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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.

Exclusive Interview: How Alex Green Beat the Market 16 Years Straight
August 21, 2017

Alex Green Cheif Investment Strategist of The Oxford Club and Investment U

For more than a decade and a half, my friend Alexander Green has been educating and entertaining investors as editor of numerous popular newsletters, many of which I’ve cited in my own writing.

For those of you subscribed to one or more of his services through the Oxford Club or Investment U, I’m sure you’ll agree that Alex is among the finest financial writers working today. His articles are brimming with intelligence, wisdom, humor and candor—all of which he brings to his public appearances at investment conferences.

Last week it was my pleasure to speak one-on-one with Alex, and together we touched on subjects ranging from our favorite books on investing to the secret lives of millionaires to business moats.

Below are highlights from the interview, but this is only the first of two parts. I’ll conclude it next week in a Frank Talk, which you can subscribe to here.

Enjoy!

You didn’t go into politics or medicine or law. What triggered you to go into the investment world?

At the time, I was living in Orlando. I got a copy of the Orlando Sentinel, and on the front page of the business section was a headline that read: “The average stockbroker in the U.S. makes $187,000 a year.” This was in 1985. Thirty years later, that’s still a substantial amount of money. I remember thinking: “If the average stockbroker makes $187,000, what do the good ones make?”

I crammed the article into my wallet and started telling everyone that I was going to become a stockbroker. Someone then told me that he had just sold a phone system to a broker in Winter Park, Florida, and he was looking to hire someone.

I went out and talked to him and got my first job in the money management business. At the small firm where I started, I was writing research reports and client communications. I discovered I enjoyed research and writing even more than dealing with clients, so when the opportunity arose to become a time financial writer, I took it. That was about 17 years ago.

You’ve published four books so far—The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. Tell us about the genesis of one or two of them.

I was speaking at a conference in Phoenix about 10 or 12 years ago, and when I came off stage, this older gentleman was waiting for me. He poked his finger at me and said: “Money, money, money. You’ve made a lot of money over the years, but I have to ask, do you ever think about anything else?”

At first I thought he was kidding, but come to find out, he really felt that I thought about nothing but money all day long. I realized then that I write hundreds of columns a year, and virtually every single one is about stocks or bonds, currencies or commodities, interest rates or economic growth. This guy figured I thought about nothing except money and how it’s made.

Beyond wealth

Of course, we all have our outside interests, and we hope for some kind of balance in our lives. And so when I went back home to Baltimore, I came up with the idea to write something expressing the idea that life isn’t just about making money. I wanted to talk about living a rich life, not just about getting richer.

This led to a column I initially called “Spiritual Wealth.” That name, though, became a problem since the word “spiritual” is one of the most nebulous words in the English language. It can mean  any number of different things to different people.

I eventually changed the name to “Beyond Wealth,” which is probably more accurate anyway. It turned into a series of reflections on things that I thought were important—things I’d read or done that I felt were of interest. All of it had very little to do with money. Those articles became one of the most popular things we do, and the eventual book turned out to be a bestseller. I was glad to have found a wider audience out there.

At this year’s FreedomFest conference in Las Vegas, you debated with The New York Times’ Robert Frank about meritocracy and luck. Robert argued that our success in life is mostly due to luck, and you disagreed. Could you talk about that?

A good book to read on this subject is Thomas Stanley’s The Millionaire Next Door. Dr. Stanley spent a lifetime researching the habits and characteristics of the nation’s wealthiest individuals. I might add here that the Spectrum Group revealed that, as of the end of 2016, one out of every nine households in the U.S. had a net worth of $1 million or more. What Dr. Stanley found is that these millionaires have many characteristics in common. Primarily, they do everything in their power to maximize their income and minimize their expenses. They religiously save and invest the difference, then leave the money alone to let it compound for years, if not decades.

That’s how most people become millionaires, regardless of their color, sex or orientation—not by establishing a software company in their garage or making a hit record or playing third base for the Yankees. Most people just work hard, save, invest and compound.

How does that thinking apply to the market?

A few years ago, a guy named Burton Malkiel wrote a book called A Random Walk Down Wall Street. He said that it’s very difficult to beat the market, and even those who do beat it do so because of luck, not skill. So you can see we’re coming to the same sort of argument as Robert Frank.

The independent Hulbert Financial Digest has ranked our Oxford Communiqué in the top 10 investment newsletters in the nation for 16 years now. We beat the market for one year, two years, five years, 10 years, 16 years now. People would say: “Well, you’re just lucky.” It’s a tough thing to argue against. But when enough time goes on, and you continue to beat the market, it should clue someone in that there’s more than luck at play.

Would you say that Warren Buffett is just simply lucky? No, he’s a financial genius who’s taken actions that others haven’t, and he’s reaped the rewards. When Roger Federer won his 19th singles major title recently, nobody said: “Wow, he’s really lucky.”

I admit, everyone has certain amounts of good and bad luck in their personal and professional lives. But to say that luck is the only determining factor is dispiriting to people who have come the furthest. It’s demeaning to say that it’s all luck, not education or hard work or persistence.

Similarly, the people who consistently beat their benchmarks are not just lucky. If you do it long enough, it’s clearly evidence of skill.

Tell us about your “Gone Fishin’” portfolio. How do you look for investment opportunities?

The gone fishin portfolio

The  Gone Fishin’ portfolio is based on the idea that, since nobody knows with any certainty what the economy or market is going to do, it’s sensible to make the foundation of your portfolio a diversified, asset-allocated basket of index funds. You want to make sure your expenses are low and that you have high tax-efficiency and your asset classes are properly represented. Simple and straightforward.

The idea is that there are 10 different asset classes in the portfolio, and you invest according to various percentages: 30 percent in U.S. stocks, 30 percent in foreign stocks, 10 percent each in high-grade bonds, high-yield bonds and Treasuries, and 5 percent each in real estate investment trusts (REITs) and gold shares.

Then, at the end of every year—or on your birthday or anniversary—rebalance the portfolio to bring all the target percentages back into alignment. That reduces your risk because you’re cutting back on what’s depreciated the most and adding to what’s depreciated the least. Over time, this adds to your return while reducing the portfolio’s volatility.

What would you say to someone right now who’s nearing retirement age or who has just retired?

I don’t think enough people think about this, to be honest, Frank. Like you, I’ve been invested in the market for over 30 years, and when I was in my 20s, 30s and 40s, we had horrific selloffs like the stock market crash of ’87, the financial bust that happened when the internet media ended, and then of course the financial crisis. When you’re younger, you realize you’ve still got decades ahead of you, and you can take actions that allow you to be comfortable with whatever your long-term scenario might be.

But as you get older, after you reach the age of 50 or so, it becomes necessary to reevaluate your goals. There’s a bus out there waiting for us as we cross the street. The thing about getting older is, you have to reduce your risk. You’re not going to be working that much longer—or maybe you’re in retirement already—and you just don’t have the time to make it back should there be a market crash. I always say to make your portfolio as conservative as you can live with once you reach this stage of your life. It might crimp your returns, but it’s also going to save your butt if we go into another financial crisis like we did in 2008.

Are there any books on investing you’d like to recommend? How did they help you?

How to make money in stocks

One book I would recommend is How to Make Money in Stocks by William O’Neil, the founder of Investor’s Business Daily. It’s probably 30 years old and has gone through some updates since then. O’Neil is looking for companies that have high sales growth, 25 percent or better compounds in earnings, higher returns on equity, great product innovation, good management and sustainable profit margins.

But to be honest, I think there’s only so much you can learn from books. I say that because you have to learn the hard way and actually feel the terror of a down draft, or fight the instinct to be greedy when you go through a long, full market as we’re in now.

So who do you look to? Where do you get your wisdom and insight?

In the mid-80s, there were three legendary investors: Warren Buffett, Peter Lynch and John Templeton. I started reading and listening to everything I could—all the Berkshire-Hathaway reports, but also tapes of Templeton and Lynch speaking at conferences.

No one knows what the economy or stock market is going to do, but Buffett, Lynch and Templeton knew to identify a business that was selling for a lot less than what it was worth and hold it until the market recognized that value. That sort of became the mantra for me from then on.

It was then that I realized I was not going to play this guessing game about what GDP growth is going to look like, what inflation’s going to be, what the Fed or stock market is going to do. That’s all a distraction. What really matters is individual businesses beating Wall Street expectations. That’s what drives stocks higher in the long term.

I often tell investors at conferences that, if you look back through history, you’d be hard-pressed to find a single example of a company that increased its earnings, quarter over quarter, year after year, and not see its stock tag along. It doesn’t matter what kind of market we’re going through or what kind of economy we’re in, those stocks tend to appreciate really strongly.

One of the publications you edit is the Momentum Alert. Can you tell us what that is?

Speaking of beating Wall Street expectations, this is exactly what we focus on in the Momentum Alert.

These companies tend to be superbly managed, but most important, they have a moat around the business. Let me give you three examples. Blockbuster, Radio Shack and Borders all went bust. There was no way for those companies to protect their margins, whether they were renting video tapes, selling electronic equipment or selling books and CDs. They had nothing to protect them from competition coming in and doing it on a bigger scale or doing it online.

Winning businesses tend to have something that protects margins. That could be a copyright or trademark or patent. Profits attract competition just as honey attracts bears. You’re not going to come across a really profitable niche and find that other people don’t want to exploit it also. You need something to keep them at arm’s length.

Think of the difference between IBM and Apple. IBM made its systems compatible, so other companies—Dell and Compac, for example—came in and made IBM-compatible machines.

No one makes an Apple-compatible machine because Apple never leased its patents to another company. All of those profits for the iMacs, iPhones, iPods and so on all go straight to Apple. That’s the kind of magic that can really help propel a stock up for longer periods of time.

My interview with Alex will conclude in this week’s Frank Talk. I don’t want you to miss it, so make sure you’re subscribed to receive the email alert!

 

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.

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. 

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 6/30/2017: Apple Inc.

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Gold Was Chemically Destined to Be Money All Along
August 16, 2017

I think most of you reading this right now are aware that gold is unlike any other metal, certainly any other element. It doesn’t play by the same rules as iron or tin or aluminum, and its value has nothing to do with its utility—or lack thereof. People valued the yellow metal for its beauty and malleability eons before they knew of its usefulness in conducting electricity or its chemical inertness.

That gold is so chemically “boring,” though, is one of the main reasons why it’s so highly valued, even today.

This is the conclusion of Andrea Sella, distinguished professor of chemistry at University College London. In 2013, Sella spoke with Justin Rowlatt of the BBC World Service, walking him through all 118 elements of the periodic table.

Gold, according to Sella, is the best possible candidate for a currency of any value.

As he points out, we can automatically eliminate whole swaths of the periodic table for various reasons. We can cross out gases, halogens and liquids such as helium, fluorine and mercury. No one wants to carry around vials of a colorless gas or, in the case of mercury and bromine, a poisonous substance.

We can then rule out alkaline earth metals such as magnesium and barium for being too reactive and explosive. Carcinogenic, radioactive elements such as uranium and plutonium are too impractical, as are synthetic elements that exist only momentarily in lab experiments—seaborgium and einsteinium, for example.

That leaves us with the 49 transition and post-transition metals: titanium, nickel, tin, lead, aluminum and more.

But many of these pose problems that should immediately exclude them from consideration as a currency. Most are too hard to smelt (titanium), too flimsy for coinage (aluminum), too corrosive (copper) and/or too plentiful (iron).

We are now left with just eight candidates, the noble metals: platinum, palladium, rhodium, iridium, osmium, ruthenium, silver and gold. These are all attractive as currencies, but except for silver and gold, they’re simply too rare.

So: silver and gold.

What gives gold the edge over silver, however, is—once again—its chemical inertness. Unlike its white cousin, gold doesn’t tarnish. It’s nonreactive to air and water. Add to this its softness, and it easily emerges as the perfect currency. Ancient peoples recognized this, and I don’t think anyone now would have any problem coming to the same conclusion either.

gold coins

“I view gold as the primary global currency.”

Those are the words of former Fed Chairman Alan Greenspan, speaking to the World Gold Council for the 2017 winter edition of its Gold Investor publication.

“It is the only currency, along with silver, that does not require a counterparty signature. Gold, however, has always been far more valuable per ounce than silver. No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counterparty. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.”

Right now, for the first time in human history, world currencies are free-floating, meaning they’re not backed by anything tangible.

It’s largely because of this that world debt has been allowed to soar to astronomical highs in recent years, threatening the stability of the global economy. As we’ve seen in Zimbabwe, Venezuela and elsewhere, a nation’s currency can rapidly lose its value and become worthless. Families and individuals who didn’t have a portion of their wealth stored in a real asset such as gold lost everything.

This is why I always recommend a 10 percent weighting in gold, with 5 percent in physical gold (coins, bars and jewelry) and the other 5 percent in high-quality gold stocks, mutual funds and ETFs.

 

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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Is this the Start of a Hot New Metals Bull Market?
August 14, 2017

Aluminum metals

Major U.S. indices slid for a second straight week as President Donald Trump and North Korea both escalated their saber-rattling, with Kim Jong-un explicitly targeting Guam, home to a number of American military bases, and Trump tweeting Friday that “Military solutions are now fully in place, locked and loaded.” The S&P 500 Index fell 1.5 percent on Thursday, its largest one-day decline since May. Military stocks, however, were up, led by Raytheon, Lockheed Martin and Northrop Grumman.

As expected, the Fear Trade boosted gold on safe haven demand. The yellow metal finished the week just under $1,300, a level we haven’t seen since November 2016. Last week, Ray Dalio, founder of Bridgewater Associates, the largest hedge fund in the world, said it was time for investors to put between 5 and 10 percent of their portfolio in gold as a precaution against global and domestic geopolitical risks. The threat of nuclear war is at the top of everyone’s mind, but Dalio reminds us that our indecisive Congress could very well fail to agree on raising the debt ceiling next month, meaning a “good” government shutdown, as Trump once put it, would follow.

Dalio’s not the only one recommending gold right now. Speaking to CNBC last week, commodities expert Dennis Gartman, editor and publisher of the widely-read Gartman Letter, said that he believed “gold is about to break out on the upside strongly” in response to geopolitical risks and inflationary pressures. Gartman thinks investors should have between 10 and 15 percent of their portfolio in gold.

Government shutdowns haven’t always been harmful to the stock market—during the last one, in October 2013, stocks actually gained about 3 percent—but I agree that it might be prudent right now for investors to de-risk and ensure their portfolios include safe haven assets such as gold and municipal bonds. Dalio and Gartman’s allocation percentages mirror my own. For years, I’ve recommended a 10 percent weighting in gold, with 5 percent in bullion and 5 percent in high-quality gold stocks, mutual funds and ETFs.

 

Analysts Bullish on Metals and Commodities

Weaker US Dollar helped commodities beat the market in july

click to enlarge

Like stocks, the U.S. dollar continued its slide last week. This has lent support not just to gold but also commodities, specifically industrial metals. The Bloomberg Commodity Index actually beat the market in July, the first time it’s done so this year.

If we look at the index’s constituents, we find that six metals—aluminum, copper, zinc, gold, silver and nickel—have been the top drivers of performance this year, thanks to a weaker dollar, China’s commitment to rein in oversupply and heightened demand. According to Bloomberg, an index of these six raw metals has jumped to its highest in more than two years.

Some market observers believe this is only the beginning. Guy Wolf, an analyst with Marex Spectron Group, told Bloomberg that he doesn’t “see anything” to make him doubt the firm’s belief that metals “are now in a bull market.”

“As people start to realize that the reasons for prices going up are robust and sustainable, that’s going to bring more money into the market,” Wolf added.

This bullish sentiment is shared by Mike McGlone, senior commodities analyst with Bloomberg Intelligence, who writes that commodities’ strong performance in July  “could be the beginning of a trend.”

“Supported by demand exceeding supply, on the back of multiple years of declining prices, a peaking dollar should mark an inflection point for sustained commodity recovery,” McGlone says.

I can’t say whether we might eventually see the highs of the commodities supercycle in the 2000s, but this news is certainly constructive.

Aluminum Liftoff

The top performer right now is aluminum, up more than 20 percent year-to-date. Last week it breached $2,000 a tonne for the first time since December 2014 and is currently trading strongly above its 50-day and 200-day moving averages.

US ISM non-manufacturing PMI sinks to 11 month low in july
click to enlarge

Demand for aluminum is growing in the automotive and packaging industries, its two key markets. With consumers and governments demanding better fuel efficiency, automakers are increasingly turning to aluminum, which is around 40 percent lighter than steel. According to Ducker Worldwide, a market research firm, the amount of aluminum used to build each new vehicle will double between the early 2010s and 2025, eventually reaching 500 pounds. That’s up from only 100 pounds per vehicle, which was the case in the 1970s. Airline manufacturers such as Boeing and Airbus are also expected to increase demand for the lightweight metal.

Supply-side conditions are also improving. Prices have struggled in recent years as China—which accounts for roughly 40 percent of world output—flooded the market with cheap, and often illegal, metal. Recently, however, the Asian giant has called for dramatic capacity cuts in a number of provinces. By the end of 2017, an estimated 4 million metric tons of capacity will have closed, or one-tenth of the country’s total annual output, according to MetalMiner.

Also supporting prices is the Commerce Department’s decision last week to slap duties on aluminum coming into the U.S. from a number of Chinese producers that were found to be heavily subsidized by the Chinese government.

The Virginia-based Aluminum Association applauded the decision, saying that its members “are very pleased with the Commerce Department’s finding and we greatly appreciate Secretary [Wilbur] Ross’s leadership in enforcing U.S. trade laws to combat unfair practices.”

The aluminum industry, the trade group says, supports more than 20,000 American jobs, both directly and indirectly, and accounts for $6.8 billion in economic activity.

Miners Getting Back to Work

There’s perhaps no greater signal of a shift in sentiment than an increase in mining activity as producers take advantage of higher prices. Bloomberg reported last week that the number of new holes drilled around the globe has accelerated for five straight quarters as of June. What’s more, drilling activity so far this quarter, as of August 7, suggests that number could extend to six quarters.

US ISM non-manufacturing PMI sinks to 11 month low in july
click to enlarge

I believe activity will only continue to expand as China pursues further large infrastructure projects, which will require even more raw materials such as aluminum, copper, zinc and other base metals. And I still have confidence that Trump and Congress can deliver on a grand infrastructure deal—the president has been turning up the heat on Senate Majority Leader Mitch McConnell, writing on Twitter that the Kentucky senator needs to “get back to work” and put “a great Infrastructure Bill on my desk for signing.”

With government spending on infrastructure falling to a record low of 1.4 percent of GDP in the second quarter, such a bill would help modernize our nation’s roads, bridges, waterways and more. It would also serve as a huge bipartisan win for Trump, which he sorely needs to build up his political capital.

But beyond that, a $1 trillion infrastructure deal would greatly boost demand for metals and other raw materials, perhaps ushering in a new commodities supercycle.

 

 

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 Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.

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 6/30/2017: The Boeing Co., Airbus SE.

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How to Invest in China’s New High-Tech Economy
August 9, 2017

How to Invest in China’s New High-Tech Economy

I’m pleased to share with you that our China Region Fund (USCOX) beat its benchmark, the Hang Seng Composite Index (HSCI), by an impressive margin for the one-year, three-year and five-year periods, as of August 1. The fund has closely tracked the HSCI, but since late February of this year, it’s pulled sharply ahead.

U.S. Global Investors China region fund beat benchmark in multiple time periods
click to enlarge

There have been recent fears among economists and investors alike that China’s debt-fueled economy would contract as it transitions from old-school manufacturing to services, but the Asian giant has been far more resilient than most anticipated. Its gross domestic product (GDP) for the second quarter rose 6.9 percent over the same period last year, beating expectations and putting the country on track to meet the International Monetary Fund’s 2017 growth forecast of 6.5 percent.

China's second quarter GDP growth in Line with Three-Year Average
click to enlarge

June economic data was particularly robust. Services were among the main contributors to growth, rising 7.7 percent year-over-year. Industrial production accelerated 7.6 percent during the month. Exports rose 11.3 percent compared to June 2016, totaling nearly $200 billion.

China’s manufacturing industry also continued to expand, with the country’s official purchasing manager’s index (PMI) posting a 51.4 in July. While this is down slightly from June’s 51.7, it’s still above 50, indicating growth, and marks the 12th straight month of expansion.

Chinese manufacturing holds above 50 in July
click to enlarge

This has all been a tailwind for USCOX, but we managed to beat the HSCI mainly by pivoting toward what I call China 2.0 and overweighting companies involved in high-tech industries. The second-largest economy has long fulfilled the role as the world’s top workhorse, producing biblical amounts of nearly every key resource, from cement to coal to steel. But lately, China has begun focusing its massive workforce and intellectual capital on advanced manufactured goods and services, which its own citizens demand more and more of as incomes rise.

This is where we see the most attractive opportunities for growth in China—not necessarily in the cement factories of Anhui Province but in the tech hubs of Shenzhen, Shanghai and Beijing.

China’s Rapid Digitalization

As the economic think tank Milken Institute wrote in September 2016, Shenzhen is “one of the pioneers in China’s new economy.” Not only is the city a fast-growing tech hub, but it’s also a “fertile ground for startup companies.”

The city is home to Chinese internet services provider Tencent, which surpassed Wells Fargo in April as the world’s 10th biggest company by value. It’s one of the largest holdings in USCOX and has been a top performer of 2017, up 70 percent year-to-date as of August 7.

The firm’s online payment system, Tenpay, has been a phenomenal revenue driver as China has steadily become the world’s largest e-commerce market, representing 42 percent of all online transactions globally as of 2016. That’s up remarkably from only 0.4 percent of all such transactions in 2005, according to management consulting firm McKinsey & Company.

It’s not hard to see what’s driving this rapid digitalization. Today’s China, with a relatively youthful median age of 37 and high urbanization rate, has 731 million internet-users—more than the U.S. and European Union combined. Since 2012, the country has been the world’s largest smartphone market, which has benefited companies such as Tencent.

It’s also been a tailwind for Chinese electronic components producers, Sunny Optical Technology Group among them. The research and development company is one of the largest cell phone camera module manufacturers in the world, but it also produces lenses for numerous other applications, including microscopes, drones, TVs, automobiles and more.

sunny optical technology group share price
click to enlarge

One of our top holdings in USCOX, Sunny Optical is up 185 percent year-to-date as of August 7. Its stock popped 17 percent on July 18 after the company reported net profit for the first half of the year was 120 percent over the same period in 2016.

Among other Chinese tech firms we like are BYD Electronic, TravelSky Technology and Apple-supplier AAC Technologies.

Autos Driving Fund Performance

Also driving fund performance were automobile manufacturers. As the number one auto market, China had a knockout 2016, with sales jumping 13.7 percent to 28 million units as consumers took advantage of the government’s tax cut on smaller-engine vehicles. The country registered more than 352,000 new electric vehicles in 2016, compared to only 159,000 in the U.S.

Sales slipped in the first quarter of this year as the tax cut was reduced, but they recovered in June, rising 2.3 percent compared to the same month last year.

Our two favorite Chinese auto names right now are Guangzhou and Geely Auto, the latter of which was our top holding in USCOX as of June 30. Geely, which bought Swedish car-manufacturer Volvo in 2010, is China’s largest non-government controlled automaker. July sales rose an amazing 88 percent compared to the same month last year, bringing the company’s market capitalization up to $22 billion. That’s about half of Ford Motors’ $43 billion market cap.

Year-to-date as of August 7, Geely shares are up more than 150 percent.

Old Economy Still Thriving

None of this is to suggest that China’s old economy, characterized by raw materials production and low-cost manufacturing, is disappearing any time very soon. The country cranked out a record amount of raw steel in June, with output rising to 73.23 million metric tons, a 5.7 percent increase over June 2016. Mill and smelter operators, responding to high steel prices, didn’t seem fazed by President Donald Trump’s threat to impose tariffs on Chinese steel, used in everything from cars to bridges to skyscrapers.

We’re focusing mostly on more advanced, high-tech industries, however, because that’s where we see the greatest opportunities for growth. The results, as you can see in the performance charts above, speak for themselves.

 

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. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Total Annualized Returns as of 6/30/2016
  One-Year Five-Year Ten-Year Gross Expense Ratio
China Region Fund 33.80% 7.01% -0.35% 2.76%
Hang Seng Composite Index 28.24% 9.43% 4.60% n/a

Expense ratios as stated in the most recent prospectus. The Adviser of the China Region Fund has voluntarily limited total fund operating expenses (exclusive of acquired fund fees and expenses of 0.02%, extraordinary expenses, taxes, brokerage commissions and interest, and advisory fee performance adjustments) to not exceed 2.55%. With the voluntary expense waiver amount of 0.38%, total annual expenses after reimbursement were 2.36%. U.S. Global Investors, Inc. can modify or terminate the voluntary limit at any time, which may lower a 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.

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 Hang Seng Composite Index is a market-cap weighted index that covers about 95% of the total market capitalization of companies listed on the Main Board of the Hong Kong Stock Exchange.

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 China Region Fund as a percentage of net assets as of 6/30/2017: Tencent Holdings Inc. 6.20%, Wells Fargo & Co. 0.00%, Sunny Optical Technology Group Co. Ltd. 6.75%, BYD Electronic Co. Ltd. 3.85%, TravelSky Technology Ltd. 3.34%, Apple Inc. 0.00%, AAC Technologies Holdings Inc. 3.00%, Guangzhou Automobile Group Co. Ltd. 4.63%, Geely Automobile Holdings Ltd. 8.96%, Ford Motor Co. 0.00%. 

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In July, the Institute for Supply Management’s (ISM) Non-Manufacturing Index fell to an 11-month low of 53.9, 3.5 points below its June reading of 57.4. The index measures the non-manufacturing, services industries such as food services, education, real estate, health care and more.

U.S. ISM Non-Manufacturing PMI sinks to 11-month low in July
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Economists had expected a reading closer to 56.9, so it’s safe to call this a disappointment. Although the index is still above the key 50 threshold, where it’s held for 91 straight months now, the slowdown suggests that “the economy may have lost some momentum going into the third quarter,” as Capital Economics’ Andrew Hunter said in a note last week.

Following this report, it’s possible we’ll see the U.S. dollar rally before pulling back even further. Having hit a 15-month low last week, the dollar looks oversold and ready for a “retracement,” as CLSA’s Christopher Wood put it.

“It remains remarkable how weak the dollar has been so far this year given the Fed’s surprisingly hawkish rhetoric and given that its latest statement last week still suggests that the American central bank intends to commence balance sheet contraction next quarter,” Wood wrote in the latest “GREED and fear.”

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I’ll have more to add on the Fed’s balance sheet later. 

July was the dollar’s fifth consecutive month of losses, the longest such stretch since December 2010 through April 2011. As I said in a Frank Talk last week, the major contributing factor to the greenback’s slide is political uncertainty surrounding President Donald Trump and Congress. Not only did the Obamacare repeal and replace bill fail (again), but Trump’s White House continues to look like a revolving-door workplace, with the foul-mouthed Anthony Scaramucci pushed out as communications director last week after only 10 days on the job. This reportedly came at the urging of brand new chief of staff John Kelly, who recently replaced Reince Priebus.

But it’s no secret that Trump favors a weaker currency. Since he declared that the dollar was “getting too strong” back in April, it’s lost close to 8 percent of its value against a basket of several other currencies. Add to this the disappointing ISM report, weakening automobile sales and slightly lower-than-hoped-for GDP growth in the second quarter, and it seems less and less likely we’ll see more than one additional rate hike in 2017.

Economic Growth Revised Down

On Friday, the Labor Department announced the U.S. economy added a robust 209,000 jobs in July, beating the consensus, while the unemployment rate dropped even further to a 16-year low of 4.3 percent.

Wage growth, however, remained pretty flat, which is a concern. Consumption is the number one driver of economic growth in the U.S., and if American workers aren’t getting raises, they’re not spending more.

All of this is spurring some economists to rethink their U.S. growth estimates. In its World Economic Outlook for July, the International Monetary Fund (IMF) revised down its domestic economic growth forecast, from 2.3 percent to 2.1 percent in 2017, and from 2.5 percent to 2.1 percent in 2018. The Washington-based fund attributes this revision to “the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of U.S. fiscal policy changes.”

IMF economists, in other words, have doubts that tax reform, deregulation or an infrastructure package will be coming anytime soon.

We’ll see if they’re right. After the August recess, Congress plans to tackle tax reform, which the U.S. sorely needs. I hope lawmakers can come together and pass a comprehensive bill this fall that will deliver some relief to American workers, families and corporations.

Fed to Take Away the Punchbowl

Big changes could be coming on the monetary side this fall as well. In an address to the Economic Club of Las Vegas last week, President and CEO of the Federal Reserve Bank of San Francisco John Williams said the Fed will likely begin the process of monetary normalization as soon as next quarter. This includes unwinding the Fed’s $4.5 trillion balance sheet, composed of long-term Treasuries and mortgage-backed securities (MBS). The process could take up to four years to complete.

Federal reserve expected to begin unwinding its balance sheet this fall
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Now that “we’ve finally recovered from the recession,” Williams said, it’s time for the private and public sectors to “step up and take the lead in making the investments and enacting policies needed to improve the longer-term prospects of our economy and society.”

I agree 100 percent. For nearly 10 years now we’ve seen an imbalance in monetary and fiscal policies, with the economy and stock market being propped up by cheap credit.

There’s a historical risk in the Fed reducing its balance sheet, though. The central bank has embarked on this reduction six times in the past—in 1921-1922, 1928-1930, 1937, 1941, 1948-1950 and 2000—and all but one episode ended in recession.

That’s according to research firm MKM Partners, whose chief economist, Mike Darda, urged attendees of a Fidelity event in May to hope for the best but prepare for the worst.

New York Post Survivor White House

“My opinion is that business cycles don’t just end accidentally,” Darda said. “They are killed by the Fed. If the Fed tightens enough to induce a recession, that’s the end of the business cycle.”

So how can investors prepare?

“Obviously, diversification is important,” Darda said, highlighting municipal bonds and emerging markets. “But my focus there would be on the commodity-importing emerging markets.”

Fidelity’s Julian Potenza seconded Darda’s emphasis of muni bonds, saying “investors should consider keeping the portion of their fixed-income portfolio that is currently earmarked for liquidity relatively short, in terms of duration.”

Indeed, shorter-duration, tax-free munis have a history of delivering positive returns even during economic downturns and in environments of rising and lowering interest rates.

 

As for emerging markets, CLSA reported last week that international ETF inflows so far this year are outpacing domestic U.S. ETF inflows, $103 billion to $86 billion. The brokerage and investment firm recommended an overweight position in emerging markets, specifically Europe ex-U.K.

Tech Stocks a Third of Market Gains in 2017

For the second quarter, close to a record 75 percent of S&P 500 Index companies are beating not just sales estimates but also earnings per share (EPS) estimates, according to FactSet data. What’s more, they’re beating these estimates by wider margins than historical second-quarter averages.

Record 73% of s&p 500 companies have beaten sales estimates in second quarter
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Granted, only around 60 percent of companies have reported as of this writing, but the news is impressive nonetheless.

How much of this is due to euphoria over Trump’s pro-growth fiscal agenda, and how much to a weakening U.S. dollar? That’s difficult to say, but no one can argue the fact that American multinationals are benefiting from a weaker dollar, which makes their exports more competitive globally. Apple, which generated 61 percent of its revenue from foreign markets in the second quarter, just reported an all-time quarterly services revenue record. “Services,” which includes Apple Music, iTunes, iCloud and Apple Pay, brought in an astounding $7.3 billion, up from $6 billion during the same quarter last year.

Speaking of Apple, it’s one of only five U.S. stocks that, together, are responsible for a third of the market’s gains in 2017, the other four being Amazon, Facebook, Microsoft and Alphabet (Google). As you can see below, information technology is up close to 22 percent year-to-date, followed by health care at 15.5 percent.

tech stocks disproportionately driving market gains
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The reason I share this with you is because, while the market appears to be seeing solid growth right now, it’s being propelled disproportionately by only a handful of tech stocks. The S&P 500 is up 10.6 percent, but if we remove information technology, it’s up only around 7.5 percent. This makes the market vulnerable, should those stocks see a correction.

And that’s why I believe it’s particularly important to stay diversified, as Mike Darda said—diversified in emerging markets, which offer attractive valuations; muni bonds; and, as always, gold and gold stocks.

 

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 ISM Nonmanufacturing index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM). The ISM Non-Manufacturing Index tracks economic data, like the ISM Non-Manufacturing Business Activity Index. A composite diffusion index is created based on the data from these surveys that monitors economic conditions of the nation.

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

Earnings per share (EPS) is a figure describing a public company's profit per outstanding share of stock, calculated on a quarterly or annual basis. EPS is arrived at by taking a company's quarterly or annual net income and dividing by the number of its shares of stock outstanding.

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

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 6/30/2017: Apple Inc.

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Net Asset Value
as of 10/20/2017

Global Resources Fund PSPFX $5.82 0.01 Gold and Precious Metals Fund USERX $7.69 -0.23 World Precious Minerals Fund UNWPX $6.19 -0.14 China Region Fund USCOX $11.55 0.20 Emerging Europe Fund EUROX $7.02 -0.01 All American Equity Fund GBTFX $24.53 0.26 Holmes Macro Trends Fund MEGAX $20.86 0.07 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change