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Can You Handle the Stress of Losing 40 Percent in the Market?
November 21, 2014

If the answer to that question is no, we have a solution for your investment woes. Not many investors can handle the stress that comes with losing nearly half of their retirement funds and being forced to wait seven years to break even—only to lose another 40 percent a couple of years later.

But that’s precisely what some investors went through when they entered the market in 2000, following the booming 1990s, when the average annualized return for the S&P 500 Index was 18.5 percent.

Our solution for avoiding this drama is the Near-Term Tax Free Fund (NEARX), which, starting from January 1, 2000, took the S&P 500 14 years to beat. To illustrate my point, I want to share with you a hypothetical story about two investors, Robert and James.

Near-Term Tax Free Fund NEARX U.S. Global Investors

It’s the year 2000. Two men, both of them in their mid-50s, spend an afternoon playing a round of golf. Between holes, they discuss how they’re coming along with their retirement plans.

Robert, the more aggressive of the two, describes his “failproof” plan to place $100,000 in an S&P 500 Index fund. The 1990s was a gangbusters decade, after all, and he sees no reason to believe that the upcoming decade will be any different.

James, who’s more cautious with his money, nods and says he agrees that the S&P 500 does indeed look attractive. But because he realizes that past performance is no guarantee of future results, he thinks it prudent to invest in a more secure instrument and has been considering short-term, investment grade municipal bonds.

“That’s way too conservative,” Robert says. “You’ll be sipping your meals through a straw before you can retire.”

James chuckles. “Slow and steady wins the race,” he says, driving the ball down the fairway.

“But the market’s been up, with no end in sight.”

“That’s what troubles me,” James says as they watch the golf ball sail through the air and land on the putting green.

The next day, both friends put their $100,000 down—Robert’s in an S&P 500 fund, James’s in a short-term municipal bond fund.

And they watch. And wait.

Man stresed out after investing in the S&P 500 14 years ago. NEARX. U.S. Global InvestorsFor Robert, the decade is as breathless as attending an all-night rave party—acid music thumping, neon lights twirling, bodies jumping and gyrating. Some days are fraught with exhilarating highs, soul-crushing lows and every shade of anxiety in between. He celebrates when the S&P hits 1,500, panics when it sinks almost 40 percent, breathes a sigh of relief when it inches its way back to 1,400, sheds actual tears when it freefalls another 40 percent a year later. One calamity follows another, from the dotcom bubble to 9/11 to the Great Recession. What the market gives, the market takes away.

More than a year after the end of the decade, the S&P finally rises back up to the breakeven point. Now 65, Robert’s no closer to retirement than the day he made his investment. And he has the ulcers to prove it.

James, on the other hand, doesn’t go through nearly the same amount of drama and heartache as his antacid-popping friend does. He sleeps better each night knowing that his money has been growing steadily. Like a calm, soothing adagio, his investment continues to climb, unaware of and indifferent to the schizophrenic behavior of the general equity market. Although he doubts his investment strategy from time to time and wonders if he could be receiving better returns, those thoughts tend to dissipate when he sees the craggy wrinkles on Robert’s face.

What shocks both friends the most, as they compare performance notes, is that it took close to 14 years for Robert’s initial $100,000 investment in the S&P to finally catch up to James’s $100,000 investment in U.S. Global Investors’ Near-Term Tax Free Fund (NEARX).

Take a look at the following chart. Whereas Robert went through undue stress and drama by repeatedly losing and gaining, losing and gaining, James enjoyed close to 14 consecutive years of conservative returns. Unlike Robert, he never had to worry about what he’d do if he needed the money for an unexpected event, and most important, he didn’t worry nearly as much about meeting his retirement goals or having to lower his lifestyle savings.

Near-Term Tax Free Fund vs S&P 500 Index
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If Robert were given the chance to do it all over again, which do you think he’d choose? To reinvest in the equity market and suffer through the unexpected Internet bubble, 9/11 and Great Recession, constantly anticipating another crisis? Or avoid the drama as his friend James did and invest in NEARX?

How many of you reading this would choose the conservative, “boring” path if you could redo your decision?

While you’re contemplating and reflecting on that question, make sure to check out NEARX, which has delivered close to a decade and a half of positive total returns. The fund has recently received the coveted 5-star overall rating from Morningstar, among 164 Municipal National Short-Term funds as of 10/31/2014, based on risk-adjusted return. Although you shouldn’t reasonably expect the fund to keep pace with the S&P 500 over the next 10, 15 and 20 years, NEARX has historically shown a greater likelihood of dodging the dramatic swings the equity market has often experienced in times of uncommonly high volatility, such as we saw in the first decade of the century.

What this comes down to, then, is a question of risk/reward tradeoff. How much risk, not to mention stress and anxiety, are you willing to assume in order to capture reward? If the answer is “not much,” then NEARX might be the solution.

Also, remember to diversify your asset allocation. One simple strategy to consider is to allocate 50 percent of your portfolio in equities, the other 50 percent in NEARX.

 

Please consider carefully a 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.

Morningstar Rating

Overall/164
3-Year/164
5-Year/137
10-Year/103

Morningstar ratings based on risk-adjusted return and number of funds
Category: Municipal National Short-term funds
Through: 10/31/2014

Total Annualized Returns as of 9/30/2014
Fund One-Year Five-Year Ten-Year Gross Expense Ratio Expense Ratio After Waivers
Near-Term Tax Free Fund 3.26% 2.59% 2.97% 1.21% 0.45%
S&P 500 Index 19.72% 15.68% 8.10% n/a n/a

Expense ratio as stated in the most recent prospectus. The expense ratio after waivers is a contractual limit through December 31, 2014, for the Near-Term Tax Free Fund, on total fund operating expenses (exclusive of acquired fund fees and expenses, extraordinary expenses, taxes, brokerage commissions and interest). After December 31, 2014, this arrangement will become a voluntary limitation that may be changed or terminated by U.S. Global Investors at any time, which may lower the fund’s yield or return. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that the credit quality of a portfolio holding could decline, as well as risk related to changes in the economic conditions of a state, region or issuer. These risks could cause the fund’s share price to decline. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local taxes and at times the alternative minimum tax. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.  

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Diversification does not protect an investor from market risks and does not assure a profit.

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Explore and Discover the Winners When Gas Prices Fall
November 17, 2014

West Texas Intermediate (WTI) oil for December delivery is currently priced at $75 per barrel, Brent for January delivery at $78 per barrel. Many investors, publications and news sources focus only on the drawbacks to falling oil and gas prices—don’t get me wrong, there are many—but today we’re going to give the spotlight to the biggest winners and beneficiaries.

Starting with your pocketbook.  

Oil has slipped 30 percent since July, but the only place in the world where retail gas has fallen as much is Iran. In most countries, gas is down between 10 and 15 percent. Here in the U.S., ground zero of the recent energy boom, the national average has fallen close to 20 percent. As I said last week, American consumers have been treated to an unexpected tax break because of this slump, just in time for the holiday shopping season.  

Retail Gasoline Prices Fall Below 3 Dollars as Crude Oil Prices Drop
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Three of the main contributors to oil’s decline are the strong U.S. dollar, which has put pressure not only on oil but other commodities as well; geopolitics, specifically tensions with Russia and the Saudis’ currency war; and the acceleration of American oil production. The hydraulic fracturing boom has flooded the market with shale oil, which in turn has driven prices down. As you can see below, there’s a wider spread between 2008 and 2014 oil production levels in the U.S. than in any other oil-producing country shown here.

Accelerating U.S. Oil Production is a Key Cause of Declining Oil Prices
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Which Countries Benefit?

Last month I briefly discussed how low crude prices benefit Asian markets the most because they tend to be net importers of oil and petroleum. On top of that, a large portion of the population in these countries spends a significant amount of their weekly income on gas—in the case of India, as much as 30 percent. The biggest winners, then, are Asian countries such as India, Philippines, Thailand and Indonesia

The Asian Markets That Benefit Most from Lower Oil PricesChina, the world’s largest net importer of oil, second only to the entire continent of Europe, also benefits. For every dollar that the price of oil drops, its economy saves about $2 billion annually. Even though it just signed a multibillion-dollar, multiyear gas supply deal with Russia, China plans on tapping into its own shale gas resources, estimated to be the largest in the world.

One notable exception to the Asian market is Singapore. Although the city-state is a net importer of crude, bringing in around 1.3 million barrels a day, it depends heavily on oil exports to grow its economy. According to Bloomberg, in fact, Singapore ranks second in the world for a reliance on crude, based on a change in oil exports as a percentage of GDP from 1993 to 2018. Only Libya’s economy is more dependent.

Because the United States continues to be a net importer of crude and petroleum—it imports around 6.5 million barrels a day, according to CLSA—it has benefited as well, but its dependence on foreign oil is falling fast.

In the chart below you can see how breakeven prices increase as both global oil demand grows and the geological formation requires more sophisticated—and expensive—extraction methods.

Crude Cost of Production Rises as Demand Grows
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Which Industries and Companies Have Benefited?

To answer this question, Strategic International Securities Research (SISR) ran a correlation coefficient between the retail price of gas and 72 global industry classification standard (GICS) sectors, focusing on the years 2000 through 2014. Below are the top three sectors that ended up benefiting the most from falling gas prices. They all have a negative correlation coefficient, meaning that their performance has historically gone in the opposite direction as the price of gas, similar to a seesaw.

sector table 1What this data shows is that the U.S. manufacturing industry has regained the cost benefit advantage to Chinese manufacturers. It’s becoming more and more attractive to build and create here in the U.S. because the cost of energy is relatively low.

Leading the list is automakers, suggesting that when gas prices have dropped, consumers have felt more confident purchasing new cars and trucks. Today consumers are even returning to vehicles that are known to guzzle rather than sip gas, such as SUVs, pickup trucks and crossovers. Ford’s F-Series continues to blow away its competition. Since mid-October, General Motors has delivered 7 percent, Ford 11 percent and Tesla, which we own in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX), 12 percent.

Sir Richard Branson's Virgin America is the first airline to go public since Spirit Airlines in 2011.It makes sense that airlines would perform better, since fuel is typically their largest single expenditure. In 2012, when the average price of a barrel of oil was $110, fuel accounted for 30 percent of airlines’ annual operating costs. Low fuel costs are cited as the main reason why Virgin America, which went public last week, reported third-quarter profits of $41.6 million, an increase of 24 percent year-over-year. The NYSE Arca Airline Index has flown up 110 percent since the beginning of 2013, hitting 13-year highs, and Morgan Stanley recently took a bullish position toward airline stocks, showing that company balance sheets are “structurally sound enough to make ‘events’ in the next five years unlikely” and that the industry as a whole is now growth-oriented.

It also makes sense that aluminum would benefit, given that the metal requires a notoriously large amount of energy to produce.

When gas prices are low, consumers have more money to spend on retail and luxury goods.SISR highlights a few industries that surprisingly have had a positive correlation coefficient: department stores, apparel retail and luxury goods. You’d think it would be safe to assume that the retail sector benefits when consumers have been given relief from high gas prices. This is certainly the case now: Walmart, a bellwether for general market sentiment, is hitting new highs, and Tiffany & Co., which we own in our Gold and Precious Metals Fund (USERX), is also thriving. But in the past, low oil and gas prices have been reflections of a weak domestic economy. The average price per barrel of crude in 2009 was $62, a sharp decrease of nearly 40 percent from the average in 2008. Today, gas is inexpensive not because the economy is weak but because frackers are simply too good at what they do. They’re victims of their own success. What has hurt them has helped American consumers build more disposable cash flows, which can now be spent on fast food, retail, home improvement and other goods and services.

OPEC Unlikely to Make Production Cuts, Consensus Says

Members of the Organization of the Petroleum Exporting Countries (OPEC) will be meeting on the 27th, and no doubt the discussion will center on whether to curb production to help oil prices recover. However, a new poll shows that commodity and energy investors do not believe such a cut will occur. According to BMO Capital Markets, 87 percent of those polled believed that no cut would be agreed on. Even those who said a cut would happen believed it would be no more than a million barrels a day, an insignificant amount.

President Putin says the Russian economy, already pomeled by sanctions and a collapsing rouble, is bracing for a catastrophic slump in oil prices.Of course, this is merely a poll, but we might be looking at cheap oil and gas for an indefinite amount of time, with a bottom possibly reached sometime between now and February.

In the meantime, American producers will continue to pour out record levels of oil, and President Vladimir Putin’s antics in Ukraine will continue to stir up geopolitical tension. Saudi Arabia appears to be more aligned with Europe and the U.S. against Russia, Syria and Iran.

All of this short-term activity might be bad for the fracking industry, but the big winners are consumers and investors. We’re in a steady, modest expansion of our economy and this is good for investing in domestic stocks.

Please consider carefully a 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.

Past performance does not guarantee future results.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

Stock markets can be volatile and can fluctuate in response to sector-related or foreign-market developments. For details about these and other risks the Holmes Macro Trends Fund may face, please refer to the fund’s prospectus.

The NYSE Arca Airline Index (XAL) is an equal-dollar weighted index designed to measure the performance of highly capitalized companies in the airline industry. The XAL Index tracks the price performance of major U.S. and overseas airlines.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the funds mentioned as a percentage of net assets as of 9/30/2014: Ford Motor Company 0.00%; General Motors 0.00%; Walmart 0.00%; Tiffany & Co. 0.44% in Gold and Precious Metals Fund; Virgin America 0.00%; Tesla Motors 2.09 in All American Equity Fund, 2.93% in Holmes Macro Trends Fund; Morgan Stanley 0.00%.

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.

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The Holiday that Jack Ma Built
November 13, 2014

Rock star retailer: Jack Ma's Alibaba generated more online revenue during Singles Day than Black Friday and Cyber Monday combined

One hour into the Singles Day sale, Jack Ma’s Alibaba had already sold $2 billion worth of merchandise. By the end of the 24-hour promotion, the Chinese retailer had exceeded expectations by generating more than $9 billion, a record.

Let that sink in for a moment. Nine. Billion. Dollars. In a single 24-hour period.

That’s more than the combined online revenue from last year’s Black Friday and Cyber Monday, the top two shopping holidays here in the U.S.

Alibaba also broke the Guinness World Record for both the highest e-commerce sales and the most cell phones sold online within a one-day period.

When you compare the company’s Singles Day haul to that of Cyber Monday, which follows Thanksgiving weekend, the results are startling.

Will the Sectors that Lagged in January Outperform the Rest of 2014?
click to enlarge

The data also illuminates the urbanization and changing spending habits of China. In a country of 1.35 billion people, about half have Internet access; of those, about half shop online, more than 300 million. Because of the one-child policy, China’s gender ratio has tilted decidedly male in recent years—so much so that by 2020, the country is expected to have 35 million more men than women.

That’s a lot of single guys.

It was for these men (and women) that Singles Day was first conceived.

From 1111 to $$$$

Legend has it that four such men attending Nanjing University in the early 1990s came up with the idea of celebrating bachelorhood. There was no special day for singles as there was for lovers and spouses. They settled on November 11, or 11.11, allegedly to emphasize the date’s composition of ones and because in Mandarin Chinese, “one” sounds like “single.”

According to Xian Liang, portfolio manager of our China Region Fund (USCOX), “11-11” also looks like “bare branches,” which is a common nickname for bachelors. The reason for this is because “human” is written thus, with two halves:

It was here at Nanjing University that four students in the early 1990s allegedly conceived of Singles Day, also known as Bachelors' Day and Double Eleven Day

Whereas “husband” typically looks like this:

It was here at Nanjing University that four students in the early 1990s allegedly conceived of Singles Day, also known as Bachelors' Day and Double Eleven Day

It was here at Nanjing University that four students in the early 1990s allegedly conceived of Singles Day, also known as Bachelors' Day and Double Eleven Day

So if you stay unmarried, you basically look like a set of bare branches.

Over the years the festival became more popular among the Chinese youth who even adopted fun traditions like eating youtiao—basically donuts that resemble the number one—for breakfast.  Young women were soon invited to participate. And most important of all, people were encouraged to buy gifts for their lonely-hearted friends.

What started off as a tongue-in-cheek festival for randy young men was quickly evolving into a real, monetizable event.

Chinese retailers had already been clamoring for such a holiday in November, historically a dry period for sales. As demand for apparel, jewelry, handheld electronics and other discretionary goods ramped up, they realized that Singles Day, also called Bachelors’ Day and Double 11 Day, was a perfect fit.

Enter Alibaba

Jack Ma might not have been the first to call the promotion “Double 11,” but he was certainly the first to secure exclusive rights to use the expression on his e-commerce sites. As a result, Taobao.com and Tmall.com, both subsidiaries of Alibaba, became the de facto sales destinations for all things Singles Day.

Between 2009 and 2013, Double 11 sales rose a meteoric 5,740 percent, and this year, Alibaba amassed a fortune that exceeds the combined GDPs of several third-world countries. Consumers from over 217 countries made transactions on Tmall before midnight.

Only one hour into Singles Day sale, Alibaba had sold $2 billion worth of merchandise.

Indeed, we’re seeing a new tectonic shift in the online marketplace ecosystem and payment service industry. This shift is led not by eBay or Amazon.com so much as it is by Alibaba and other Asian e-commerce merchants. It will be interesting to see what Alibaba has in store for next Singles Day. Those 300 million online shoppers will soon become 400 million, then half a billion.

Understandably so, many American retailers want a slice of Jack Ma’s Christmas pie. Conventional wisdom might say that because we already have Black Friday and Cyber Monday within the same 30-day period, there’s neither demand nor room for a third sales event. But of the 217 countries that placed orders on November 11, Hong Kong, the U.S. and Russia ranked as the top three regions in terms of volume. Clearly the demand and opportunity is there. Alibaba’s success shows that its business model is attractive not just to Chinese but also global consumers. This is where the money wants to be.

And not just on Singles Day, but every single day.

Please consider carefully a 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.

Past performance does not guarantee future results. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 9/30/2014: Alibaba Group Holding, Ltd. 0.42%, Amazon.com, Inc. 0.00%, eBay, Inc. 0.00%.

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Everyone Loves a Discount—But Where’s the Support for Oil Prices?
November 10, 2014

Christmas comes more than a month early.For the first time since 2010, the average price of a gallon of gas in the United States has fallen below $3, according to AAA’s Daily Fuel Gauge Report. An estimated $40 billion will be saved this year alone. That’s money that can be put toward other expenses—bigger cars, children’s education, retirement and investing.

But that discount comes with a price. Cheap gas might help consumers and companies in certain industries, but they’re a drag on oil producers, retailers and entire nations. This affects everyone. We live in a global economy, after all.

Since June, crude oil has tumbled 30 percent to prices we haven’t seen in about three years. For the past 20 days and 60 days, it’s down about two standard deviations. We can blame this dip on a number of things: geopolitics, the slowing of real GDP growth across the globe, a huge oil surplus here in the U.S. and a strong dollar. The strength of the dollar, as you can see, has historically had an inverse relationship with the price of oil.

A Strong U.S. Dollar Puts Pressure on the Price of Crude Oil
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Recent cuts to our military budget have also affected oil prices. The U.S. military uses more oil than any other institution on earth. Every year it consumes over 100 million barrels to fuel ships, aircraft and other vehicles, but that number is dropping at the same time supply is rising.

Meet the Frackers

Because of the success of unconventional extraction methods such as fracking, the U.S.’s production level is at a 25-year high. What would the rate of depletion be if fracking were no longer profitable at $70 or $60 per barrel and production had to be halted? There’s no definitive answer to that question because it’s not clear how many companies would be affected and to what extent. But what should be clear is that reserves would begin to shrink and we would go back to the days of an overreliance on foreign oil.

Below are the estimated breakeven points for some of the most important shale plays in the U.S. With crude currently priced at slightly under $80 per barrel, many companies, especially those that practice fracking, are starting to feel the pinch. Each play has its own unique set of challenges, one of the most significant being the region’s geology. As you can imagine, the harder it is to get the crude out of the ground, the costlier it becomes.

Estimate of Breakeven Points for Key U.S. Shale Plays
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Some analysts believe that approximately a third of all U.S. shale oil producers operate in the red when the price per barrel falls below $80. At $70 a barrel, these producers will need to make drastic changes such as production cuts and layoffs. According to energy research firm Wood Mackenzie:

If WTI prices were below $70 for most of 2015, we predict that around 0.6 million b/d [barrels per day] of U.S. tight oil supply growth would be under serious threat by the end of the year—a figure which would continue to increase with low prices.

And if crude were to fall to $60 per barrel? An estimated 80 percent of U.S. companies that extract tight oil, or shale oil, through fracking would be shut down and all new supply would diminish quickly due to the rapid decline rate.

Already oil producers must contend with the challenge of decreased production. When a well is first drilled, it might begin producing 1,200 barrels a day but, throughout the year, gradually decline between 5 and 20 percent. By the end of the year, the site is producing only around 100 barrels a day. Oil producers are often able to recoup exploration and production costs in that timeframe, but then it’s necessary to move on to the next drill site.

Oil Production Rate Declines Every YEar - Eagle Ford Shale
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Unconventional extraction methods accelerate the decline rate. If frackers were forced to halt production now, our reserves would dwindle even more rapidly.

Man on treadmill.It’s critical that America keeps running on this treadmill, so to speak. The results of stopping now would be similar to those of a workout buff who suddenly quits going to the gym. We all know how much harder it is to get back in shape than it is to stay in shape.

Layoffs would especially hurt, given that the tight oil revolution has significantly contributed to the U.S.’s economic recovery. Think not just of general oilfield roustabouts but also geoscientists, petroleum engineers and the thousands of other incidental professionals who face losing their jobs if prices continue to slip.

Meanwhile, people continue to have babies, drive their vehicles to work and heat their homes, all of which requires oil.

And there’s reason to believe that we’ll especially need oil for heating this winter. Already an intense storm even larger than Superstorm Sandy, Typhoon Nuri, is moving west along Alaska’s Aleutian Islands and is expected to bring freezing temperatures to much of the northern part of the U.S. It looks as if winter has arrived earlier than normal this year.

Bundle up! Typhoon Nuri is expected to bring freezing temperatures to much of the U.S.

Tiffany Stock Was a Better Investment Than Diamonds Were.For the time being, however, we can all enjoy lower gas prices this year. With the money saved, we can make better investment decisions. It’s as if we received an unexpected tax break. Lower gas prices leads to more consumer spending, which means that luxury goods stocks such as Tiffany & Co., which we own in our Gold and Precious Metals Fund (USERX), might benefit.

Speaking of Tiffany & Co., did you know that buying the company’s stock in 1987, the year it went public, would have been a better investment than buying an actual diamond? You can read about it here.

Enter the Saudis: Who Will Blink First?

Many of the world’s major oil-producing countries are also feeling the pressure of low prices. Of those shown below, only four—Oman, Kuwait, Qatar and the United Arab Emirates—are still able to balance their books with Brent oil flirting with $80 a barrel.

Producer Country Budget Breakeven Prices
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Oil reserves would be necessary if the U.S. ever engaged with a country as powerful as RussiaHere’s where geopolitics comes into play. Russia is currently the second-largest oil exporter in the world and set to overtake Saudi Arabia very soon. This might help explain why the Saudis aren’t in any hurry to limit their own production and support prices. They have everything to lose and nothing to gain by reducing output. They’re in a better position to maintain current levels and still be profitable with $80 oil than Russia, the U.S. and most of the Organisation of the Petroleum Exporting Countries (OPEC). The kingdom has already lowered the price of the oil it exports to the U.S., a sign that it’s aiming to undercut the competition and hang on to its status as the world’s top exporter.

As oil and gas policy expert Dr. Kent Moors argues in a recent article, Saudi Arabia is fighting a losing battle against three fronts: Russia, over control of the Asian market; neighboring OPEC members such as Iraq and Iran; and the U.S., a market the Saudis don’t want to lose to more efficient fracking companies here in America. And, of course, the U.S. and Russia are locked in their own energy skirmish, one that Casey Research’s Marin Katusa calls The Colder War, the title to his latest book.

OPEC officials will be meeting later this month, and hopefully an agreement can be reached. During our webcast last month, Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), emphasized the point that the current price of oil just isn’t sustainable:

I would be surprised if we did not see another production cut if oil remains at these levels. I think that OPEC and the Saudis need to come in and support prices even more so than they already have following the cut in August.

One Word: Plastics

Just as consumers have benefited from sliding oil prices, so too have many companies, including those in the transportation sector. Below you can see that near the start of September, the oil and gas industry decoupled from the transportation sector, composed of airline, trucking, delivery services, railroad and marine transportation companies. Currently there’s more than a 35-point spread between the Dow Jones Transportation Average and SPDR S&P Oil & Gas Exploration & Production ETF.

Transportation Stocks Have Decoupled from Oil and Gas Stocks since the Start of September
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Manufacturers of plastics and synthetic rubber, of which crude is the main component, have also benefited. The U.S. producer price of plastics and rubber products is up $1.20 year-to-date. In 30 days, Cooper Tire & Rubber has shot up 13 percent, Berry Plastics 14 percent, Goodyear 15 percent.

Shell, on the other hand, has given back 5 percent.

This is precisely why we’re attracted to low-cost oil producers such as EOG Resources and Devon Energy. Many, but not all, of them are nimbler and more adaptable in uncertain economic climates than the big names are. We strive to buy only those that have been well screened and fit our models.

Learn more about our investment process here at U.S. Global Investors.


Late last month I noted that the the eurozone is in trouble because its monetary and fiscal policies are sorely out of balance. The region relies too much on punitive taxes and entitlement spending and not enough on stimulation. Right now its GDP growth rate is a sluggish 0.1 percent, its inflation rate 0.4 percent.

I suggested that the eurozone should look to China to see how it’s handling its own slowdown—the government has cut hundreds of lines of regulation and plans to cut more—but members of the European Union, and especially the European Central Bank (ECB), might also do well to look to China’s neighbor, Japan.

A week ago the Bank of Japan (BOJ) surprisingly unveiled a gargantuan $724 billion-a-year stimulus package to combat deflation. The monetary measure will essentially turn the BOJ’s governor, Haruhiko Kuroda, into the world’s largest hedge fund manager. The market seemed to like the announcement, as the Nikkei 225 has risen 3 percent since then.

Janap's Monetary Policy on Steroids
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Such a plan, of course, is too extreme for the ECB to make, and there’s no guarantee that it will work. But at least no one can fault Japan for refusing to use both tools, monetary and fiscal policy, to jumpstart its economy and effect change.

 

Please consider carefully a 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.

Past performance does not guarantee future results.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

The Dow Jones Transportation Average is a price-weighted average of 20 U.S. transportation stocks.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the funds mentioned as a percentage of net assets as of 9/30/2014: Berry Plastics 0.00%, Cooper Tire & Rubber Company 0.00%, Devon Energy Corp. 1.82% in Global Resources Fund, EOG Resources, Inc. 2.13% in Global Resources Fund, Goodyear Tire and Rubber Company 0.00%, Royal Dutch Shell 0.00%, SPDR S&P Oil & Gas Exploration & Production ETF 0.00%, Tiffany & Co. 0.44% in Gold and Precious Metals Fund. 

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.

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Greece’s Darkest Hour Before Its Dawn
November 6, 2014

“Much better than expected.”

That’s how John Derrick, Director of Research here at U.S. Global Investors, summed up his trip to Greece, the beleaguered country that hopes to put its financial woes behind it and rise again like the phoenix from the Mediterranean culture’s ancient mythology.

Last week I spoke with John about his trip, which took place following his visit to Turkey to meet with companies held in our Emerging Europe Fund (EUROX). Here are the highlights of our conversation.

So why do you say “better than expected”?

Greece has been in recession for six years now but it’s finally on track to turn things around. Its economy has stabilized and is beginning to improve since the crisis. It has a balanced budget. The projected GDP growth rate for this year is 0.6 percent, which doesn’t sound great, but it would be the first time since the end of 2008 that it’s been above zero. We’d like to see the purchasing manager’s index improve, though—it’s been below 50.0 for four of the past five months, indicating that the country’s manufacturing sector is still in contraction mode.

Turkish Banks Starting to Recover After a Disappointing September
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Greek citizens are fed up with austerity measures that were set in place to secure a multibillion-dollar bailout, and their egos were bruised after their country was downgraded last year from a developed market to an emerging market. But as the saying goes, the darkest hour is just before the dawn, and we’re now beginning to see a glimpse of the sunrise, so to speak. The painful adjustments have already been made, they’re behind Greece now, and the worst appears to be over.

Prime Minister Antonis Samaras, in fact, plans to ease out of the European Union’s bailout by the end of this year, which would be a whole calendar year ahead of schedule. In doing so, he might also siphon support away from anti-austerity candidates in the far-left Syriza party.

The mostly positive results from the European bank stress test seem to confirm that things are better than expected.

They do. There was a lot of anxiety going into the results, and there was this collective sigh of relief after they came back better than expected. Markets responded positively. Of the 25 banks that the European Central Bank (BCB) failed, only two were Greek: Eurobank and the National Bank of Greece. This shows that the Greek financial sector is trying to stabilize in a time when it’s predicted that the eurozone might face its third recession in six years.

The slump in the Greek shipping industry, very important to Greece’s economy, is partially to blame for the country’s current troubles. Has it improved any?

Not by much, unfortunately. I met with two shipping companies, Goldenport and Tsakos Energy Navigation. What I took away from these meetings is that dry bulk shipping rates are not recovering as expected. The industry is washed out, with many companies having been put out of business over the last three years.

The good news is that this is probably the time to accumulate these types of companies, as many of them are trading at attractive discounts to net asset values (NAVs). But it’s still a waiting game until rates head higher.

On the crude and product transport side, lots of boat supply companies are hitting the market in the next two years, and rates have recovered some. They might move modestly higher in the short term. Tsakos has talked about a master limited partnership (MLP) structure before, but that sounds like a 2016 event if it ever gets done.

Talk a little about the Greek retailing industry.

This was the best part of my visit to Greece. I met with two retailers, Jumbo and Fourlis, both of which are seen as survivors in a down economy, with very strong market share.

Jumbo, kind of like a low-end Target, has 40-percent market share in its category. I visited the store and its layout resembles an IKEA—there aren’t any traditional aisles, and you basically have to walk through the whole store to get out. Its key products are toys, seasonal items and stationery. One of the most popular retailers in Greece, Jumbo plays its cards pretty close to the chest. Its management team doesn’t go to or hold conferences—they don’t even do conference calls, actually. This hurts valuation, but the financials have been very strong.

As for Fourlis, it holds the IKEA franchise for the region and also owns a sporting goods franchise, Intersport, which is seeing positive year-over-year same-store sales. Besides home furnishings and sporting goods, it’s also involved in fashion and electronic appliances. The company’s been operating since 1950 and has locations not just in Greece but also Romania, Bulgaria, Turkey and Cyprus. With the recent Greek equity selloff, this is likely an opportunity.

Check out our Emerging Europe Fund (EUROX) for more investment opportunities.

Please consider carefully a 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.

Past performance does not guarantee future results.

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. The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries.  The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

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

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Emerging Europe Fund as a percentage of net assets as of 9/30/2014: Eurobank Ergasias 0.00%, National Bank of Greece 0.00%, Goldenport Holdings, Inc. 0.00%, Tsakos Energy Navigation, Ltd. 0.00%, Jumbo S.A. 1.79%, Fourlis Holdings S.A. 0.00%, IKEA 0.00%, Intersport 0.00%.  

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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Net Asset Value
as of 11/21/2014

Global Resources Fund PSPFX $8.37 0.20 Gold and Precious Metals Fund USERX $5.68 0.08 World Precious Minerals Fund UNWPX $5.11 0.08 China Region Fund USCOX $8.08 0.07 Emerging Europe Fund EUROX $7.40 0.03 All American Equity Fund GBTFX $33.25 0.15 Holmes Macro Trends Fund MEGAX $23.28 0.05 Near-Term Tax Free Fund NEARX $2.26 No Change China Region Fund USCOX $8.08 0.07