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Investor Alert

Here’s Your Guide to What the Influencers Are Saying about Commodities
September 4, 2015

The podcast will be avaiable on Tuesday. We are sorry for the inconvenience.

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

A few legendary influencers in investing are making huge bets right now on commodities, an area that’s faced—and continues to face—some pretty strong headwinds. What are we to make of this?

I already shared with you that famed hedge fund manager Stanley Druckenmiller made a $323-million bet on gold, now the largest position in his family office fund. It’s also come to light that George Soros recently moved $2 million into coal producers Peabody Energy and Arch Coal. Meanwhile, activist investor Carl Icahn took an 8.5-percent position in copper miner Freeport-McMoRan, which we own.

These giants of the investing world have just given huge endorsements for gold, coal, copper, and precious metals

My friend Marc Faber, the widely-respected Swiss investor and editor of the influential “Gloom, Boom & Doom Report,” is now plugging for the mining sector and precious metals. Speaking to Bloomberg TV this week, Faber claimed that investors are running low on safe assets and suggested they revisit mining companies:

If I had to turn anywhere where… the opportunity for large capital gains exists, and the downside is, in my opinion, limited, it would be the mining sectors, specifically precious metals and mining companies… like Freeport, Newmont, Barrick. They’ve been hammered because of falling commodity prices. Now commodities may still go down for a while, but I don’t think they’ll stay down forever.

Freeport became the first major miner to announce production cuts, late last month, in response to depressed copper prices, which have slipped around 19 percent since their 2015 high of $2.95 per pound in May. This reduction should remove an estimated 70,000 tonnes of copper from global markets, according to BCA Research, and eventually help support prices.

Platinum and palladium miners in South Africa, a leading producer of both metals, also announced job cuts and mine closures, as platinum has slipped more than 16 percent this year, palladium a quarter.

But Marc sees opportunity, as I do. In my keynote speeches earlier this year I suggested that 2015 would see a bottom in cost-cutting due to divesture and slashing of capital expenditures, and that in 2016 we should see higher returns on capital.

Furthermore, using our oscillators to measure the degree to which asset classes are overbought and oversold, we find that commodities are extremely oversold and currently bouncing off low negative sentiment. The smart money is buying.

When asked if he thought commodities had reached a bottom, Marc had this to say:

I would rather focus on precious metals—gold, silver, platinum—because they do not depend on industrial demand as much as base metals and industrial commodities.

Marc was referring, of course, to China, the 800-pound commodity gorilla, as I’ve often described the country. The Asian powerhouse is currently responsible for nearly 13 percent of the world’s commodity demand, followed by the U.S. at a little over 10 percent.

China's demand for commodities is huge
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But as I discussed last week, China is transitioning from a manufacturing-based economy to one that emphasizes services, consumption and real estate. Commodity demand is cooling, therefore, and we can expect it to cool even further. Aside from the strong dollar, this is one of the key reasons why prices have plunged to multi-year lows.

Commodities Seeking an Upturn to Global Manufacturing

The JPMorgan Global Manufacturing PMI continues to decline as well. Since its peak in February 2014, the reading has fallen 4.5 percent. The August score of 50.7, just barely indicating manufacturing expansion, is the sixth consecutive monthly reading to remain below the three-month moving average.

I’ve shown a number of times in the past that when this is the case—that is, when the one-month reading is below the three-month trend—commodity prices have tended to trade lower. Unlike other economic indicators such as gross domestic product (GDP), the PMI is forward-looking and helps investors manage expectations. Based on our own research, there’s a strong probability that copper and crude oil prices might dip three months following a “cross below.”

The opposite has also been true: Prices have a stronger probability of ticking up three months after the one-month crosses above the three-month.

Commodities and commodity stocks historically rose three months after pmi "cross-above"
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This is why we believe prices will have a better chance at recovery after the global PMI crosses above its three-month moving average.

I have great respect and admiration for Druckenmiller, Soros, Icahn and Marc—all of whom are clearly bullish on commodities—but we would prefer to see global manufacturing growth reverse course.

In the meantime, low commodity prices are a windfall for many companies in Europe, Japan and the U.S. Metals and other raw materials are at their lowest in years, which is the equivalent of a massive tax break for the construction and manufacturing sectors.

Low gold prices are also expected to generate high demand in India as we approach fall festivals such as Diwali and Dussehra, not to mention weddings. According to estimates from Swiss precious metals refiner Valcambi, demand could reach 950 tonnes by the end of the year, compared to 891 tonnes in 2014.

Emerging Markets Might Have Found a Bottom

It might be challenging for the global PMI to cross above the three-year moving average since Chinese manufacturing has slowed, but there’s burgeoning strength in other emerging markets, many of them unexpected: the Philippines, Myanmar, Ethiopia. The Czech Republic has the highest PMI reading among emerging Europe countries and the fastest-growing economy in all of Europe.

An interesting chart from Morgan Stanley suggests that emerging markets might have found a trough and are ready to turn up. Assuming that August 24, 2015 was the bottom, the bank compares the recent bear market to five previous ones and finds that it’s tracking a similar price action as 1995, 2002 and 2011. It’s also much less severe than 1998 and 2008.

A contrarian thesis: have emerging markets found a bottom?
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Additionally, Bloomberg reminds us that by 2050, 3 billion people will enter the middle class, nearly all of them in the developing world. Emerging markets might be struggling somewhat right now, but they’re still very much our future.

U.S. Travelers to Spend Big This Labor Day Weekend, but Airline Stocks Are Reasonably Priced

This Labor Day weekend, Americans are projected to spend a whopping $13.5 billion, according to the U.S. Travel Association (USTA). This figure includes spending on goods and services as people travel by automobile, jet or some other means to visit friends and family. Air travelers alone will spend $2.9 billion, if expectations are accurate.

Luxury in the air: delta is now offering private jet upgrades to select passengers

The International Air Transport Association (IATA) released air travel demand figures for the month of July, noting that demand continues to be robust both domestically and internationally. All global markets saw growth in July, with domestic flight demand rising 5.9 percent year-over-year. At an eye-popping 28.1 percent, India posted the strongest growth.

As GARP (growth at a reasonable price) investors, we still find airline stocks attractively priced, as do many others. Barron’s recently made note of this, stating: “Major airline stocks are trading 9.4x our 2015 EPS (earnings per share) estimates and 9.0x our 2016 EPS estimates, below their historical trading range of 10x – 12x.”

We own a number of these carriers in our funds: Delta Air Lines (which announced a $5-billion stock buyback program in May), Alaska Air, and JetBlue in the Holmes Macro Trends Fund (MEGAX); Ryanair (which just hit a new 52-week high) and Aegean Greece in the Emerging Europe Fund (EUROX). We also own several names in the aircraft manufacturing and airport services areas, including Pegasus Hava Ta??mac?l???, Wizz Air Holdings and TAV Havalimanlar?.

The Iran Nuclear Deal Could Be a Boon to Boeing and Airbus

On a final note, if you’ve been paying attention to the news, you’re probably familiar with the pending nuclear deal with Iran. When implemented, trade barriers will be lifted for the first time in decades. Whether you approve or disapprove of the deal, you have to recognize that this could be a huge opportunity for many companies that, up until now, have been cut off from doing business with the Iranians.

One area that’s in dire need of an overhaul is the Middle Eastern country’s jet fleet. The average age of the United Arab Emirates’s planes is 6.3 years. In Iran, meanwhile, it’s 27 years. These are ancient relics!  

Iran nuclear deal: a huge opportunity for Boeing and Airbus?
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The total number of jets that will need replacing is estimated to be 400—and cost $20 billion.

Aircraft manufacturers Boeing and Airbus already have a growing backlog of new aircraft orders—10,000 jets altogether, according to the Wall Street Journal—and the Iran deal has the potential to increase it even further.

We also see it as an opportunity for energy companies in particular that the median age of Iran’s educated population is 28 years—this is a market with promising growth potential.

You might have seen headlines that energy officials from Iran and Saudi Arabia secretly met to cooperate on trying to get crude oil prices stable at between $70 and $80 per barrel. Oil prices spiked this past week in response, but as far as we can tell, this is only chatter. Don’t bet on rumors, but rather on good government monetary and fiscal policy, excellent management and undervalued stocks.

Have a happy and restful Labor Day weekend!

 

Happy Labor Day from U.S. Global Investors

Index Summary

  • The major market indices finished down this week.  The Dow Jones Industrial Average lost 3.25 percent. The S&P 500 Stock Index lost 3.40 percent, while the Nasdaq Composite lost 2.99 percent. The Russell 2000 small capitalization index was down 2.30 percent this week.
  • The Hang Seng Composite fell 3.95 percent this week; while Taiwan lost 0.23 percent and the KOSPI lost 2.66 percent.
  • The 10-year Treasury bond yield fell 5 basis points, closing at 2.13 percent.

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Domestic Equity Market

S&P 500 Economic Sectors
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Strengths

  • Amid a down week for the market, telecommunication services was the best performing sector on a relative basis, down 2.29 percent, while the S&P 500 Index fell 2.97 percent.
  • Cablevision Systems was the best performing stock in the S&P 500 this week, up 8.85 percent. The stock rose throughout the week on rumors of a buyout.
  • U.S. automobile sales increased to an annualized rate of 17.8 million vehicles in August, the best performance since July 2005. The six largest automakers all sold more vehicles than forecast. Ford Motor had particularly strong results, with sales rising 5 percent.

Weaknesses

  • The utilities sector had a tough week, ending as the worst performer with a return of -5.18 percent.  
  • Joy Global was the worst performing stock in the S&P 500 this week, down 22.41 percent. The company reported a 37 percent drop in profit for the quarter and reduced its forecasts for the full year.
  • U.S. nonfarm productivity rose 3.3 percent in the second quarter, its strongest pace since the fourth quarter of 2013, after contracting 1.1 percent in the first quarter. However, the longer-term trend in productivity remains weak, increasing just 0.7 percent from a year ago. 

Opportunities

  • The latest factory orders data show that pharmaceutical shipments are booming, consistent with robust consumer outlays on drugs. Increased job security and income growth should sustain these trends. Meanwhile, health care equipment manufacturers are also enjoying the benefits of these trends. Backlogs are rising quickly, which will ensure that production lines run at optimal rates. Furthermore, the health care facilities industry has returned to expansion mode as capacity fills up, which will further support demand for medical products.
  • New orders for telecommunication gear, which have been ramping up, follow the trend in telecommunication facilities construction. This underscores that a period of solid growth lies ahead. Moreover, global demand for telecommunication equipment has remained healthy, as exports are booming, even in the face of a strong U.S. dollar. Against a backdrop of attractive relative valuations, capital is likely to flow into the out-of-favor communications equipment sector.
  • Amid deflationary pressures from abroad, stocks in the utilities sector are some of the few to provide safety. Historically, the relative performance of utilities has been negatively correlated with long-term interest rates, and a reprieve is likely underway given the meltdown in inflation expectations and risks to overall economic growth.

Threats

  • The downtrend in the global purchasing managers’ index (PMI) continues to fuel bearishness towards goods producers. The implication is that a rebound in cyclical sector profits will remain elusive for a while longer, prolonging underperformance.

PMI Heeds Warning of further cyclical sector headwinds
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  • The University of Michigan’s consumer sentiment index will be reported next Friday. The one-month trend remains below the three-month reading, and given recent market volatility, odds favor a disappointment. With uncertainty already high due to the upcoming Federal Open Market Committee (FOMC) meeting, such a result would add to a bearish bias.
  • U.S. asset managers and custody banks could face difficulty in lifting profit margins if the ongoing market volatility increases the equity risk premium. 

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The Economy and Bond Market

Global market volatility persisted this week, as investors remained nervous on China's slowing economy along with a possible interest rate increase at the U.S. Federal Reserve's mid-September meeting. Stocks fluctuated substantially day-to-day, with major market indices down overall. A positive jobs report added to rate-hike jitters on Friday.

The VIX Index, which measures U.S. stock market volatility, stood near 27 on Friday, down from a mid-week peak above 33. The yield on the 10-year Treasury note mostly traded above, then dipped below 2.15 percent on Friday's employment report. Crude oil prices fluctuated, with WTI crude oil futures ranging between $44 and $49 per barrel and Brent crude oil prices ranging from $50 to $54 per barrel. Both ended the week in the middle of their ranges.

Strengths

  • Although the headline number disappointed with job growth of 173,000 in August, relative to expectations of 217,000, the rest of the report was solid. The prior two months were revised up a net 44,000, leaving job growth of 221,000 on a three-month average and 205,000 on a six-month. Furthermore, the unemployment rate improved notably, falling to 5.1 percent (5.112 percent unrounded) from 5.3 percent (5.261 percent unrounded), while the labor force participation rate held at 62.6 percent (62.552 percent unrounded). Assuming the Fed’s median estimate of the non-accelerating inflation rate of unemployment (NAIRU), the U.S. economy has finally reached full employment. Wage growth was also strong, growing 0.3 percent month-over-month (MoM), and leaving the year-over-year (YoY) rate at 2.2 percent.
  • The trade deficit in July narrowed to $41.9 billion from $45.2 billion in June (revised from $43.8 billion initially). This was lower than the expected $42.2 billion deficit. Exports increased 0.4 percent MoM, to $188.5 billion, while imports declined 1.1 percent MoM, to $230.4 billion.
  • The ISM non-manufacturing composite declined to 59.0 in August from 60.3 in July, above expectations of a decline to 58.2. This is still a high-level for the index: excluding July’s 60.3 cyclical high, this month’s level is the highest seen since December 2005. This shows continued strength in the services side of the economy, its largest portion.

Weaknesses

  • According to BCA Research, corporate credit performance began to deteriorate after measures of corporate balance sheet health and monetary conditions began to turn in a bearish direction in the latter half of 2014. Over the past year, domestic monetary conditions have tightened via the end of the Fed’s quantitative easing (QE) program and subsequent strengthening of the U.S. dollar.

    Furthermore, corporate balance sheet health has steadily deteriorated on the back of increased leverage and weaker profit growth. As a result, it is now clear that the U.S. is in the latter stages of the multi-year credit cycle, a period when rising corporate leverage negatively affects returns to corporate debt as investors demand higher risk premiums to compensate for the greater volatility created by increased leverage.

bearish turn in the U.S. credit cycle
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  • The ISM manufacturing index inched down to 51.1 in August from 52.7 in July. This was below the expected 52.5. The report represents a slowdown in growth in the manufacturing sector and is in line with the slowdown in global purchasing managers’ index (PMI) data.
  • Canada's GDP contracted another 0.5 percent at an annual pace in the second quarter, after shrinking a downward revised 0.8 percent in the first quarter. Some consider two straight quarters of negative economic growth to be the definition of a recession.

Opportunities

  • The European Central Bank’s (ECB’s) latest bank credit data shows a very healthy rebound in euro-area bank credit flows during the month of July. With eurozone growth continuing to recover, this could be the start of an upturn in the euro-area credit cycle.
  • While everyone awaits the September 16-17 Federal Open Market Committee (FOMC) meeting, there are a number of central bank meetings next week where policymakers are likely to echo the ECB’s dovish, market-supporting bias. For example, a rate cut is widely expected at the Reserve Bank of New Zealand on Thursday while two consecutive quarters of contraction in Canada’s economy means that further easing is likely on the Bank of Canada’s agenda for Wednesday.
  • According to new research on the role of the U.S. dollar from Harvard, cited by Fed Vice Chairman Stanley Fischer, the U.S. economy is fairly insulated from foreign inflation/deflation pressures via exchange rates, implying that policymakers should be less worried about global deflation pressures.

Threats

  • From an equity sentiment perspective, bearishness has taken over. The number of stocks making 52-week lows on the NYSE has soared, reflecting substantial technical damage. Currency and credit markets also caution that the bottom may not be in yet. Emerging market exchange rates continue to deteriorate and falling currencies threaten capital flight, which impairs monetary policy. Consequently, an upturn in the global profit cycle is unlikely without some stability in emerging market exchange rates. Further, a widening of U.S. corporate bond spreads in the last couple of months has been an impending warning for equity markets. Downside risks are unlikely to be removed until a concerted narrowing of credit spreads take place. To note, the end of previous equity market corrections occurred within the context of a rebound in emerging market exchange rates and narrower U.S. credit spreads.

too soon to pick a bottom in the equities market
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  • China fears, along with expectations related to the Fed's interest rate plans, will continue to dominate near-term market moves. In regards to China, the pressure to support growth will only grow if data continues to disappoint. Key releases to watch next week will be the external trade data on Wednesday along with the consumer price index (CPI) and the producer price index (PPI) on Thursday.
  • The meeting of central bankers in Jackson Hole, Wyoming, provided few clues for the near-term path of policy rates. The Fed is leaving the door open to a rate rise in September. With less than two weeks before the September FOMC meeting, market volatility is likely to remain elevated.

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Gold Market

For the week, spot gold closed at $1,123.45, down $10.10 per ounce, or 0.89 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 6.13 percent. The U.S. Trade-Weighted Dollar Index lost 0.13 percent for the week. The S&P/TSX Venture Index was off just 0.55 percent, besting the larger capitalization stocks by a significant margin, as these stocks took most of their losses in prior periods.

Next week, U.S. Initial Jobless Claims will be closely watched as the economy has had some mixed signals on how robust the economy really is and how this might impact the Federal Reserve’s decision to raise interest rates.

Date Event Survey Actual Prior
Aug -31 EC CPI Core YoY 0.90% 1.00% 1.00%
Aug -31 CH Caixin China PMI Mfg 47.1 47.3 47.1
Sep -1 US ISM Manufacturing 52.5 51.1 52.7
Sep -2 US ADP Employment Change 200K 190K 185K
Sep -3 EC ECB Main Refinancing Rate 0.05% 0.05% 0.05%
Sep -3 U.S. Initial Jobless Claims 275K 282K 271K
Sep -4 US Change in Nonfarm Payrolls 271K 173K 215K
Sep -10 US Initial Jobless Claims 275K -- 282K
Sep -11 GE CPI YoY 0.20% -- 0.20%
Sep -11 US PPI Final Demand YoY -0.90% -- -0.80%

Strengths

  • Silver was the best-performing precious metal for the week, down a marginal 0.08 percent. This was a reversal from last week, when it was the worst performer.
  • Gold consumers in India, the world’s biggest users after China, are expected to increase purchases for festivals in the second half of the year given that the metal has become cheaper, according to the World Gold Council. Imports in August are estimated between 95 and 100 tonnes, compared to 67 tonnes the year prior.
  • According to Zijin Mining, the price of bullion will steadily rise in the short term due to output growth slowing in China amid a lack of high-quality mines.

Weaknesses

  • Platinum was the worst-performing precious metal for the week, down 2.51 percent. Last week it had gained the most among the precious metals.
  • Gold futures fell to their lowest level in two weeks as the U.S. unemployment rate dropped to 5.1 percent, a seven-year low. With employment back to pre-crisis levels, it builds up the U.S. recovery story and impetus for the Fed to raise interest rates.
  • BullionVault’s Gold Investor Index fell to a seven-month low in August. The index measures the balance of client buyers against sellers. It came in at 52.8 versus 54.5 in July. Nonetheless, a reading above 50 indicates more buyers than sellers. Gold sales at the Perth Mint dropped to 33,900 ounces in August, down from 51,088 in July. 

Opportunities

Are central bank gold reserves declining?
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  • In a new piece, Deutsche Bank argues that 2015 will mark the peak in global FX reserve accumulation, with three drivers pointing to further reserve draw-downs in the short term: China’s economic slowdown, impending U.S. monetary tightening and the collapse in the price of oil. On the other hand, central banks have been increasing their exposure to gold as part of their asset mix, presenting a compelling opportunity moving forward. Since 2014, foreign central banks have withdrawn 246 tonnes of gold from the New York Fed, a trend that reflects that central bankers are more seriously viewing the role of gold in their portfolio to lower the volatility of a reserve mix of just currencies.

Federal reserve rate hikes and the gold price
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  • There is a lot of talk about the negative impact of Fed interest rate hikes on the price of gold. However, historical evidence of past tightening cycles does not provide a consistent confirmation of this. As seen in the chart above, the data is mixed, with the past three tightening cycles actually resulting in a net gain in the price of bullion.
  • Zijin Mining Group has said it will use the slump in metal prices to accelerate overseas acquisitions. The company wants to secure producing assets abroad as it juggles depleting mines and heightened environmental scrutiny at home with growing demand in the world’s biggest buyer of the metal.

Threats

  • With indicators from macro-fundamentals to market-oriented measures all flashing red in recent sessions, the gigantic spike in the Arms (TRIN) Index stands out. TRIN is a technical indicator that compares advancing and declining stock issues and trading volume as an indicator of overall market sentiment. It is used as a predictor of future price movements in the market. An index value above one is bearish, below one is bullish and one is market neutral. The recent spike to 4.95 reflects a lack of confidence by traders.
  • Renmac also highlights the TRIN index, showing past episodes of elevated readings. The historical evidence shows that there is usually a clustering of high readings and the first spike—such as the one the market encountered recently—is usually not the last. Therefore, trying to bottom-fish in the market is probably still too early.
  • According to BCA, broad market volatility is likely to persist until the profit cycle turns back up. The latter won’t occur without looser monetary policy. That would include a weaker U.S. dollar, a pre-condition for easing foreign currency funding strains in the emerging world. Low interest rates have given a huge incentive to shift out of low-risk assets into stocks and corporate bonds in search of higher returns. However, equities require support from rising corporate earnings. That has not been the case lately, as earnings have been flat or declining. Therefore, it is no coincidence that U.S. equities started to struggle this year soon after earnings flattened.

What's gold's touchdown Pass This Week?

Energy and Natural Resources Market

WTI crude oil has room to recover
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Strengths

  • Construction materials remained strong once again this week, as housing and non-residential construction activity continue to improve.  The S&P 500 Construction Materials Index gained 1.96 percent.
  • Crude oil rallied 20 percent this week from its $38 per barrel low set last week. This move came as the broader equity market recouped prior losses.  Accordingly, energy income stocks held up well in a difficult equity market.  The Yorkville Oil & Gas Royalty Trust Index fell 1.2 percent on the week.  
  • Oil refining stocks continue to lead the energy complex as investors seek a safer alternative to investing in upstream oil producers with commodity-price exposure.  The S&P 500 Oil Refining & Marketing Index lost 0.87 percent on the week.

Weaknesses

  • Gold equities remained weak as investors weighed the probability of a Federal Reserve interest rate hike later this month.  The Philadelphia Gold & Silver Index lost 7.2 percent during the week.  
  • Despite its safe-haven status, the utilities sector saw investors opt for cash and take profits on recent gains.  The S&P 500 Utility Index lost 5.14 percent. 
  • Copper and other base metals stocks pulled back this week as investors continue to fear a slowdown in China’s growth. The S&P/TSX Capped Diversified Metals and Mining Index fell 9.3 percent.

Opportunities

  • The Department of Energy is set to release its Short-Term Crude Outlook next Wednesday. The report could highlight declining U.S. oil production trends and consumer demand growth.
  • According to the Wall Street Journal, private equity firms are looking for opportunities in the oil patch following the latest downturn in prices.  These firms are hoping that the commodity-price crash this summer will open up both producing assets as well as capital-starved companies on the cheap.
  • China’s foreign exchange reserves will be released next week and will likely set the tone for currency flows and possible interest rate moves in the near future. 

Threats

  • Crude oil rallied 20 percent from its 52-week low this week, but is technically overbought and in a downtrend. Crude could experience a technical pullback over the near term.
  • Over the past two years, underlying inflows have frequently come into the commodity complex during periods of negative price performance.  However, this trend appears to be absent amid the summer’s commodity-price downturn, leaving any upturn in notional investment in question for the time being.
  • U.S. oil refiners are expected to have 354,000 barrels per day of capacity offline in the week ending September 4.  This could worsen the already high crude oil inventory levels.
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China Region

Strengths

  • Thailand was the best performing market in Asia this week. A larger-than-expected July expansion in current account surplus, to $2.1 billion thanks to more sluggish imports than exports, lent support for the Thai baht.  The Stock Exchange of Thailand Index eked out a 0.27 percent gain this week. 
  • Technology was the best performing sector in Asia this week, as Apple suppliers in Taiwan stabilized ahead of the company’s media event next week where new iPhones are expected to be rolled out.  The MSCI Asia Pacific ex Japan Information Technology Index fell 1.42 percent this week, the mildest pullback among all the sectors.
  • The Chinese renminbi was the best performing currency in Asia this week, strengthening by 0.35 percent. The renminbi was up despite mounting fears that China might have embarked on a devaluation track of its currency to help stabilize the local export sector, along with alleviate deflationary pressure and incentivize inbound tourism. 

Weaknesses

  • Hong Kong was the worst performing market in Asia this week, as China’s government-compiled purchasing managers’ index (PMI) data declined to a three-year low in August to 49.7. The final print of the private Caixin / Markit PMI settled at 47.3 and was little changed from the flash estimate and lowest since 2009.  The Hang Seng Composite Index retreated 3.95 percent this week. 
  • Energy was the worst performing sector in Asia this week, as crude oil prices remain highly volatile absent substantial changes in global supply-demand balance, giving back partial gains made from last Thursday to this Monday.  The MSCI Asia Pacific ex Japan Energy Index lost 5.22 percent this week.
  • The Malaysian ringgit was the worst performing currency in Asia this week, weakening by another 2.83 percent. The currency’s movement was in response to a massive 34-hour protest staged by tens of thousands against the incumbent Prime Minister Najib Razak on an alleged scandal involving a $700 million cash transfer into his personal bank account.

Opportunities

  • The rising likelihood of the European Central Bank to continue its quantitative easing (QE) program well beyond September 2016, as hinted by Mario Draghi this week, along with the looming prospect of the Fed to kick start interest rate hikes in September, only adds to the probability of an even stronger U.S. dollar. This could deepen the markets’ fear that the Chinese currency devaluation might resume beyond the short term and capital flight from China could intensify.  If next week’s August data release for China provides little solace, holding higher-than-normal cash should be the most prudent approach.  

Cash is king as investor fears of capital flight from China linger
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  • The Philippines’ economy is much less reliant on China and less vulnerable to the Fed’s rate cycle among emerging Asian countries. Its market should prove more resilient amid increasing global volatility.
  • Should Apple’s media event on Wednesday prove positive in terms of new product rollouts, Taiwanese semiconductor and electronics companies on Apple’s supply chain could continue to outperform. 

Threats

  • Macau’s 26 percent decline in second-quarter GDP and its 36 percent plunge in August gaming revenue should bring further revelation that a meaningful recovery has not occurred in the city, as newly-opened casinos in Cotai failed to drive sufficient mass market demand to offset the retrenchment of high rollers.  Subdued visibility of industry growth, less-than-attractive valuation, and lack of sustainable catalysts may continue to weigh on investor sentiment towards Macau casino stocks.
  • Hong Kong’s 8.4 percent drop in visitor arrivals in July, led by a 9.8 percent plunge in Chinese tourist arrivals, may aggravate investors’ secular concern that Hong Kong is losing its attraction for mainland middle class Chinese. In addition, investors may be worried about purchasing power erosion for Chinese travelers from a weaker Chinese renminbi.  Local Hong Kong retail, transport, restaurant and hotel industries should be most at risk.
  • As many as 50 Chinese stock brokers were asked by China’s securities regulator to surrender up to RMB 150 billion ($23.5 billion) additional cash to replenish the government’s ammunition for further rescue of the domestic A-Share market.  Persistent command-and-control intervention may prove counterproductive, and could only drive investors away from publicly-traded Chinese brokers acting like public service agents with diminishing prospects of future growth.

Emerging Europe

Strengths

  • The Hungarian market was the strongest this week, closing slightly to the upside from the prior week’s level, gaining 0.01 percent.   Manufacturing purchasing managers’ index (PMI) data came in at 50.7 in August, versus a prior reading of 50, suggesting expansion of the manufacturing sector.
  • The Hungarian forint was the strongest emerging European currency this week, losing only 40 basis points. The Central Bank of Hungary kept its key interest rate at 1.35 percent on the back of falling commodity prices, boosting demand for forint bonds.
  • The consumer discretionary sector was the strongest performing sector this week.

Weaknesses

  • Turkey was the weakest market this week, falling 2.3 percent. Manufacturing PMI data fell below the elusive 50-mark, suggesting a contraction of the manufacturing sector. Turkey’s annual inflation rate went up more than expected in August to 7.14 percent, moving further away from the central bank’s target inflation of 5 percent. The high cost of food in Turkey continues to pressure consumer prices. 
  • The Russian ruble was the weakest currency this week, down 4.6 percent, and losing most of its gains from the prior week.
  • The telecommunication services sector was the weakest performing sector this week.

Opportunities

  • Eurozone business activity accelerated this week as output growth increased. Markit’s Eurozone PMI Composite Output Index, that tracks business trends across the manufacturing and services sectors, was reported at 54.3, beating earlier estimates of 54.1.

Eurozone composite purchasing managers' idnex (PMI)
click to enlarge

  • The release of new opinion polls in Greece suggests a small lead by the New Democracy party, backed by 25.3 percent of voters, versus the 25 percent who favor Syriza. This is positive news that Syriza is not heading for a big win and that more pro euro-oriented parties are gaining ground.
  • Mario Draghi, president of the European Central Bank (ECB), sent a strong signal during Thursday’s news conference that the bank is prepared to expand its more than $1.1 trillion bond-buying program. European stocks and bonds rallied on his comments while the euro lost 1 percent against the dollar. It’s interesting to note that central bank stimulus typically weakens a country’s currency.  A weaker euro and an increase in quantitative easing (QE) should strengthen the euro area. 

Threats

  • It looks as though the upcoming months will be dominated by political risk. Greece will hold elections on September 20, following Prime Minister Alex Tsipras’ resignation in August. In Poland, parliamentary elections will take place October 25, where the opposition party is currently gaining power for the first time in eight years. In Turkey, new parliamentary elections will be held November 1.
  • The Turkish lira fell to a record low against the U.S. dollar this week on the rising prospects for the Fed to increase interest rates. The currency also reacted to domestic political tension as the country approaches a snap election scheduled for later this year.

Turkish Lira continues to look weak
click to enlarge

  • The euro area should benefit from undergoing a stimulus package, but policymakers are facing some challenges as they seek to revive the economy. The consumer price index (CPI) for August came in at an anemic 1 percent level, despite the ECB being in the midst of QE, low interest rates and a weaker euro.

Uncover the Patterns in Commodity Returns

Leaders and Laggards

Weekly Performance
Index Close Weekly
Change($)
Weekly
Change(%)
DJIA 16,102.38 -540.63 -3.25%
S&P 500 1,921.22 -67.65 -3.40%
S&P Energy 464.18 -14.98 -3.13%
S&P Basic Materials 262.96 -10.08 -3.69%
Nasdaq 4,683.92 -144.41 -2.99%
Russell 2000 1,136.17 -26.75 -2.30%
Hang Seng Composite Index 2,840.37 -116.72 -3.95%
Korean KOSPI Index 1,886.04 -51.63 -2.66%
S&P/TSX Canadian Gold Index 121.99 -8.16 -6.27%
XAU 45.33 -3.49 -7.15%
Gold Futures 1,122.30 -11.70 -1.03%
Oil Futures 45.81 +0.59 +1.30%
Natural Gas Futures 2.66 -0.06 -2.14%
10-Yr Treasury Bond 2.13 -0.05 -2.43%
 
Monthly Performance
Index Close Monthly
Change($)
Monthly
Change(%)
DJIA 16,102.38 -1,438.09 -8.20%
S&P 500 1,921.22 -178.62 -8.51%
S&P Energy 464.18 -27.66 -5.62%
S&P Basic Materials 262.96 -25.81 -8.94%
Nasdaq 4,683.92 -456.03 -8.87%
Russell 2000 1,136.17 -95.58 -7.76%
Hang Seng Composite Index 2,840.37 -496.91 -14.89%
Korean KOSPI Index 1,886.04 -143.72 -7.08%
S&P/TSX Canadian Gold Index 121.99 +4.01 +3.40%
XAU 45.33 +0.82 +1.84%
Gold Futures 1,122.30 +36.70 +3.38%
Oil Futures 45.81 +0.66 +1.46%
Natural Gas Futures 2.66 -0.14 -5.04%
10-Yr Treasury Bond 2.13 -0.14 -6.25%
 
Quarterly Performance
Index Close Quarterly
Change($)
Quarterly
Change(%)
DJIA 16,102.38 -1,747.08 -9.79%
S&P 500 1,921.22 -171.61 -8.20%
S&P Energy 464.18 -101.70 -17.97%
S&P Basic Materials 262.96 -49.86 -15.94%
Nasdaq 4,683.92 -384.54 -7.59%
Russell 2000 1,136.17 -124.84 -9.90%
Hang Seng Composite Index 2,840.37 -991.48 -25.87%
Korean KOSPI Index 1,886.04 -182.06 -8.80%
S&P/TSX Canadian Gold Index 121.99 -37.45 -23.49%
XAU 45.33 -22.39 -33.06%
Gold Futures 1,122.30 -47.80 -4.09%
Oil Futures 45.81 -13.32 -22.53%
Natural Gas Futures 2.66 +0.07 +2.59%
10-Yr Treasury Bond 2.13 -0.28 -11.59%

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.

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

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

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 percent 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.

Because the Global Resources Fund concentrates its investments in a specific industry, 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 percent to 10 percent of your portfolio in these sectors.

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.

Investing in real estate securities involves risks including the potential loss of principal resulting from changes in property value, interest rates, taxes and changes in regulatory requirements.

Past performance does not guarantee future results.

Some link(s) above may 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.

These market comments were compiled using Bloomberg and Reuters financial news.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings as a percentage of net assets as of 6/30/2015:

Aegean Greece 0.00%
Airbus 0.00%
Alaska Air 0.00%
Apple Inc. (All American Equity Fund 3.10%, Holmes Macro Trends Fund 4.46%)
Arch Coal 0.00%
Barrick Gold Corp. (Gold and Precious Metals Fund 0.03%, World Precious Minerals Fund 0.03%)
Boeing (All American Equity Fund 1.06%, Holmes Macro Trends Fund 1.50%)
Cablevision Systems 0.00%
Delta Air Lines 0.00%
Ford Motor Co. (All American Equity Fund 1.20%)
Freeport-McMoRan (Global Resources Fund 0.35%)
JetBlue 0.00%
Joy Global 0.00%
Newmont (All American Equity Fund 1.19%, Gold and Precious Metals Fund 1.15%, World Precious Minerals Fund 0.06%)
Peabody Energy 0.00%
Pegasus Hava Ta??mac?l??? (Emerging Europe Fund 0.50%)
Ryanair 0.00%
TAV Havalimanlar? (Emerging Europe Fund 1.09%)
Valcambi 0.00%
Wizz Air Holdings 0.00%

*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.


*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.
The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.
The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.
The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.
The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.
The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.
The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.
The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.
The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.
The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500.
The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500.
The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500.
The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500.
The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500.
The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500.
The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.
The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.
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.
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.
The J.P. Morgan Global Purchasing Manager’s Index is an indicator of the economic health of the global manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
The University of Michigan Confidence Index is a survey of consumer confidence conducted by the University of Michigan. The report, released on the tenth of each month, gives a snapshot of whether or not consumers are willing to spend money.
The S&P Volatility Index (VIX) shows the market’s 30-day volatility, and is a widely used measure of market risk.
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 ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.
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.
The Producer Price Index (PPI) measures prices received by producers at the first commercial sale. The index measures goods at three stages of production: finished, intermediate and crude.
Non-accelerating inflation rate of unemployment (NAIRU) refers to a level of unemployment below which inflation rises.
The S&P 500 Construction Materials Index is a capitalization-weighted index that tracks the companies in the construction materials industry as a subset of the S&P 500.
The Yorkville Royalty Trust Universe Index is a market capitalization weighted index, consisting of the entire universe of royalty trusts.
The S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index is market capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to remove companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, will be greater than 0.05% of the index.
The Philadelphia Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
S&P/TSX Capped Diversified Metals and Mining Index is an index of companies engaged in diversified production or extraction of metals and minerals.
The Bangkok SET Index is a capitalization-weighted index of all the stocks traded on the Stock Exchange of Thailand.
The MSCI Asia ex-Japan Index is a free float-adjusted, capitalization-weighted index measuring the performance of all stock markets of China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand, India and Pakistan.

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Net Asset Value
as of 09/04/2015

Global Resources Fund PSPFX $4.88 -0.03 Gold and Precious Metals Fund USERX $4.69 0.04 World Precious Minerals Fund UNWPX $3.95 0.02 China Region Fund USCOX $6.97 -0.10 Emerging Europe Fund EUROX $5.38 -0.05 All American Equity Fund GBTFX $25.79 -0.34 Holmes Macro Trends Fund MEGAX $19.39 -0.16 Near-Term Tax Free Fund NEARX $2.24 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.01 No Change