withstand a nuclear blast. For the value we get out of the president’s main ride, in other words, the exorbinant sticker price might not be so exorbinant as it initially appears.

But then, the $4 billion Trump refers to couldn’t be confirmed. Boeing responded by saying it’s currently under contract to build the jet for only $170 million, and production hasn’t even begun yet.

Again, in questioning the details of Trump’s tweet, the media might be missing the forest for the trees. It’s possible the president-elect means simply that we need to keep government cost overruns in check—not literally cancel the Air Force One order—something we can all agree with.

Investors Take Trump Seriously—and Somewhat Literally

Investors have so far managed to find the right balance between taking Trump seriously and literally, to a certain extent. Since Election Day, small-cap stocks have rallied more than 12 percent, suggesting the market sees Trump’s “America First” policies benefiting them the most. Because they have less exposure to foreign markets than blue-chip companies, small caps are in an attractive position to take advantage of lower corporate taxes, streamlined regulations and a stronger U.S. dollar.

The market’s also betting big on Trump’s proposal to spend $1 trillion on infrastructure over the next 10 years. For the one-year and three-month periods, the energy and materials sectors were among the best performers in the S&P 500 Index. Both landed in the “leading and gaining” quadrant in the chart below. 

energy and materials among the best sp 500 sectors
click to enlarge

We see similar results in the small-cap Russell 2000 Index. Materials and processing was the best performer for the one-year period while energy led over the past three months.

energy and materials among the best russell 2000 sectors
click to enlarge

Granted, a lot of the growth in energy can be attributed to OPEC’s recent announcement that it would trim production for the first time since 2008. Such an agreement was rumored back in October. Oil rallied sharply following the announcement but has retreated slightly on news that the cartel raised production to more than 34 million barrels a day in November. Speculation is also high on whether non-OPEC countries such as Russia will join the coordinated effort to help prices recover.

But like small-cap stocks, energy and materials appear to be getting a boost on hopes that Trump will make good on his commitment to opening the fiscal valves. If he succeeds at getting what he wants from Congress, we could very well see another major infrastructure boom and commodities bull market similar to the one led by China a decade ago.

No Better Time Than Now

Construction Californias Shasta Dam

It’s worth noting that Trump will likely face some tough opposition from Congress. Even though most of the $1 trillion will allegedly come from private investment, the same fiscal conservatives who said no to President Obama’s 2009 stimulus package, worth over $800 billion, might also balk at Trump’s request.

But if the government is serious about rolling out such a monumental spending package, there’s really no better time than now, with borrowing costs still at near-historic lows.

As Steve Bannon, Trump’s controversial advisor, told the Hollywood Reporter: “With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Shipyards, ironworks—get them all jacked up. We’re just going to throw it up against the wall and see if it sticks.”

I don’t know if I’d be so flippant about $1 trillion, but most everyone agrees that more needs to be done about our nation’s infrastructure. According to the American Society of Civil Engineers (ASCE), each American household could lose as much as $3,400 per year if roads, bridges and tunnels never see an upgrade. The longer we put off repairing our infrastructure, the more expensive it might get.

In a report this week, Deutsche Bank agreed that the U.S. should dream big or go home:

To drive strong infrastructure spending growth, the country will need to get much more aggressive in building new (or replacing) major transport bridges and tunnels, and to reach for Earth-altering infrastructure that addresses national risks like floods, droughts… If the U.S. is to meaningfully stimulate its economy via infrastructure, it must think bigger and act quicker.

Besides roads and bridges, Deutsche writes, the U.S. should pursue “ten-figure projects” such as levee systems, storm protection systems, water tunnels and river dredging, not to mention “new science and technology super structures like new rocket building and launch facilities, biotech labs,” and “next-generation communication and air traffic control.”

Such projects would benefit many more people than those using them. According to BCA Research, public spending on infrastructure has one of the highest multiplier effects, making it more effective at stimulating the economy than tax cuts.

Not All Stimulus Is Created Equal

 

Estimated Multipliers

Type of Activity

Low Estimate

High Estimate

Purchases of goods and services by the federal government

0.5x

2.5x

Transfer payments to state and local governments for infrastructure

0.4x

2.2x

Two-year tax cuts for lower and middle-income people

0.3x

1.5x

One-year tax cut for higher-income people

0.1x

0.6x

Finally, the U.S. is due for another major infrastructure build. Under Obama, total public construction spending dropped relative to spending during his two predecessors’ administrations

total public u.s. construction spending fell under president obama
click to enlarge

Global Economy at Point of Inflection: OECD

Increasing infrastructure investment would be good not just for the U.S. but also the world economy, which has struggled to gain traction for the past couple of years. In its just-released Global Economic Outlook, the Organization for Economic Cooperation and Development (OECD) strongly endorsed the idea of “using the fiscal levers to escape the low-growth trap”—similar to what Trump has proposed.

With the U.S. and China both planning sweeping stimulus efforts in the next one to two years, the Paris-based group sees global GDP growing 3.6 percent in 2018, the fastest pace since 2011. The OECD also revised its earlier 2017 growth estimate to 3.3 percent, up from 3.2 percent.

increased government spending could help global growth pick up speed
click to enlarge

Speaking in Paris last month, OECD Secretary-General Ángel Gurría commented that “there is reason to hope that the global economy may be at a point of inflection.”

I agree. Although I have my differences with Trump, I’m optimistic he can negotiate an infrastructure deal that will jumpstart growth, both here and abroad.

Explore investment opportunities in commodities and natural resources!

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 9/30/2016: The Boeing Co.

 
 

Share “Time to Take Trump Seriously on Infrastructure Spending?”

Here’s What Oil Did the Last Time OPEC Cut Production
December 5, 2016
 

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Here's What Oil Did the Last Time OPEC cut Production

It finally happened. For the first time since 2008, the Organization of Petroleum Exporting Countries (OPEC) agreed to a crude oil production cut last week, renewing hope among producers and investors that prices can begin to recover in earnest after a protracted two-year slump, one of the worst in living memory.

The last three times the cartel agreed to trim output—in 2008, 2001 and 1998—oil rallied in the following weeks and months. Of course, there’s no guarantee the same will happen this time around, as other market forces are at play, but it’s helpful to look at the historical precedent.

OIl Historically Rallied in the Two Years Following OPEC's Agreement to Cut Production
click to enlarge

OPEC’s decision follows a strong endorsement from Goldman Sachs, which upgraded its rating on basic materials to overweight for the first time in four years. Analysts see commodities gaining 9 percent on average over the next three months, 11 percent over the next six months.

As reported by TheStreet’s Paul Whitfield, Goldman’s change of heart was prompted by “the recent acceleration in global PMIs (purchasing managers’ indexes),” which “suggests commodity markets are entering a cyclically stronger environment.” 

The JPMorgan Global Manufacturing PMI rose slightly in November to a 27-month high of 52.1, extending sector expansion for the sixth straight month—very encouraging news.

JPMorgan Global Manufacturing PMI continues upward momentum
click to enlarge

As I’ve shared with you many times before, our own research has shown a strong correlation between PMI performance and commodity prices three and six months out. I’m thrilled to see Wall Street and media outlets coming around to this realization as well.

In short, OPEC’s production cut is constructive for energy in the near term, while a rising PMI is good news for the long term.

$70 Oil Next Year?

Since oil collapsed in September 2014, as much as $4 billion have been wiped from oil workers’ wages in the U.S. alone, according to Bureau of Labor Statistics data. Countries that rely heavily on oil revenue—Venezuela, Colombia, Russia and Nigeria, notably—have had to stretch balance sheets. And for the first time in nearly 40 years, Alaska, where the oil industry accounts for half of all economic activity, is scheduled to impose an income tax by 2019.

Many analysts now find reason to be optimistic about a recovery in energy. Speaking to the Houston Chronicle, David Pursell of energy investment bank Tudor, Pickering, Holt & Co. predicts “2017 will be a better year for oil and gas activity than we anticipated.” Pursell sees crude possibly rallying above $70 a barrel sometime next year. 

The OPEC deal, announced last Wednesday, aims to reduce production by 1.2 million barrels a day, or about 1 percent of global output. For comparison’s sake, the cartel, which controls a third of all oil production, agreed to a reduction of 2.2 million barrels a day in 2008. Although not an OPEC member, Russia has also agreed to trim production—by about 300,000 barrels a day—the first time it’s cooperated with OPEC since 2001.

Following the announcement, West Texas Intermediate (WTI) crude surged above $50 a barrel.

Crude oil surges above $50 a barrel on OPEC production cut announcement
click to enlarge

Meanwhile, investors piled into oil ETFs, with inflows into one surpassing $1 billion on Thursday alone. Shares of Halliburton, Continental Resources and California Resources all saw dramatic spikes.

Oil explorers & producers jump on production cut news
click to enlarge

The Challenges Ahead

Some investors are understandably cautious. OPEC doesn’t have the authority to enforce compliance from its 14 member-nations, and output has typically exceeded quotas.

What’s more, it’s likely U.S. shale producers, which today operate at lower costs compared to other players, will be first to take advantage of a bump in prices. Drilling activity is already accelerating. Since May, the number of active oil rigs in North America has climbed 50 percent to 474, as of November 23.

Most low-cost oil is in U.S. Shale Reserves
click to enlarge

“U.S. oil production growth is all but guaranteed to return in 2017,” according to Joseph Triepke, founder of oil research firm Infill Thinking. Triepke adds that as many as 150 rigs could be reactivated next year in Texas’ Permian Basin alone.

It’s there, in the Wolfcamp formation of the Permian, that the United States Geological Survey (USGS) recently discovered 20 billion barrels of “technically recoverable” oil, the largest deposit ever to be found in the U.S. Bloomberg reports that the deposit is worth an estimated $900 billion at today’s prices.  

On the demand side, higher prices could spell trouble in emerging countries whose currencies have weakened against the U.S. dollar in recent months, especially since Donald Trump won the presidential election. Because oil is priced in dollars, it’s become more expensive in China and India, the second and third largest oil consumers following the U.S.

Gold Looks Technically Oversold, Ready for a Price Reversal

As I often say, every asset class has its own DNA of volatility, which is measured by standard deviation. Specifically, standard deviation gauges the typical fluctuation of a security or asset class around its mean return over a period of time ranging from one day to 12 months or more.

This brings us to mean reversion, which is the theory that, although prices might trend up for some time (as in a bull market), or fall (as in a bear market), they tend to move back toward their historic averages eventually. Such elasticity is the basis for knowing when an asset is overbought or oversold—and when to sell or buy.

As you can see in the oscillator below, gold looks oversold right now and is nearing a “buy” signal, after which we can statistically expect it to return to its mean.

Gold 60-Day Percent Change Oscillator
click to enlarge

Gold’s current standard deviation for the 60-day period is about 7 percent—you can reasonably expect it to move this much over a two-month period, therefore, 68 percent of the time.

For more on standard deviation and mean reversion, I invite you to download my whitepaper, “Managing Expectations: Anticipate Before You Participate in the Market.”

The J.P. Morgan Global Purchasing Manager’s Index is an indicator of the economic health of the global manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2016.

 
 

Share “Here’s What Oil Did the Last Time OPEC Cut Production”

Modi’s Demonetization Is a Cure Worse Than the Disease
December 1, 2016

overnight indian prime minister narendra modi killed 90 nations currency

Next Tuesday will mark four weeks since Indian Prime Minister Narendra Modi made his surprise demonetization announcement that has sent shockwaves throughout the South Asian country’s economy. In an effort to combat corruption, tax evasion and counterfeiting, all 500 and 1,000 rupee banknotes are no longer recognized as legal tender.

I've previously written about the possible ramifications of the “war on cash,” which is strengthening all over the globe, even here in the U.S. Many policymakers, including former Treasury Secretary Larry Summers, are in favor of axing the $100 bill. In May, the European Central Bank (ECB) said it would stop printing the 500 euro note, though it will still be recognized as legal currency. The decision to scrap the “Bin Laden” banknote, as it’s sometimes called, hinged on its association with money laundering and terror financing.

Electronic payment systems are convenient, fast and easy, but when a government imposes this decision on you, your economic liberty is debased. In a purely electronic system, every financial transaction is not only charged a fee but can also be tracked and monitored. Taxes can’t be levied on emergency cash that’s buried in the backyard. Central banks could drop rates below zero, essentially forcing you to spend your money or else watch it rapidly lose value.

Inevitably, low-income and rural households have been hardest hit by Modi’s currency reform. Barter economies have reportedly sprung up in many towns and villages. Banks have limited the amount that can be withdrawn. Scores of weddings have been called off. Indian stocks plunged below their 200-day moving average.

indian stocks tumble following modis demonetization announcement
click to enlarge

Demonetization has also weighed heavily on the country’s manufacturing sector. The Nikkei India Manufacturing PMI fell to 52.3 in November from October’s 54.4. Although still in expansion mode, manufacturing production growth slowed, possibly signaling further erosion in the coming months.

Indian Manufacturing Cools in December
click to enlarge

India Runs on Cash

The two Indian bills in question, worth $7.50 and $15, represented an estimated 86 percent of all cash in circulation by value. No two bills in the U.S. so dominate transactions quite like the Rs500 and Rs1,000 notes, but imagine if tomorrow the Treasury Department killed everything north of the $20 bill. Despite the widespread availability and acceptability of electronic payment systems, this would be devastating to many American consumers who prefer cash or who are underbanked.

Because India’s economy relies predominantly on cash, the effects will be far greater. ATMs are scarce, and few rural Indians have a credit or debit card. An estimated 600 million Indians—nearly half the country’s population—are without a bank account. Three hundred million have no government identification, necessary to open an account. By comparison, about 7 percent of Americans are unbanked, with an additional 20 percent underbanked, according to the Federal Deposit Insurance Corporation (FDIC).

In india cash is king
click to enlarge

This is one of the main reasons why Indians have traditionally held gold in such high demand. Many have little faith in banks and other financial institutions, preferring instead to store their wealth in something more reliable and tangible. So great is Indians’ appetite for the yellow metal that prices have historically surged in September, following the end of the monsoon season and ahead of Diwali and the wedding season, when gifts of gold jewelry are typically given.

“Gold is a need of the [Indian] people,” says Suresh Jain, owner of India’s B.J. Jain Jewellers, as quoted in the Financial Times. “It is not a luxury item. It is essential.”

Ironically, though, Modi’s demonetization scheme will likely hurt gold demand in the long run, “by dramatically reducing the stock of black money hitherto used in a large chunk of purchases,” according to the Financial Times.

In the three days following the announcement, Apple iPhone sales surged, equaling three quarters of the sales that typically happen in a month, as people tried to move their black money. Shopkeepers obliged by backdating receipts. Demand for other luxury items, such as Rolex watches, also surged.

Last year, our office was visited by the founders of MoneyOnMobile, which provides full point-of-sale services to Indians who don’t have ready access to ATMs. Think of it as the Indian version of Square. It’s likely that with demonetization wiping out so much paper currency, demand for services such as MoneyOnMobile’s will skyrocket.  

Good Intentions, Bad Execution

India is right to tackle corruption

Admittedly, high cash usage often comes with a cost. In 2013, research firm McKinsey found a strong correlation between high cash usage and the size of a country’s shadow economy. The size of India’s own shadow economy—which includes black market transactions and undeclared work—is roughly a quarter the size of gross domestic product (GDP).

Indeed, India suffers from a serious rash of corruption, which hurts honest, hard-working families. According to Transparency International, the South Asian country ranks 76 out of 168 countries in its 2015 Corruption Perceptions Index. In May, Indian government data showed that a scant 1 percent of Indians pay income taxes.

So yes, corruption is a problem. But in the case of ditching paper money altogether, the cure is worse than the disease.

In a New York Times op-ed, Indian economist and World Bank Vice-President Kaushik Basu strongly criticized the policy, rightly pointing out that it’s “mostly hurting people who aren’t its intended targets.”

“The government’s wish to tackle these problems is laudable,” Basu added, “but demonetization is a ham-fisted move that will put only a temporary dent in corruption, if even that, and is likely to rock the entire economy.”

I agree. Demonetization will hurt low-income and rural families the most, while those who’ve benefited from the country’s deep shadow economy will likely find other avenues to traffic in corruption.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also-called the BSE 30 or simply the SENSEX, is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange.

The Nikkei India Manufacturing PMI is based on data compiled from monthly replied to questionnaires sent to purchasing executives in over 400 industrial companies. The panel is stratified by GDP and company workforce size. The manufacturing sector is divided into the following eight broad categories: Basic Metals, Chemicals & Plastics, Electrical & Optical, Food & Drink, Mechanical Engineering, Textiles & Clothing, Timber & Paper and Transport.

The Corruption Perception Index, developed in 1995 by Transparency International, ranks almost 200 countries on a scale of zero to 10, with zero indicating high levels of corruption and 10 indicating low levels. Developed countries typically rank higher than developing nations due to stronger regulations.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2016.

Share “Modi’s Demonetization Is a Cure Worse Than the Disease”

Fidel Castro’s Cuba vs Lee Kuan Yew’s Singapore: A Tale of Two Economies (UPDATE)
November 29, 2016

On Friday, November 25, Fidel Castro died at age 90. The former revolutionary and hardline dictator of Cuba was among the 20th century’s longest-serving leaders, third only to Elizabeth II and Bhumibol Adulyadej, the King of Thailand, who passed away in October.

Castro’s death comes at a pivotal moment in U.S.-Cuban relations. With trade between the two countries on the path to normalization, and with U.S. airlines making scheduled flights to Havana for the first time in more than 50 years, President-elect Donald J. Trump has pledged to reinstate many of the Cold War embargos that were lifted by President Barack Obama.

“If Cuba is unwilling to make a better deal for the Cuban people, the Cuban/American people and the U.S. as a whole, I will terminate deal,” Trump tweeted on November 28.

In light of Castro’s passing, we are rerunning this Frank Talk from March 2015, in which Frank compares and analyzes the widely divergent economies of Cuba and Singapore under their now-deceased leaders, Castro and Lee Kuan Yew. 

A Victoria's Secret in the Toronto Pearson International AirportIt would be nearly impossible to find two world leaders in living memory whose influence is more inextricably linked to the countries they presided over than Cuba’s Fidel Castro and Singapore’s Lee Kuan Yew, who passed away this Monday at the age of 91.

You might find this hard to believe now, but in 1959—the year both leaders assumed power—Cuba was a much wealthier nation than Singapore. Whereas Singapore was little more than a sleepy former colonial trading and naval outpost with very few natural resources, Cuba enjoyed a thriving tourism industry and was rich in tobacco, sugar and coffee.

Fast forward about 55 years, and things couldn’t have reversed more dramatically, as you can see in the images below.

Cube in 1950, Singapore in 1950, Cuba today, Singapore today

The ever-widening divergence between the two nations serves as a textbook case study of a) the economic atrophy that’s indicative of Soviet-style communism, and b) the sky-is-the-limit prosperity that comes with the sort of American-style free market capitalism Lee introduced to Singapore.

Sound fiscal policy, a strong emphasis on free trade and competitive tax rates have transformed the Southeast Asian city-state from an impoverished third world country into a bustling metropolis and global financial hub that today rivals New York City, London and Switzerland. Between 1965 and 1990—the year he stepped down as prime minister—Lee grew Singapore’s per capita GDP a massive 2,800 percent, from $500 to $14,500.

Since then, its per capita GDP based on purchasing power parity (PPP) has caught up with and zoomed past America’s.

Lee Kuan Yew's Singapore Flourished while Fidel Castro's Cuba Floundered
click to enlarge

Under Castro and his brother Raúl’s control, Cuba’s once-promising economy has deteriorated, private enterprise has all but been abolished and the poverty rate stands at 26 percent. According to the CIA’s World Factbook, “the average Cuban’s standard of living remains at a lower level than before the collapse of the Soviet Union.” Its government is currently facing bankruptcy. And among 11.3 million of Cuba’s inhabitants, only 5 million—less than 45 percent of the population—participate in the labor force.

Compare that to Singapore: Even though the island is home to a mere 5.4 million people, its labor force hovers above 3.4 million.

Singapore Had Third-Highest GDP Based on Purchasing Power Parity (PPP) Per Capita

Because of the free-market policies that Lee implemented, Singapore is ranked first in the world on the World Bank Group’s Ease of Doing Business list and, for the fourth consecutive year, ranked second on the World Economic Forum’s Global Competitiveness Report. The Heritage Foundation ranks the nation second on its 2015 Index of Economic Freedom, writing:

Sustained efforts to build a world-class financial center and further open its market to global commerce have led to advances in… economic freedoms, including financial freedom and investment freedom.

Cuba, meanwhile, comes in at number 177 on the Heritage Foundation’s list and is the “least free of 29 countries in the South and Central America/Caribbean region.” The Caribbean island-state doesn’t rank at all on the World Bank Group’s list, which includes 189 world economies.

Many successful international businesses have emerged and thrived in the Singapore that Lee created, the most notable being Singapore Airlines. Founded in 1947, the carrier has ascended to become one of the most profitable companies in the world. It’s been recognized as the world’s best airline countless times by dozens of groups and publications. Recently it appeared on Fortune’s Most Admired Companies list.

Singapore AIrlines

We at U.S. Global Investors honor the legacy of Lee Kuan Yew, founder of modern-day Singapore. He showed the world that when a country chooses to open its markets and foster a friendly business environment, strength and prosperity follow. Even on the other side of the globe, the American Dream lives on.

 

 

The Global Competitiveness Index, developed for the World Economic Forum, is used to assess competitiveness of nations. The Index is made up of over 113 variables, organized into 12 pillars, with each pillar representing an area considered as an important determinant of competitiveness: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation.

The Ease of Doing Business Index is an index created by the World Bank Group. Higher rankings (a low numerical value) indicate better, usually simpler, regulations for businesses and stronger protections of property rights.

The Index of Economic Freedom is an annual index and ranking created by The Heritage Foundation and The Wall Street Journal in 1995 to measure the degree of economic freedom in the world's nations.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2016.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Share “Fidel Castro’s Cuba vs Lee Kuan Yew’s Singapore: A Tale of Two Economies (UPDATE)”

The Great American Splurge
November 28, 2016

Retail madness: more than 137 million american consumers plan to shop thanksgiving weekend

In a Frank Talk last week, I discussed the surge in small-cap stocks since Donald Trump’s election. A bet on smaller domestic stocks, I wrote, is a bet that Trump will deliver on his promise to “make America great again.” He plans to lower taxes, streamline regulations and spend big on infrastructure—all of which has led to a rally in the small-cap Russell 2000 Index and the 10-Year Treasury yield.

big moves in small-cap stocks and treasury yields since trump's election
click to enlarge

The ramifications of government policy change under Trump, especially fiscal policy, have the potential to be huge. Since Election Day, we’ve seen the strong U.S. dollar hurt gold, while the Canadian dollar and Chinese renminbi have dropped.

The question now is whether Federal Reserve Chair Janet Yellen will put the brakes on the so-called Trump rally. She asserts that Fed policy is not politically motivated, but I wonder how many people actually believe that. She’s already criticized Trump’s plans to tear up or at least significantly weaken Dodd-Frank Wall Street Reform.

Both former Fed Chair Alan Greenspan and billionaire investor Warren Buffett have recently suggested Dodd-Frank needs to go, with Greenspan telling CNBC that he’d love to see the 2010 law “disappear.” Buffett, meanwhile, commented in an interview this month that the U.S. is “less well equipped to handle a financial crisis today than we were in 2008. Dodd-Frank has taken away the Federal Reserve’s ability to act in a crisis.”

Retail madness: more than 137 million american consumers plan to shop thanksgiving weekend

Since the election, banks have seen strong inflows, as investors are betting that the financial industry could be one of the largest beneficiaries of Trump’s administration.

According to Evercore ISI analyst Glenn Schorr, “Animal spirits and higher confidence have returned, and investors are now expecting a better revenue, expense, tax, capital and regulatory profile for financials.” In addition, “we might have just flipped from feeling pretty late cycle right back to early cycle depending on how much we want to buy into Trump’s pro-growth agenda.”

Americans Take Advantage of Low Inflation

Last year, lower gas prices helped American households save $700 on average. Although savings aren’t likely to be as much this year, Americans managed to save in other ways—namely, food and beverages.

According to the American Farm Bureau Federation (AFBF), the cost of a typical Thanksgiving meal for 10—consisting of a turkey, stuffing, sweet potatoes, cranberries, a pumpkin pie and other traditional sides—fell 24 cents from last year’s average to $49.87. That translates to a per-person cost of just under $5, confirming that “U.S. consumers benefit from an abundant high-quality and affordable food supply,” says AFBF Director of Market Intelligence Dr. John Newton.

As I’ve said multiple times before, the U.S. shale oil boom helped deliver an “oil peace dividend” to the world, which drove transportation costs and, therefore, food and beverage costs down over the past two years.

A Thanksgiving Meal fell below $5 per person this year
click to enlarge

Low fuel costs also encouraged a huge number of families to hit the highway this Thanksgiving weekend. According to AAA, roughly 50 million people—about 1 million more than last year— journeyed 50 miles or more from their homes, the most since 2007.

With gas prices at their second lowest level in a decade, driving remains the most popular mode of transportation. But as I previously shared with you, flying has also become more and more affordable for many Americans. This week, an estimated 27 million passengers flew on U.S. airlines, an increase of 2.5 percent over last year.

27 million passengers will fly U.S. airlines this Thanksgiving week, up 2.5 percent from last year

Black Friday Is the New Cyber Monday

It isn’t just travel that’s back to pre-recession levels. This year, it appears more Americans than ever before—enjoying low inflation and rising wages—will be spending their savings on gifts for friends and family, if estimates from the National Retail Federation (NRF) are accurate.

According to the retail trade association, as many as 137.4 million consumers planned to shop this Thanksgiving weekend, nearly a whopping 60 percent of Americans. This figure is up from last year's 135.8 million people. This includes both in-store shopping as well as online shopping, which, as you might have noticed, is becoming a huge deal.

Black Friday remains the busiest shopping day, with 74 percent of consumers telling the NRF they planned to venture out into the crowds to take advantage of gotta-have-it bargains.

But e-commerce is quickly catching up, with the internet-only Cyber Monday second in sales to Black Friday. For the first time this holiday season, online purchases are expected to account for more than 10 percent of all retail sales, according to consumer research firm eMarketer. “Online sales,” reports Bloomberg, “are likely to climb to $94.7 billion, representing almost 11 percent of total sales in November and December, an all-time high.”

E-commerce is set to account for a record share of retails sales this holiday season
click to enlarge

The growing popularity of online shopping has prompted more and more brick-and-mortar retailers to push their e-commerce sales earlier to Black Friday and even Thanksgiving Day. In years past, retailers waited until Cyber Monday to post digital discounts, but today they risk losing market share among shoppers who increasingly prefer making purchases off their laptop and smartphone.

One of these retailers is Walmart, which will start offering online sales two days in advance, in a bid to stay ahead of competitor Amazon.  In a press release, the Arkansas-based behemoth announced it has tripled its assortment of online products, from 8 million last year to more than 23 million today.

Another Record Year for Packages Delivered

The rise in e-commerce has had the inevitable effect of giving more business to ground and air delivery companies such as FedEx and United Parcel Service (UPS). It’s expected that, with online sales jumping 17 percent this year, the number of packages handled and shipped will jump to a record high.

According to Business Insider, UPS—the world’s largest delivery company—projects it will ship a record-setting 700 million packages between Thanksgiving and Christmas, or 70 million more than the same time last year. FedEx hopes it can ship 10 percent more than the 325 million it delivered last year.

Meanwhile, Amazon’s plans to establish its own in-house transportation network have hit a setback. About 250 pilots contracted with Amazon partners Air Transport Service Group and Atlas Air Worldwide Holdings went on strike Tuesday over a “longstanding labor dispute.” The Jeff Bezos-run retailer has been determined to deliver its own products after bad weather in 2013 delayed millions of Christmas deliveries, but it appears these efforts are off to a rough start.

Wishing You Health, Wealth and Happiness!

I wish to conclude by giving thanks to our loyal Investor Alert readers as well as investors. Visit us on Facebook or Twitter and let us know what you’re thankful for this season!      

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 9/30/2016: United Parcel Service Inc.

Share “The Great American Splurge”

Net Asset Value
as of 12/07/2016

Global Resources Fund PSPFX $5.61 0.07 Gold and Precious Metals Fund USERX $7.54 0.03 World Precious Minerals Fund UNWPX $6.71 0.02 China Region Fund USCOX $7.84 0.09 Emerging Europe Fund EUROX $5.75 0.07 All American Equity Fund GBTFX $23.73 0.33 Holmes Macro Trends Fund MEGAX $20.21 0.20 Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change