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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.

No One Ever Said Brexit Was Going to Be Easy
December 11, 2018

The Yield Curve Just Inverted for the First Time in Years. Time to Reconsider Risk?

If you followed some of my posts from two years ago, you might recall that I was in favor of Brexit. I still am. One of British voters’ main grievances was the heavy burden of European Union (EU) regulations, many of which are decided by unelected bureaucrats in Brussels. Altogether, these regulations cost U.K. businesses an estimated 33.3 billion pounds every year. Voters should have the right to decide whether to abide by these rules, which hamper business, or choose a different path.

At the same time, I was realistic about the huge, unprecedented challenges this divorce presented—to the United Kingdom, but also to the EU and its main trading partners. “Global growth is unstable, especially in the EU, and Brexit will only add to the instability,” I wrote. “This will likely continue to be the case in the short and intermediate terms as markets digest the implications of the U.K.’s historic exit.”

No one said it was going to be easy.

Today was supposed to be the day when U.K. Members of Parliament (MPs) voted on Prime Minister Theresa May’s Brexit deal with the EU, capping off two and a half years since Britons elected to leave the 28-member bloc.

Yesterday, however, May postponed the vote in the face of certain defeat, thanks largely to disagreement over how best to deal with the border between Northern Ireland (part of the U.K.) and the Republic of Ireland (part of the EU).

The British pound sterling promptly lost as much as 1.25 percent against the U.S. dollar, falling to its lowest level in more than a year and a half as foreign investors halted nearly all trading of the currency, according to the Financial Times.

British stocks, as measured by the FTSE 100 Index, extended losses for the fourth time out of the past five trading days. Telescoping their uncertainty of May’s deal, investors sent London-listed stocks plummeting 3.15 percent last Thursday in the worst session since the day after the Brexit referendum in June 2016.

British pound and stocks slipped after delay of Brexit vote
click to enlarge

The question on everyone’s mind is: What happens now? 

Between a Rock and a Hard Place

As I see it, there are three main options: 1) leave the EU without a deal (the “hard” Brexit); 2) halt the entire Brexit process, leaving open the possibility of another referendum; and 3) go back to the drawing board and renegotiate.

By any measure, a hard Brexit would be disastrous. Thomas Verbraken, executive director of risk management research at MSCI, estimates that U.K. stocks could fall as much as 25 percent, European stocks at least 10 percent, if either Parliament rejects the deal or a “disorderly Brexit” is triggered. In such a scenario, according to Morningstar’s Alex Morozov, the British auto industry would fare the worst since its entire supply chain is highly integrated with the EU, including parts manufacturing and vehicle production. U.K. and EU aerospace and defense companies such as Airbus, Rolls-Royce and Meggitt are also highly exposed to Brexit risks.

As for the second option, May has already nixed the idea of bringing a halt to Brexit, even though the European Court of Justice (ECJ) just ruled that the U.K. can “unilaterally withdraw its notification to leave the European Union without the permission of other EU countries,” according to Politico.

May’s job may be in peril because of her handling of Brexit—Jeremy Corbyn, leader of U.K.’s Labour Party, could push for a vote of no confidence at some point—but here I think she made the right decision. The people of the United Kingdom spoke. Even though Britons’ approval of EU leadership has improved since the 2016 referendum, disapproval is still above 50 percent.  

More than half of britons still disapprove of european union leadership
click to enlarge

That brings us to option number three. The problem here is that the nearly-600-page agreement already required a year’s worth of back-and-forth. European Commission President Jean-Claude Juncker made clear today that Brussels will not reopen negotiations. “The deal we have achieved is the best deal possible—it’s the only deal possible,” Juncker said. “So there is no room whatsoever for renegotiation.”

What there is room for, according to Juncker, is clarification and reinterpretation of the deal.

So Where Does This Leave Things?

I don’t believe anyone knows the answer to this question. As of now, the U.K. is scheduled to leave the 28-member bloc on March 29 of next year. I hope that before that time, MPs can be convinced that the package May has delivered is the best possible solution to an impossible situation.

I urge investors to be cautious. Brexit isn’t the only geopolitical risk to stocks right now. Here in the U.S., Democrats will take control of the House in about a month, and although talk of impeaching President Donald Trump is premature, it’s certain we’ll see innumerable new investigations into this administration.

With a new year about to begin, it might be a good time to rebalance your portfolio and make sure you have a 10 percent weighting in gold, with 5 percent in bullion and jewelry, the other 5 percent in high-quality gold mining stocks, mutual funds and ETFs. I also recommend short-term, tax-free municipal bonds, as they’ve performed well even in times of economic pullbacks and bear markets.

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 FTSE 100 Index is an index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2018.

 

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A New Wrinkle in the U.S.-China Trade Dispute
December 10, 2018

Frank in Washington at the Senate Press room

Last week I had the opportunity to attend the Young Presidents Organization (YPO) parliamentary intelligence forum in Washington, D.C. More than 200 members of parliaments from as many as 60 European countries joined us to hear from such dignitaries as Congressmen Robert Pittenger (R-NC) and Mike McCaul (R-TX), chairman of the Homeland Security Committee.

While in D.C., I was very honored to be invited into the epicenter of power and decision-making. That includes the Senate Press Office, pictured above, and the west front of the U.S. Capital facing the National Mall, where every president since Ronald Reagan in 1981 has been inaugurated.

It was there that George H.W. Bush took the oath of office, exactly 200 years after George Washington did. Newly arrived to Texas from Canada, I remember watching Bush’s inauguration on TV and being moved by his testament to freedom: “We know how to secure a more just and prosperous life for man on Earth,” he said, “through free markets, free speech, free elections and the exercise of free will unhampered by the state.”

The memory was made all the most poignant by the flags flying at half-staff, and the fact that I was standing in the same building where, just 24 hours earlier, the former president’s remains lied in state.

Remembering the 41st President

President George HW Bush 1924-2018

The life of George Bush, son of a U.S. senator and father of two governors and a president, stands as a case study in sacrifice and service. On the same day that he graduated from high school in 1942, he enlisted in the United States Navy. The country’s youngest Navy pilot at the time, Bush went on to receive the Distinguished Flying Cross after completing a bombing mission despite his plane being engulfed in flames from Japanese fire.

And from there it only gets more interesting.

Founder of a successful oil and gas company, congressman in the House of Representatives, ambassador to the United Nations, special envoy to the People’s Republic of China (before the U.S. had diplomatic relations with the Asian country), director of the Central Intelligence Agency (CIA), two-term vice president—Bush was and remains to this day perhaps the most qualified and well-equipped chief executive ever to set foot in the Oval Office.

As the 41st president, he oversaw the collapse of the Soviet Union and reunification of Germany, putting him at odds with U.K. Prime Minister Margaret Thatcher and French President Francois Mitterrand, who favored a divided Germany. His decision to push back Iraqi forces from Kuwait, arguably the greatest defining moment of his one-term presidency, was both a military and political success.  

American voters ultimately denied him a second term, however, once they felt his pledge to create “no new taxes” went unfulfilled. As part of a compromise with the Democratic-controlled Congress, Bush agreed to raise taxes to help reduce the national deficit. The episode is a reminder of a time when politicians’ duty to country trumped duty to party, even if it jeopardized reelection.

That deep sense of duty sustained him for the rest of his 94 years. Bush was involved in a number of charities and humanitarian efforts, most notably the Bush Clinton Coastal Recovery Fund. The fund— spearheaded in cooperation with his former political rival and, some might say, unlikely friend Bill Clinton—raised tens of millions of dollars for families impacted by 2005’s Hurricane Katrina.

On behalf of everyone at U.S. Global Investors, I extend my gratitude and sympathy to the Bush family. May George Herbert Walker rest in peace and remain firmly in our memory.

Stocks Hit on Renewed U.S.-China Trade Concerns

On a very different note, global stocks last week plunged on concerns that trade negotiations between the U.S. and China are not running as smoothly as initially thought. The S&P 500 Index is not only having one of its worst quarters in years, but it could also end up in the red for the year for the first time since 2008.

Adding to the uncertainty was news of the arrest in Canada of the chief financial officer (CFO) of Chinese tech giant Huawei. Although no charges have been filed yet, the company has long been investigated by U.S. authorities, and more recently it’s been suspected of violating economic sanctions against Iran. The CFO, Meng Wanzhou, faces extradition to the U.S.

A Huawei smartphone

The name might not be known to most Americans, but Huawei is the world’s second-largest manufacturer of smartphones following Samsung, and the largest supplier of telecommunications equipment. Meng is not only a top executive but also the daughter of the company’s founder, Ren Zhengfei, a former officer in the People’s Liberation Army who has close ties to the Communist Party of China.

Imagine a foreign power arresting the daughter of Steve Jobs, and you might get some idea of how big a deal this is.

President Donald Trump has levied much of his criticism on China for “unfair” trade practices and stealing intellectual property from the U.S. As I told you back in March, China’s J-31 stealth fighter jet is believed to be a knockoff of Lockheed Martin’s F-35. (A 2014 whitepaper on Huawei, in fact, states that the tech firm got its start in 1987 by “reverse-engineering foreign products and using that as the foundation to develop more complex technologies.”) But America’s beef with Huawei, and its Hong Kong-listed rival ZTE, go back further than the start of this administration and rest on suspicions their phones and other telecomm products might be used for espionage.

In 2012, after investigating Huawei and ZTE, the House Permanent Select Committee on Intelligence concluded that the two firms could be seeking to “undermine core U.S. national-security interest.” Committee members recommended that the U.S. block any mergers and acquisitions involving the companies and that all U.S. governmental agencies not use their equipment. Earlier this year, officials with the CIA, National Security Agency (NSA), Federal Bureau of Investigation (FBI) and Defense Intelligence Agency (DIA) testified before the Senate Intelligence Committee that Huawei and ZTE’s phones posed a security risk to American consumers.       

In any case, Meng’s arrest last week rattled investors, convincing many of them that U.S.-China trade talks are deteriorating rather than improving. We saw a knock-on effect among a number of Huawei’s suppliers, including lens-maker Sunny Optical (down almost 5.5 percent last Thursday), data networking firm Inphi (off 9.25 percent) and California-based NeoPhotonics (down more than 16 percent).

U.S. Trade Deficit Just Widened Even More

Speaking of trade, the U.S. deficit with the rest of the world tumbled to a 10-year low in October. According to Zero Hedge, the “trade deficit was $55.5 billion in October (worse than the $55.0 billion expected and well down from the $54.6 billion revised print for September)… underscoring continued fallout from the trade dispute with China.”

As for the U.S.-China trade deficit—the difference between exports and imports—that measure widened to a new all-time low of $43.1 billion in October, down from $40.2 billion a month earlier. The fall in net exports is expected to weigh heavily on fourth-quarter gross domestic product (GDP) growth.

US trade deficit with China fell to a record low in October
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The trade report comes at a time when additional tariffs on goods coming into the U.S. are increasingly to blame for stock volatility this year. A new analysis by Bank of America Merrill Lynch suggests that worries about tariffs have trimmed some 6 percent off domestic stocks in 2018 alone.

What’s more, tariffs could be costing American households more than most realize. Last month a study conducted by consulting firm ImpactECON and commissioned by Koch Industries—an opponent of Trump’s trade policies despite its billionaire chief executive brothers, Charles and David, being top Republican donors—estimated that tariffs would cost each U.S. household nearly $2,400 in 2019, or $915 per person. GDP growth could be reduced 1.78 percent next year, with losses close to $2.8 trillion between now and 2030, if current trade actions were allowed to stay in place, the study says. As many as 2.75 million American workers “are likely to become unemployed” in 2019 “if all trade actions are implemented concurrently.”

Gold Price Rises on Weaker-Than-Expected Jobs Report

Speaking of employment, the U.S. added 155,000 jobs in November, falling far short of expectations. The U.S. dollar pulled back slightly as a result, prompting gold to trade at a five-month high of more than $1,255 per ounce. Earlier in the week, the price of palladium briefly overtook gold’s on tightening supply and increased automobile demand. (The silvery white metal is used to manufacture catalytic converters). But if economic uncertainty continues to weigh on the dollar, we could see gold lift even higher and safely retain its spot as the most valuable precious metal.

Palladium briefly became most precious metal for first time in 16 years
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As I reminder, I recommend that investors maintain a 10 percent exposure to gold in their portfolio—half of that in gold coins, bars and jewelry; the other half in high-quality gold mining stocks, mutual funds and ETFs. Remember to rebalance at least once a year.

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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

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 09/30/2018: Sunny Optical Technology Group Co.

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Talking Tech With Pulitzer Prize Nominee Michael Robinson
November 28, 2018

Michael Robinson, chief technology strategist of Money Map Press, is a lot of things: devoted son and father, technologist, avid skier and gun enthusiast, accomplished blues guitarist, Pulitzer Prize nominee.

Readers of his popular newsletters know him for his mantra, "The road to wealth is paved with tech.” As editor of Strategic Tech Investor, Nova-X Report and Radical Technology Profits, Michael has helped curious investors get in early on small-cap and micro-cap names involved in biotech, defense, cannabis research and more.

I got to see Michael’s presentation at the Black Diamond Investment Conference in October and was impressed by his energy, interesting life story and deep knowledge of niche markets.

Below are snippets from our recent discussion, which touches on topics ranging from trap shooting to cannabis legalization to blockchain technology.

Tell us about your start in military tech and biotech.

I grew up in a military household. My dad was a Marine Corps officer, and later he became the senior military editor at Aviation Week & Space Technology. He was among the earliest to write about the Strategic Defense Initiative (SDI), popularly known as Star Wars. So as a high schooler, I was exposed to all of these exotic defense technologies—materials, sensors, warheads and the like—which really gave me a leg up.

My dad and I ran a high-tech military newsletter in the 1980s. This put me in a position to visit Silicon Valley pretty regularly and talk with scientists and CEOs about cutting edge tech—materials that made battleships and submarines quieter, for example.

As a young auto analyst and reporter, I managed to break some big tech stories because I was willing to look away from the mainstream. The biggest story I did actually led to the firing of two executive vice presidents, which cost the bank close to $80 million. The New York Times and Wall Street Journal ended up having to cover the story, so that helped put me on the map.

I got involved in biotechnology later through my work at what was then the Oakland Tribune. The biotech sector was brand new in the mid-80s, and I was in California where it was all happening. While there, I did a five-part series on Betaseron, the first FDA-approved biotech drug to treat multiple sclerosis (MS).

How did you make the leap to the financial world?

That just felt like the natural next step. Every time I left a Silicon Valley presentation on some new tech, I would think: "That's really cool, but how can you make money off of it?" So even though I consider myself a technologist, I'm always looking at the financial angle.

What’s more, I served on the advisory board of a venture capital company. The experience gave me a different way of evaluating startups than a standard financial analyst, who might be trained only to do ratio analysis and things like that. There's nothing wrong with ratio analysis, but it's not going to give you the kinds of insights and instinct you need to figure out which companies really have it together and which don’t.

You’re known to have a strong interest in guns and shooting. Did that come out of your dad’s military background?

I never really thought of it that way. I just love shooting guns. Mostly these days I shoot trap and skeet. I joined the National Rifle Association (NRA) because I wanted to qualify as a Triple Distinguished Expert in pistols, rifles and shotguns. Shotgun was the most difficult, I thought.

The amount of concentration that's required to shoot at a high level really appeals to me. You have to block out all distractions. In that respect, shooting is a lot like investing. One of the things I remind readers and clients is to separate the signal from the noise. You can't become a good shot if you can't block out all the external distractions and things. Similarly, investors must learn to block out short-term market noise before they pull the trigger, so to speak.

Who would you say are your biggest influences?

Besides my dad, I would have to say the renowned economist Milton Friedman. I had the great pleasure to interview him once for the American Enterprise Institute (AEI). I remember he had a portrait of himself done, but his wife wouldn’t let him hang it up on the wall in their Nob Hill condo. It’s funny—here’s one of the world’s greatest economic thinkers, a Nobel Prize winner, and he had his portrait just sort of propped up in a corner somewhere.

In any case, Friedman was a huge influence on the way that I think about economics. In my freshman year when I was signing on to be an economics major, I remember reading about how iconoclastic he was, how out of step he was with the rest of the economics community, which was very Keynesian at the time. I learned the true value of contrarianism from studying him and looking at things like freedom to choose. Ayn Rand was another huge influence in that respect.

Michigan just voted to legalize recreational cannabis, making it the first Midwest state to do so. Is this a tipping point?

I think the tipping point probably occurred in 2016, when as many as nine states had cannabis legalization on their ballots. That year is also when we launched our investment report, the Roadmap to Marijuana Millions. All 30 of the stocks we recommended made money. The reason I say that is not to brag about our track record, but to point out that we saw large numbers of new investors coming in, willing to take the risk, wanting to be early and understand the industry.

Michigan, for me, was an affirmation of this critical mass. It’s also a reminder of what we need more of to attract institutional investors: initial public offerings (IPOs), mergers and acquisitions (M&As), up-listings to major exchanges.

Obviously the biggest catalyst would be something out of Washington—an effort to reclassify marijuana off of Schedule I, for instance. I would love to see that happen, as would my dad, the Marine Corps officer, but I don’t believe the support is there right now.

You recently argued that blockchain technology should not be used for voting, for reasons involving secrecy and anonymity. In what industries do you see its application making the most sense?

Literally everything. Supply chain management is a huge area that could benefit from blockchain. Look at the oil industry, which still uses this old paper-based system. Companies that have already shown interest in blockchain are British Petroleum (BP) and Royal Dutch Shell, among others.

Counterfeit goods is a problem that runs in the hundreds of billions of dollar every year. Blockchain can help with that. You can use it to tag and identify goods early on, and then they can be tracked with some kind of a distributed ledger.

Or look at financial services. Frank, you’ve pointed out a number of times before that JPMorgan Chase CEO Jamie Dimon has criticized cryptocurrencies, and yet the bank was quietly investing millions upon millions.

Speaking of cryptocurrencies, they’re down significantly this year. Do you think now is a good time to buy, or is more pain ahead?

I fear about jumping in right now. Are we at the bottom of bitcoin? I don't know. One thing I do know is that this crypto selloff may be healthy in the long-term. There’s been an insane number of initial coin offerings (ICOs), which have really hurt bitcoin and Ethereum. We need to sweep out some of the smaller coins because 2,000 cryptos is more than the world can possibly absorb. There has to be a shakeout.

Total currency market capitalization
click to enlarge

You work on several newsletters. Can you describe them for our readers and explain what value they bring?

The main value they bring is making our readers a lot of money. For starters, we have Strategic Tech Investor, which is our free service. The idea is to give investors the rules they need to succeed and not be so emotionally-driven. Because it's free and it's open format, we want to educate investors, and hopefully they'll develop an interest in my investing style and decide to subscribe to one of our paid services.

That brings us to the Nova-X Report and Radical Technology Profits.

Nova-X focuses on mid-cap stocks and the lower end of large-caps. We feel that's a good comfort zone for entry-level investors who are looking for big trends and ways to make money that aren't necessarily household names. We try to get to market early.

Radical Tech is our premium service. It’s designed for much more savvy, much more aggressive people. We swing for the fences more than we do with Nova-X. The focus is on any kind of cutting-edge technology—small-caps and even some micro-caps.

As long as my readers make money, I know I'll do well. I take breaks from time to time, but for the most part I'm up well before dawn screening charts and looking at articles—anything to make our readers as much money as I can.

I want to thank Michael for his time and enthusiasm. Be sure to check out his newsletters!

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 9/30/2018: BP PLC, Royal Dutch Shell PLC.

 

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Freezing Temperatures Could Heat Up Natural Gas Prices
November 19, 2018

Midterm Elections Gridlock Was the Best Possible Outcome

Here in San Antonio, the temperature hit a bone-chilling low of 27 degrees last Wednesday, breaking a 102-year-old record for mid-November. An out-of-state visitor, Cornerstone Macro’s Head of Portfolio Insights Stephen Gregory, speculated that the Central Texas temperature, ordinarily mild this time of year, was down more than three standard deviations. I didn’t make the calculation, but my guess would be about the same.

With temperatures so low, it’s perhaps no surprise that natural gas had one of its best days in years. Its price popped almost 18 percent last Wednesday—before falling nearly as much on Thursday. The Energy Information Administration (EIA) reported that natural gas storage in the lower 48 states was below the five-year average as of October 31. This, combined with a stronger-than-expected start to winter, prompted traders to push prices to a four-year high of $4.84 per million British thermal units (MBtu). Meanwhile, natural gas futures trading hit an all-time daily volume record of 1.2 million contracts, according to CME Group.

Natural gas prices exploded
click to enlarge

Freezing temperatures increase demand for heating, much of which is provided by natural gas. In January of this year, when temperatures fell below the average in many parts of the U.S., demand reached a single-day record of 150.7 billion cubic feet, according to the EIA. I can’t say we’ll beat this record again in the coming months, but forecasts for more freezing weather this Thanksgiving week and beyond should support additional moves to the upside.

What kind of moves? Says Jacob Meisel, chief weather analyst at Bespoke Weather Services, the price could get to $7 or $8 per MBtus, levels we haven’t seen since 2008. “This looks like a capitulation move today, but if cold weather really takes off, the sky is the limit,” Meisel told CNBC.

Oil Selloff Steepest in Three Years, “Overdone”

Natural gas wasn’t the only commodity that broke records last week. On Tuesday, West Texas Intermediate (WTI) crude oil ended an extraordinary 12 straight days of losses, settling at a 2018 low of $55.69 per barrel, down more than 27 percent from its 2018 high in early October. Triggered by concerns of a global demand slowdown, the plunge is oil’s steepest in three years, and a stunning reversal from last month’s calls for $100-per-barrel crude.

The bears appear to have overreacted, though. “Crude-oil-position liquidations have never been this extreme, indicating the purge in WTI futures is overdone,” writes Business Intelligence strategist Mike McGlone, adding that petroleum markets have “never experienced a comparable decline over a similar period.” 

World Needs the Equivalent of Another Russia’s Worth of Crude

Again, the oil selloff halted last Tuesday, the same day the International Energy Agency (IEA) announced its estimate that U.S. shale will need to add the equivalent of Russia’s entire oil production by 2025 to prevent a global shortage. In its flagship “World Energy Outlook 2018,” the Paris-based group says that world oil consumption will increase significantly in the coming decades due to “rising petrochemicals, trucking and aviation demand.”

“U.S. shale production, which has already been expanding at record pace, would have to add more than 10 million barrels a day from today to 2025, the equivalent of adding another Russia to global supply in seven years—which would be an historically unprecedented feat,” according to the IEA.

Jets fyling high

The U.S. produced 11.7 million barrels of crude per day in the week ended November 9. That means shale producers would need to ramp up output to at least 21 million barrels in seven years, if the IEA’s estimates are accurate.

I think this would be a challenge, but a real possibility. The reason I think this is because the U.S. fracking industry continues to prove it can produce more with less. According to a recent report by the EIA, U.S. crude oil and natural gas production increased in 2017, despite there being fewer wells. This is thanks in large part to horizontal wells, which “contact more reservoir rock and therefore produce greater volumes” of oil and gas. Although more expensive to drill, horizontal wells are growing faster than traditional vertical wells. In 2017 they accounted for 13 percent of total well drills, up from only 10 percent three years earlier.

Also in the IEA’s outlook: By 2040, emerging markets, led by China and India, will account for 40 percent of global energy demand, up from 20 percent in 2000. Below, note how the European Union is expected to be displaced by India and Africa in terms of energy demand within the next couple of decades.

Emerging markets will account for 40 percent of global energy demand by 2040
click to enlarge

I believe only the U.S. fracking industry would be able to meet this demand. Russia and Saudi Arabia are pumping at record levels right now, but production cuts of as much as 1.4 million barrels per day are being discussed among members of the Organization of Petroleum Exporting Countries (OPEC) to firm up prices. If cuts do go into effect, U.S. producers can be expected to fill in the supply gap.

“It can happen but would be a small miracle,” said Fatih Birol, the IEA’s executive director.

U.S. Shale “More Profitable Than Ever”

Normally, ever greater supply would weigh on prices and weaken profitability. Based on new data, it looks as if the U.S. fracking industry has changed the game.

According to Reuters, “U.S. shale firms are more profitable than ever after a strong third quarter,” according to the agency’s analysis of 32 independent producers. “These companies are producing more efficiently, generating more cash flow and consolidating in a wave of mergers.”

Nearly a third of these 32 companies “generates more cash from operations than they spent on drilling and shareholder payouts, a group including Devon Energy, EOG Resources and Continental Resources. A year ago, there were just three companies on that list,” Reuters writes.

Thanksgiving Travel to Hit 13-Year High

On a final but related note, this week is Thanksgiving, the busiest travel season of the year in the U.S. The American Automobile Association (AAA) predicts that the number of travelers on Thanksgiving Day, by auto and air, will top 54.3 million people, an increase of almost 5 percent from last year, and the highest volume since 2005.

Similarly, Airlines for America (A4A) believes U.S. Thanksgiving air travel demand between last Friday and November 27 will climb to an all-time high of 30.6 million passengers. “It is thanks to incredibly accessible and affordable flight options that more travelers than ever before are visiting loved ones, wrapping up year-end business or enjoying a vacation this Thanksgiving,” commented A4A Vice President and Chief Economist John Heimlich.

Thanksgiving 2018 US air travel demand estimated to rise 5 percent from last year
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While I’m on the topic of aviation, A4A also reported that U.S. airport revenues have grown faster than the consumer price index (CPI) as well as the number of air passengers and aircraft departures. From 2000 to 2017, airport revenues rose 87 percent, double the pace of U.S. inflation. Increased growth came thanks to a number of resources, from taxes and fees to the Passenger Facility Charge (PFC) and Airport & Airway Trust Fund (AATF).

US airport revenues have grown faster than flights passengers and inflation
click to enlarge

According to Fitch Ratings, “strong overall performance for U.S. airports should continue undeterred for the foreseeable future.” Over 90 percent of the airports Fitch currently rates have a “Stable Rating Outlook,” signifying continued stability deep into 2019.

Curious to learn more? Explore our latest slideshow, “How Do Airports Make Money?”

 

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.

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2018.

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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Two Big Reasons Why I Believe China Looks Attractive Right Now
September 25, 2018

emerging markets look like a buy after decoupling from the U.S. market

Emerging markets continue to decouple from the U.S. market, making them look attractive as a value play—particularly distressed Chinese equities. Below I’ll share with you two big reasons why I think China is well-positioned to outperform over the long term.

So far this year, the MSCI Emerging Markets Index has given up about 10 percent, mostly on currency weakness and global trade fears. The S&P 500 Index, meanwhile, has advanced roughly 9 percent as a flood of passive index buying pushes valuations up and companies buy back their own stock at a record pace.

emerging markets look like a buy after decoupling from the U.S. market
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S&P Dow Jones Indices reported this week that buybacks in the second quarter increased almost 60 percent from the same three months a year ago to a record $190.6 billion. For the 12 months ended June 30, S&P 500 companies, flush with cash thanks to corporate tax reform, spent an unprecedented $645.8 billion shrinking their float. In the first half of 2018, in fact, companies spent more on buybacks than they did on capital expenditures.

As I told CNBC recently, this, combined with fewer stocks available for fundamental investing, could contribute toward a massive selloff when it comes time for multibillion-dollar index funds to rebalance at year’s end.

But let’s get back to emerging markets.

The Selloff Is Overdone, According to Experts

Again, China in particular looks like a buying opportunity with stocks down near a four-year low. Speaking with CNBC last week, chief executive of J.P. Morgan Chase’s China business, Mark Leung, said that the emerging market selloff is largely overdone. “If you look at the positioning and also the fundamentals side, we think there are reasons to start going into emerging markets for the medium and long term,” Leung said, adding, “China is a big piece.”

This view was echoed by Catherine Cai, chairman of UBS’s Greater China investment banking arm, who told CNBC that she believes “among all the emerging markets, China’s still representing the most attractive market.”

The U.S. just imposed tariffs on as much as $200 billion worth of Chinese imports, which will have the effect of raising consumer prices. Among the retailers and brands that have already announced they will be passing costs on to consumers are Walmart, General Motors, Toyota, Coca-Cola and MillerCoors. China plans to retaliate with tariffs of its own on $60 billion in U.S. exports. 

Despite this, the tariffs’ impact on the Chinese economy will be “very small,” Cai said, as the country’s government is now “prepared” to handle the additional pressure.

The Power of 600 Million Millennials

The two reasons I find China so compelling right now are 1) promising demographics, and 2) financial reform.

As for the first reason, there’s really no arguing against the sheer math of Asia’s exploding population. You’ve heard the expression “There is strength in numbers,” and nowhere is that more apparent than in China and India, affectionately known as “Chindia,” where 40 percent of all humans live.

But there’s more. According to a recent report from CLSA, the entire continent of Asia is now home to nearly one billion millennials, or people aged 20 to 34. China and India alone contribute more than 600 million millennials, the youngest of whom will “start to hit their ‘peak’ earning capacity” over the next 10 years, says CLSA.

Asian millennials are changing global consumption
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“Millennials are more affluent, better educated with difference perspectives and priorities than their parents’ generation, which tends to sacrifice present consumption for the future,” CLSA writes. “Millennials care less about saving.”

This translates into not only the largest consumer class the world has ever seen, but also the most eager to spend their money on goods and services their parents and grandparents could never have imagined.

Consumption, in fact, now accounts for nearly 80 percent of China’s gross domestic product (GDP) growth, helping the country become less dependent on capital input and foreign trade.

China’s Capital Markets Continue to Mature

chinese premiere li keqiang: the pool is full of water and the challenge is to unblock the channels. As for my second reason, financial reform, Premier Li Keqiang recently pledged to give equal treatment to foreign investors in capital markets, all in the name of bolstering confidence among investors who may have been rattled lately by the U.S.-China trade dispute.

“The pool is full of water,” Li said, “and the challenge is to unblock the channels.”

China A-shares, those traded in the Shanghai and Shenzhen stock exchanges, were once available only to Chinese citizens living on the mainland. But as a sign of the financial market’s maturation, last week marked the first time that foreign investors living in mainland China, as well as employees of listed Chinese firms living overseas, could freely trade A-shares.

Many A-shares have already been added to indexes provided by MSCI, and FTSE Russell said it will decide soon whether to do the same.

As we’ve seen in the U.S. market and elsewhere, a stock’s inclusion in a major index has meant, for better or worse, that it automatically gets an infusion of investors’ money, regardless of fundamentals.

That Premier Li plans to open China’s market up even further is exciting, and makes its investment case even stronger.

To learn more about investment opportunities in China and the surrounding region, watch our short video by clicking here.

 

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 MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries. The S&P 500 index is a basket of 500 of the largest U.S. stocks, weighted by market capitalization. 

Gross domestic product (GDP) is the total value of goods produced and services provided in a country during one year.

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 6/30/2018: Coca-Cola Bottling Co. Consolidated.

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Net Asset Value
as of 12/12/2018

Global Resources Fund PSPFX $4.59 0.03 Gold and Precious Metals Fund USERX $6.46 -0.01 World Precious Minerals Fund UNWPX $3.03 -0.02 China Region Fund USCOX $7.97 0.06 Emerging Europe Fund EUROX $6.18 -0.01 All American Equity Fund GBTFX $24.18 0.06 Holmes Macro Trends Fund MEGAX $18.17 0.13 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change