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Five Thousand Pounds of Steel are Falling

    October 30, 2009

San Francisco Bay Bridge 103009Drivers on San Francisco’s Bay Bridge were greeted by 5,000 pounds of metal on Wednesday when a recently repaired eyebar snapped under pressure from high winds.

Unlike the 2007 bridge collapse tragedy in Minneapolis, no one was killed and only one motorist suffered minor injuries. A lucky break since the accident happened during rush hour on a bridge that services 280,000 commuters every day.

This isn’t the first newsworthy item in the Bay Bridge’s history, as a 50-foot section of the upper level collapsed onto the bottom level during the 1989 Loma Prieta earthquake. The image was quickly beamed to millions of homes around the U.S. as they were tuning in for Game 2 of the World Series.

Though a major disaster was averted this time, the clock is ticking unless measures are taken to rebuild, reinforce and restore America’s crumbling infrastructure.

One in four of America’s bridges are either structurally deficient or functionally obsolete, according to the American Society of Civil Engineers. Overall, they rate America’s 600,000 bridges a "D."  The ASCE estimates there is a nearly a $7 billion gap between what is needed to be invested in order to improve conditions versus what actually is being invested.

Hopefully, that and similar domestic infrastructure spending gaps will start to close before the problem becomes a crisis.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. #09-760

 

Is it Over for Gold?

    October 29, 2009

Frank and Simon Wall Street 102909I visited the Wall Street Journal offices this morning to discuss gold and commodities markets with reporter Simon Constable. Simon and I discussed gold’s volatility and demand concerns. I also outlined who some of gold’s key constituents are:

There are what they call the price takers and the price makers. The price takers are the jewelers...they’re a huge part of the demand equation. The price makers are the investment people who are worried and have a lack of confidence in the government’s policies about the currency.

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

The following securities mentioned in the interview were held by one or more of U.S. Global Investors family of funds as of September 30, 2009: SPDR Gold Trust. #09-758

 

China’s Private Investment Picking Up

    October 28, 2009

China's Private Investment GrowthOur friend Andy Rothman from research firm CLSA sent out an interesting chart last week following the release of China’s macroeconomic data for the month of September.

As you can see from the chart, private investment (Non State-Owned Enterprises) growth accelerated to 37 percent on a year-over-year basis, a more rapid rate than that of state-owned enterprises. This is the first time we’ve seen this happen since October of last year and it is the fastest rate of growth since November 2007.

A more confident private sector should not only make China’s ongoing recovery more sustainable in a time of diminishing government-mandated stimulus, but also facilitate the structural transition of the Chinese economy toward private consumption.

The private investment revival is largely driven by the real estate sector, which has seen inventory levels drop in major cities like Beijing and Shanghai. CLSA’s on the ground survey revealed that 50 percent of middle-class families surveyed said they were considering buying an apartment.

Activity has also picked up in the business sector. Out of more than 100 small- to medium-sized enterprises surveyed, 32 percent added staff during this past quarter and more than that expected to do so this quarter. Even more telling is that more than two-thirds of the small- to medium-sized enterprises expect the business environment to improve over the next six months.

It’s still too early to call but this could mark a shift in China in which the government’s economic assistance is reduced and economic growth is sustained by the private sector.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. #09-756

 

Britain’s Spy in the Sky

    October 27, 2009

Britain Big Brother 102709Ever feel like somebody’s watching you? If you’ve traveled to the UK recently, chances are somebody has.

An article from Sunday’s New York Times: “Britons Weary of Surveillance in Minor Cases” details some troubling surveillance tactics being used in Britain.

According to London’s Evening Standard, more than 10,000 cameras have been set up around the city at a cost of $326 million.

These cameras are being used to monitor comings and goings along the streets,  and to help solve a range of crimes – from pickpocketing and loan-sharking to failing to clean up after a pet.

A controversial law enacted in 2000 allows the authorities to install the cameras. The costs are tangible, both in dollar terms and loss of privacy, but the benefit is less clear: The parts of London with the most cameras have a below-average rate of solving crimes, the Evening Standard says.

Read “Britons Weary of Surveillance in Minor Cases”

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

By clicking the link in this article, you will be redirected to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. #09-749

 

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.

Percentage of Stocks

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.

COMM-Average Lifespan of a Junk Rally

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.

Phases of Purchasing-Manager Cycle and Phase II of Cycle: Focus on Earnings Growth

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

 

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