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Dollar in Disarray, China Buys Away
July 27, 2009
This article is from portfolio manager Romeo Dator, who covers China for the U.S. Global Investors investment team.
Since peaking on March 5, the dollar has fallen nearly 12 percent against the trade-weighted U.S. Dollar Index (DXY).
This weakness has coincided with price gains for gold, oil and copper, but several other commodities are starting to break out as well. Cocoa, sugar, cotton and orange juice prices have all jumped recently.
Dollar weakness has been especially bullish for emerging markets.
This chart above shows year-to-date performance of the dollar versus the currencies of the BRIC (Brazil, Russia, India and China) countries. The dollar’s demise has led to large percentage increases for each of the country’s respective markets.
The relationship works like this: Let’s say one dollar equals 10 Brazilian reales and an American investor purchases a share of stock in Brazil for 10 reales, or one dollar. If the dollar depreciates to eight reales per dollar, the investor could sell the share and convert the proceeds back to $1.25. That’s a 25 percent gain based on currency movement only.
A similar performance pattern this year isn’t the only thing China and Brazil have in common. The two countries have formed a strategic relationship over the past couple of years.
As the export market to the U.S. weakened due to the recession, Brazil and China turned to each other to offset the weakness. The reason is simple—China needs commodities and Brazil needs export markets.
In June alone, China’s imports from Brazil reached nearly $3 billion, a 278 percent increase from the low in early January. That’s a dramatic increase but still below the level prior to the global credit crisis. As the global economy continues to improve, we should see this figure rise even further.
China is out making deals across the world. Last week’s BusinessWeek cover story details China’s recent shopping spree which includes a car business, appliances and department stores.
China is flush with cash and 2008’s meltdown has allowed it to purchase assets at bargain-basement prices. As a result, China’s overseas investments grew to $52 billion in 2008, more than double the $26.5 billion the country sent overseas in 2007.
The second reason is China’s looking to diversify away from its massive U.S. Treasury holdings. By purchasing these companies, China is acquiring the expertise needed to move the country up the manufacturing food chain.
If growth in China continues at the level we saw in the second quarter, it’s likely China’s shopping spree is just getting started.
The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar. The Bovespa Index (IBOV) is a total return index weighted by traded volume and is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The Hang Seng China Enterprises Index is a capitalization-weighted index comprised of state-owned Chinese companies (H-Shares) listed on the Hong Kong Stock Exchange and included in HSMLCI index (Hang Seng Mainland Composite Index). The Mumbai Stock Exchange Sensitive Index (Sensex) is a cap-weighted index. The selection of the index members has been made on the basis of liquidity, depth, and floating-stock-adjustment depth and industry representation. The MICEX Index is the real-time cap-weighted Russian composite index. It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors. The MICEX Index was launched on September 22, 1997, base value 100. The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange. 09-506
What Nasdaq’s Winning Streak Tells Us
July 24, 2009
All winning streaks eventually come to an end, and today was that day for the Nasdaq.
After posting gains for 12 straight days, its longest streak since 1992, the Nasdaq Composite closed down 0.39 percent.
Before today, the Nasdaq had gained 13 percent since July 7 to reach its high for the year. Over the same period, the Dow and the S&P 500 each rose 11 percent.
If the Nasdaq’s winning streak ends today, what does it mean going forward?
The statistics-minded folks at Bespoke Investment Group have run some numbers and come up with some interesting observations.
They looked at all 20 of the Nasdaq’s winning streaks of at least 11 days going back to 1971 (the longest was 19 straight in August 1979), and then at the weeks that followed.
For the 19 previous instances, one week after the streak ended, the index posted additional gains 14 times. The average post-streak gain was 0.65 percent.
Going out farther in time also yields positive results. Three months after the streak, the Nasdaq was up 13 of the 19 occasions, and the average gain was nearly 3 percent.
In the words of Bespoke, “it appears that once the ‘animal spirits’ are out of the barn, it’s hard to get them back in again.”
Bespoke also crunched some Nasdaq numbers relating to trading volume in companies that were up for the day. They found that for the 10 trading days ending this past Wednesday, the “upside volume” represented about 72 percent of the total volume.
Then they went back and looked at the three previous instances when the 10-day average upside volume was at least 67 percent (two-thirds) of total volume. In all three cases, the Nasdaq was up three months later by an average of 9.7 percent.
The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of 6/30/09. 09-504
Traveling Down the Road to Recovery
July 21, 2009
The Summer 2009 edition of our award-winning Shareholder Report “On The Road to Recovery” was mailed to our fund shareholders last week. This issue gives an inside look at all of our key sectors at U.S. Global Investors: gold, oil, natural resources, Asia and other emerging markets.
There’s also a special feature on municipal bond funds. Over the past tumultuous year, pension funds, Warren Buffett and other investors have sought out the relative calm of investing in municipal bonds.
What’s important to remember is that municipal bonds can play an important role in your portfolio in both good and bad times for the market. Portfolio manager John Derrick explains how in this edition’s Q&A.
To request your own copy of the Shareholder Report, send an email with your mailing address to webmaster@usfunds.com.
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Searching for Signs of a Recovery
July 02, 2009
We received a number of good questions from listeners to my “Searching for Signs of a Recovery” webcast last week, but time ran out before we could get to them.
Romeo Dator, co-manager of the U.S. Global Investors China Region Fund (USCOX), took a few minutes to offer up quick answers to a couple of questions relating to Asia.
What lessons could the United States learn from Asian countries to benefit its own economy?
The primary lesson the U.S. could learn from these countries is to use government policy to promote economic growth and prosperity. Right now, the United States is considering policies aimed at redistributing income and wealth—such an approach reduces incentives needed to grow the overall economy.
In China, by contrast, the government is promoting domestic growth with policies that get people to own housing and cars. This adds to the wealth effect.
When the infrastructure is improved in these Asian markets, will their economies improve by default?
Economic development depends on a reliable network of roads, bridges, airports, power generation, etc., so that goods and services can easily move from one place to another. Having them doesn’t guarantee growth, but without them, economic expansion is constrained.Infrastructure’s impact can be seen in real-life examples from the past.
It was infrastructure, along with low wages, that allowed China to become the manufacturer to the world. Mexico, India and other emerging nations don’t have comparable manufacturing infrastructure and thus their economies aren’t as developed.
Balancing Oil Supply and Demand
May 19, 2009
By Evan Smith
Co-manager, Global Resources Fund (PSPFX)
We’ve seen huge volatility for oil prices the last nine months, but it now looks like oil is starting to bottom out after hitting lows in late 2008 and the first part of this year.
While prices have improved, there hasn’t been much data in the United States to indicate we’re out of the woods just yet. But there is hope, as incremental buying from China and other Asian countries has started to pick up.
The above chart shows projected annual growth in oil demand over the next 10 years. The largest block—representing 1 million barrels a day—comes from China, Southeast Asia and the Middle East.
The next largest source of demand growth—about 400,000 barrels a day—is projected to come from Russia and other developing markets.
Historically, as GDP per capita rises to a certain threshold between $5,000 and $10,000 per person per year on a purchasing-power-parity basis, you start to see a really accelerated demand in oil use per person. Many Southeast Asian and developing countries are at this point right now so we expect a considerable increase in demand from those areas in the years to come.
In contrast, OECD countries are expected to see their oil demand shrink by a couple hundred thousand barrels per day. This decrease is mostly a result of aging populations and becoming more efficient in their energy use.
Oil Supply
There are several factors that can disrupt supply. Spare capacity and concentrated production are two things we’re keeping an eye on.
We’re seeing a spike in spare capacity in 2009 above the historical average (marked by the horizontal yellow line) after four or five years of running well below that average. That spike is likely a result of a steep decline in demand. However, a lack of investment by OPEC producers and a recovery in demand will slip us back into the long-term trend which is supportive for oil prices.
We also see the concentration of oil supply in the Middle East as a potential threat to supply because of its susceptibility to disruptions. This has always been a big issue, but we’re starting to see more market share of the global oil industry in the hands of the Middle Eastern producers.
The Middle East is currently home to about two-thirds of the world’s crude oil reserves and about a third of global crude oil production. If there are geopolitical issues or supply problems, it’s possible we could see severe supply disruption up to a million barrels a day or more.
Please consider carefully the 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.
To learn more, view our recent webcast *Commodities: Reasons to be a Bull When Everyone’s a Bear.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
*Please note: The information you are about to review may contain dated material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned, please go to www.usfunds.com and visit the appropriate fund performance page.
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Net Asset Value
as of 11/20/2009
- Global Resources Fund
PSPFX $8.53 -0.06 - Gold and Precious Metals Fund
USERX $16.05 -0.08 - World Precious Minerals Fund
UNWPX $17.97 -0.02 - China Region Fund
USCOX $8.24 No Change - Eastern European Fund
EUROX $8.97 -0.10 - Global Emerging Markets Fund
GEMFX $7.94 -0.02 - Global MegaTrends Fund
MEGAX $7.94 -0.04 - All American Equity Fund
GBTFX $19.21 -0.10 - Holmes Growth Fund
ACBGX $15.12 -0.06 - Tax Free Fund
USUTX $12.24 +0.01 - Near-Term Tax Free Fund
NEARX $2.22 No Change - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change