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Health Care Costs and Gold Stocks
March 23, 2010
How much will health care expansion cost the government? Like everything else related to this soon-to-be-law bill, there is a deep and wide chasm between proponents and opponents.
The White House estimates that the health care legislation will cost $950 billion over the 10-year period from 2010 and 2019, and the Congressional Budget Office (CBO) estimates that the bill will reduce the federal deficit by $143 billion during the same period.
It’s hard to imagine the accounting that makes those two numbers compatible, as a former CBO director under President George W. Bush points out in a commentary in Sunday’s New York Times.
Douglas Holtz-Eakin suggests that, based on his analysis, the health care legislation will actually add another $560 billion to an already massive federal budget deficit estimate by the CBO – nearly $10 trillion over 10 years. This figure is equivalent to more than 80 percent of current U.S. GDP.
Huge deficits tend to weigh on the dollar, which stands to benefit gold equities. We discussed this in a commentary last year in which we used the charts below comparing gold stocks to the S&P 500.
The visuals, going back to 1971, show that when the federal government spends more than it takes in, gold stocks tend to outperform the broader market.
The federal budget deficits will likely lead to increasing worries about inflation and keep downward pressure on the dollar. If the cost of health care is higher than current estimates, the dollar stands to be weakened further. Either way, the potential remains for gold stocks to be attractive relative to the broader market for some time to come.
By clicking on the link, you will be directed to New York Times website. U.S. Global Investors does not endorse all the information supplied by this website and is not responsible for its content. The Toronto Stock Exchange Gold and Precious Minerals Total Return Index is the total return version of the Toronto Stock Exchange Gold and Precious Minerals Index with dividends reinvested. The Toronto Stock Exchange Gold and Precious Minerals Index is a capitalization-weighted index designed to measure the performance of the gold and precious minerals sector of the TSX 300 Index. The S&P 500 Total Return Index is the total return version of the S&P 500 Stock Index with dividends reinvested. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. #10-205
Mapping a Global Recovery
February 26, 2010
The U.S. economy grew nearly 6 percent in the fourth quarter of 2009, the Commerce Department reported Friday. This higher-than-expected number, however, was not due to more commerce, but rather to increased manufacturing to replenish depleted inventories.
The U.S. isn’t alone with good economic news this week. China announced that its economy grew 8.7 percent in 2009 and Britain raised its growth forecast for 2010. Not to be outdone, India’s finance ministry is forecasting 8.75 percent growth for the coming fiscal year.
Globally, the World Bank anticipates 2.7 percent growth in real GDP in 2010 and 3.2 percent growth in 2011. As it has in recent years, the emerging world should lead this growth trend.
The graphic from Visual Economics supports the emerging markets growth story. The World Bank forecasts that real GDP growth in the developing world will grow 5.2 percent and 5.8 percent in 2010 and 2011, respectively. This is double the expected growth rate for the U.S. and three to four times the pace foreseen for the eurozone.
Visit the Visual Economics website
By clicking on the link, you will be redirected to the Visual Economics Web site. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. #10-140
In America We Trust
February 18, 2010
A financial crisis and a polarizing debate on social and political issues may have Americans down, but they are not out.
A new Gallup/USA Today poll shows that most Americans expect good things are coming — when asked how they feel about the next 20 years, nearly two-thirds of survey respondents said they were optimistic.
Asked why, 35 percent answered the “strength/will of the American people.”
In addition, more than six in 10 respondents said they believe today’s children will have a better life than their parents.
This positive outlook on the future is consistent with the response to a question that the Gallup Poll has asked periodically for the past 50 years.
Americans now rate their country’s standing as a 5 on a scale of 1 to 10, with 10 being the best. The bad news is that this result was just above the all-time low of 4.8 during the Watergate scandal. Better news — the forecast is that the U.S. will climb to 5.7 by 2015.
One thing many people may have to look forward to is an improving job market. More jobs are still being lost than created, but the chart below shows that the trend is better than we’ve seen since the beginning of 2008.
I’ve said many times that the government’s main focus should be on creating jobs. Once people get back to work and feel confident they can fulfill the needs of their family, economic activity will pick up.
With their resilience, Americans are setting a great example for the emerging world.
In India, China, Brazil and dozens of other countries, ambitious people are creating better lives for themselves and their children. These children will go on to provide new opportunities for their own children—just like what happened in the United States in decades past.
The Chinese and the Indians and the Brazilians will get knocked down along the way, but their strong belief in what we call “the American Dream” will help them get up and continue to prosper.
#10-115
History Lesson: November Good for Dow
November 03, 2009
What happens in markets in the first 10 months of the year can shed light on what might happen in November and December.
The statistic-minded folks at Bespoke Investment Group crunched some numbers going back more than a century and came up with this interesting tidbit – when the Dow Jones Industrial Average is up 10 percent or more through October, the next two months have yielded positive Dow returns 87 percent of the time.
2009 marks the 47th time since 1901 that the Dow has topped 10 percent through October. When that occurs, Bespoke says, there has been an average Dow gain of 4.2 percent and a median gain of 3.6 percent through the end of the year.
Here’s another factoid – regardless of performance through October, the Dow has averaged a 65-basis-point gain in November over the past century. The results are better over the past 50 years and 20 years – monthly gains of 1.21 percent and 1.79 percent, respectively.
You can see in the yellow bar on the chart above that November is the second-best month for the Dow (trailing only April) over the past 20 years, and the reddish bar shows that November and December are two of the best months over the past 50 years.
There are, of course, no assurances, that this year will follow the strong November-December historical trend. In 2007, for instance, the Dow dropped nearly 5 percent in the last two months of the year as the U.S. and other countries slipped into recession.
But for what it’s worth, Bespoke says all of the other five November-Decembers with negative Dow performance came before the end of World War II (1912, 1918, 1919, 1925 and 1943).
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. #09-772
Time for New Stock Market Leadership?
October 26, 2009
This analysis is from John Derrick, U.S. Global Investors Director of Research.
The market has rallied dramatically since the March 9 low, with the biggest beneficiary of this rally being low-quality companies.
This intuitively makes sense, given that companies with the most troubled outlooks are the ones most likely to have a strong recovery when the dire outcomes predicted at the bottom of the crisis failed to transpire.
Quality may have different meanings to different investors, but in a recent research piece, Citigroup ranked performance based on multiple definitions of quality. S&P earnings quality ranking, debt-to-capitalization ratio and return on equity were used as proxies for quality. The research universe was the small-cap Russell 2000 Index, but I believe broader market conclusions can be drawn as well.
Based on S&P earnings quality rankings, companies with C or D (the two lowest categories) ratings returned about 55 percent over the past six months, while the highest-rated stocks returned about 11 percent. As a whole, the Russell 2000 universe returned 30 percent over that time period.
This trend is also broadly true for the other measures of quality. Generally speaking, companies with higher debt burdens outperformed companies carrying low debt, and companies with negative return on equity outperformed the broader market as well as the companies with the highest return on equity.
Morgan Stanley also recently released a research report that looked at low-priced stocks as a proxy for low-quality and found that S&P 500 stocks trading below $5 dramatically outperformed. The same analysis was conducted on the MSCI Europe Index with very similar results, indicating a broad-based global phenomenon.
Morgan Stanley highlighted that the recovery so far has been driven by multiple expansion – the valuation that investors are willing to pay has increased, but that has not been supported by an increase in earnings in the current period. But we are now potentially at an inflection point at which the junk rally has more or less run its course and the market is beginning to focus on earnings growth.
The business cycle plays a significant role in market valuations in the sense that the market anticipates a recovery and pays up for the anticipated earnings stream. Once the recovery takes hold, however, investors focus on actual earnings power as the primary driver of valuations.
One persuasive indicator that the recovery has indeed taken hold can be seen in the ISM Manufacturing Index, which moved above 50 about six weeks ago, indicating that the economy is expanding.
What has worked so far in this stock market recovery will not likely carry us into 2010 and beyond, so the time could be right to reposition for the next leg of the recovery.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization. The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of September 2002, the MSCI Europe Index consisted of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. 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. #09-734
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