Our Commentaries
Quick Links
Changing as Markets Change
March 01, 2010
I had the chance to listen to a prominent MIT finance professor talk about how market participants make their decisions, and I came away thinking that his big-brain ideas validate the approach that we’ve been using for years.
Andrew Lo, the MIT professor, has developed what he calls the “adaptive markets hypothesis” (AMH) as a more sophisticated framework than the long-standing “efficient markets hypothesis” (EMH).
I won’t go into a lot of detail, but the EMH assumes that all market participants act rationally at all times, and that all available information is immediately reflected in market prices.
In Lo’s AMH, market participants are not always perfectly rational, he says – they often make bad decisions. They learn from those bad decisions and, driven by competition, the survivors constantly innovate. Those who don’t adapt don’t last.
At U.S. Global, we have long viewed markets as “complex adaptive systems”—they are made up of many moving parts that are interconnected across a global network, and they learn from experiences and change accordingly.
In our case, we use a matrix of top-down macro models and bottom-up micro stock selection models to determine weighting in countries, sectors and individual securities. We believe government policies are a precursor to change, and as a result, we keep tabs on the fiscal and monetary policies of the G-7 and what we call the “E-7” -- the world’s developing nations by population.
We also focus on historical and socioeconomic cycles, and we apply both statistical and fundamental models to identify companies with superior growth and value metrics. We overlay these explicit knowledge models with the tacit knowledge obtained by domestic and global travel for first-hand observation of local and geopolitical conditions, as well as specific companies and projects.
During his San Antonio visit, Lo contrasted “fear and greed” with “rational thinking” – the former being reactive and emotional, while the latter is measured and opportunistic. We use oscillators, like the one above showing gold and the dollar, to help us determine when fear or greed may be taking hold in a market.
I’m a big believer in globalization, urbanization and major technological breakthroughs as key drivers of change in the world. These factors have an enormous impact on infrastructure creation around the world, which in turn greatly affects commodities demand.
Back in the early 1970s, when gold resumed free-trading status in the U.S., China and India were both inward-looking and had very small economic footprints – now their economic engines are lifting tens of millions of people into middle-class prosperity each year.
“I'd be a bum on the street with a tin cup if the markets were always efficient,” Warren Buffett once said. In other words, opportunities come to those (like us) who are able to navigate increasingly complex markets.
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.
March is a Good Month for Energy
February 22, 2010
We are entering a time of year that in recent decades has been good for energy prices and energy equities.
Combine that with new estimates that domestic and global energy demand will rise in 2010, and we have the makings of a promising period for investors.
March tends to be one of the best months of the year for both crude oil and natural gas.
As you can see on the charts below, which cover roughly the past 20 years, the price of oil at the end of March is on average nearly 4 percent higher than the closing price in February. For natural gas, the increase is even more eye-catching – gas on average climbs more than 7 percent in March.
The main reason for the oil price rise in March relates to the demand pull created by refiners ramping up in advance of the summer driving season. Crude price increases fall off through the early summer before picking up again in the late summer. From September to October, there is typically a big price drop that continues through year-end.
For the refiners, March marks the end of a five-month stretch in which monthly crack spreads (value of refined products minus the price of the crude oil feedstock) tends to increase. If next month follows the pattern, spreads would be 4 percent wider than February. So far in 2010, however, the results have lagged the longer term trend – January saw spreads narrow by about 3.5 percent and for February to date, spreads are up about 2 percent.
For natural gas, which is always extremely volatile, March is a strong month in large part due to late winter snowstorms that move across the country. When you couple that weather variable with the fact that inventory levels for natural gas have usually been drawn down substantially during the winter heating season, the result can be some dramatic spikes for gas.
A cold January lifted spot natural gas prices about 6 percent higher than the December forecast, and in early February gas for April delivery was on average trading 16 percent higher than the same period in 2009.
For energy equities, the typical rally period is February through May. So far, 2010 is not straying too far from that long-term trend: from a peak of 1,122 in early January, the Amex Oil Index (XOI) fell 12 percent by February 9 before heading back up 5 percent over the next six trading sessions.
Of course, seasonality is not a perfect barometer because each year brings its own distinct market conditions. In 2010, the extent of global economic recovery will be a factor, as will economic growth rates in the large emerging nations.
In the U.S., petroleum consumption fell by 820,000 barrels per day (4 percent) last year. Federal officials predict daily oil demand will increase about 1 percent this year, while natural gas demand is expected to increase nearly a half-percent. Gasoline prices may top $3 per gallon this spring, according to the federal outlook.
In its latest monthly report, the International Energy Agency raised its forecast for global oil demand growth to about 1.6 million barrels per day this year, with all of that incremental demand coming from the emerging markets.
China accounts for a quarter of the new global demand for oil. That incremental growth could be revised upward again if it looks like global GDP growth – led by the large emerging economies – will be stronger than the anticipated 4 percent. And if the supply response to additional demand is weak, higher oil prices could result.
The AMEX Oil Index (XOI) is a price weighted index designed to measure the performance of the oil industry through changes in the prices of a cross section of widely-held corporations involved in the exploration, production, and development of petroleum.
Fear, Gold and the Dollar
February 08, 2010
The U.S. dollar was up last week against the euro out of fear of how debt problems in Greece and elsewhere in Europe will be resolved, and as a result gold had a tough week.
The dollar’s rally appears to be a short-term safe haven move, rather than a response to improving economic conditions in the U.S.
In fact, Friday’s report of a net loss of 20,000 jobs in December (the expectation was for a net gain in employment) and that many thousands more would-be workers have given up looking for jobs is evidence that the economy remains somewhat weak.
This weakness makes it less likely that the Federal Reserve will play it safe by not raising interest rates, and more likely that Congress and the Obama administration will pump more financial stimulus money into the system.
Both keeping rates near zero and expanding the monetary base are negative for the dollar, and thus positive for gold. We’ve seen that after a period of money-supply tightening in December and January, it appears that money is loosening again.
The federal deficit is pegged at more than $1 trillion this year and more than $8 trillion through 2019—this will slowly weigh on the dollar. On top of that, the TARP money being repaid by banks is not being removed from the monetary base—we shouldn’t be surprised if that money is used as a stimulus booster shot ahead of the 2010 midterm elections.
Our gold-dollar oscillator (above) shows that the dollar is approaching being overbought over the past 60 trading days, while gold is showing signs of being oversold.
The magnitude of the current spread between gold and the dollar typically means that both could be close to a price reversal—the dollar heading back downward and gold back up toward the mean.
In the 1990s, a strong dollar was associated with a strong U.S. economy, but the current one-month dollar rally has been accompanied by a drop in the S&P 500. With most of the world’s economic growth coming in emerging markets, many U.S. companies are relying on overseas sales to drive revenue and profit growth. A stronger dollar hurts U.S. companies trying to thrive in the global marketplace.
This is clearly evident in the illustration below. Here you can see that the world has changed and a strong stock market is aided by a weaker dollar.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
A Decade of Hot Commodities
January 19, 2010
We’ve updated our popular Periodic Table of Commodity Returns, and the headline news should come as no surprise – 2009 was a complete turnaround for the sector’s 2008 performance.
Commodities (as measured by the Reuters-Jefferies CRB Index) rose 24 percent in 2009, the largest single-year increase since the early 1970s.
In 2008, only one of the 14 commodities in the table finished positive – gold, up a scant 5.8 percent – while five finished with losses exceeding 50 percent, led by lead at a negative 63.5 percent.
Last year, only three of the 14 ended up underwater for the year, with coal coming in at rock bottom at minus 13 percent. Four of the industrial metals – copper, lead, zinc and palladium – each rose more than 100 percent in 2009.
Just to get into the top half of 2009’s performers, a commodity needed gains of about 57 percent, as you can see with platinum in the 10-year chart above. In fact, while gold received tonnes of attention last year, its 24 percent returns were only good enough for 10th place.
There are many ways to analyze the data in the periodic table – I’ll share just a few basic observations.
- Of the 140 squares in the table (14 commodities times 10 years), 92 of them contain positive returns – that’s just under two-thirds success covering a range from the spectacular 320 percent up year for natural gas in 2000 down to the microscopic 0.02 percent gain by crude oil in 2006.
- Gold had the most positive years – its streak now stands at nine straight years after a 5.5 percent loss in 2000, when the bullion price dipped below $265, roughly a quarter of the current price. Oil, platinum and silver all had eight positive years during the decade, while nickel had six down years.
- Natural gas had the most extreme swings, finishing at #1 three times and at the bottom twice. One year after recording the biggest yearly gain in 2000, natural gas had the worst single-year loss – minus 74 percent.
- Aluminum and silver had the least relative volatility and the most years hovering around the middle. Even in their best performance year (2009), both were in the bottom half – silver at #8 and aluminum at #9.
We believe that the secular bull market for commodities and natural resources stocks that began in 2000 is far from over. The International Monetary Fund believes that commodity prices will rise further in 2010 as a result of global economic recovery and escalating demand from fast-growing emerging markets.
The expanding middle class in China, Brazil and the other biggest emerging economies want more of the material goods taken for granted in the developed world. They are laying claim to a bigger share of the world’s commodities, many of which could face future supply constraints.
History shows that commodity supercycles typically last 20 to 25 years, though not without periods of volatility. If the current cycle follows the historic pattern, we could be just starting the second half of a prolonged upward trend.
View the Complete Interactive Table
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Investments in natural resources, emerging markets and infrastructure are subject to distinct risks as described in the funds’ prospectus. The Reuters/Jefferies CRB Index is an unweighted geometric average of commodity price levels relative to the base year average price.
China Keeps Moving Forward
January 11, 2010
This commentary is from John Derrick, director of research.
China’s stock market is growing up.
Regulators in Beijing have approved a variety of investment products and strategies that are commonplace in mature stock markets: margin accounts for trading, stock index futures and short selling.
A trial period will come first, so it’s not yet clear when the millions of investors in China will be able to execute a short sale or buy stocks on margin. But just the decision to move forward on this front indicates that the government recognizes that its highly liquid markets are ready for more sophisticated strategies.
Chinese investors now have only one direction to go – long-only. If they don’t like a particular company’s prospects, they can either avoid it or, if they own it already, they can sell.
The result is that the country’s stock market is subject to wild mood swings – the Shanghai Composite index, for instance, saw a 130 percent gain in 2006, followed by a 97 percent gain in 2007, a 65 percent tumble in 2008 and an 80 percent gain last year.
Until the measures are fully implemented, we won’t know for certain the benefits and the risks of giving investors more tools to work with.
China’s regulators are optimistic about the impact of the changes. “This improves the stability and the healthy development of the capital markets,” the China Securities Regulatory Commission said on its web site.
Some market observers, however, say that the typical Chinese investor is not ready to take their game to a higher level, perhaps not unlike elevating a decent high school basketball player into the NBA. Their worry is that small-time investors won’t be able to keep up with their better-equipped professional competitors, and that an already volatile market could become even more volatile.
One risk is that, without the proper regulatory structure on shorting, the potential exists for selling pressure similar to what we saw in the U.S. market after the “uptick” rule was removed a couple of years ago. On the other hand, futures and margin-buying could allow speculation that would drive markets higher, which would be a positive.
Overall, we think approval of these new products and strategies are a clear sign that the Beijing leadership believes the worst of the 2008 financial crisis is behind them and that China is ready to refocus on its goal of becoming an important global financial center.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Shanghai Stock Exchange Composite Index is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. #10-17
Net Asset Value
as of 09/08/2010
- Global Resources Fund
PSPFX $8.78 +0.05 - Gold and Precious Metals Fund
USERX $17.44 +0.03 - World Precious Minerals Fund
UNWPX $20.18 -0.01 - China Region Fund
USCOX $8.61 -0.02 - Eastern European Fund
EUROX $9.11 +0.13 - Global Emerging Markets Fund
GEMFX $8.17 +0.08 - Global MegaTrends Fund
MEGAX $7.71 +0.04 - All American Equity Fund
GBTFX $20.02 +0.09 - Holmes Growth Fund
ACBGX $16.04 +0.15 - Tax Free Fund
USUTX $12.58 -0.01 - Near-Term Tax Free Fund
NEARX $2.26 -0.01 - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change