- July 5, 2012
- Global PMI: The Trend is Your Friend
Manufacturing around the world weakened in June, according to the JP Morgan Global Manufacturing Purchasing Managers’ Index (PMI). Its reading of 48.9 was the lowest in three years and the first dip below 50 since September 2011. The current reading is also below the three-month moving average for the second month in a row. As you can see on the chart, PMI crossed below the three-month in May.
While Europe, China and the U.S. were primarily responsible for the slowed activity, we believe the trend is your friend. In April, global PMI crossed above the three-month moving average, and historically, when a “cross-above” has happened, it’s signaled higher prices for many commodities. Take a look at the chart below which shows the following:
Ninety percent of the time, copper rose 10 percent over the following three months. Eighty-five percent of the time, West Texas Intermediate oil has also increased. Its median three-month change has been an increase of 11 percent.
Materials and energy were also positively affected, with modest results: When the PMI crosses above the three-month average, 70 percent of the time, the S&P 500 Materials Index rose, with a median return of about 3 percent. The S&P 500 Energy Index had a median three-month return of about 5 percent, with an 80 percent chance of the three-month change being positive.
Using history as a guide, this suggests that by the end of July, we could see strength in these commodities and energy and materials stocks. Although volatility and uncertainty rule the markets these days, we believe that the world’s central bankers are taking note of slowed activity and will act if deemed necessary.
The trend is your friend only if your portfolio is “resourceful” enough to benefit. Read the Financial Planning article, which showed how U.S. Global Investors’ Global Resources Fund strengthened a diversified portfolio over the past 10 years. Read the article.
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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.
Diversification does not protect an investor from market risks and does not assure a profit.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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 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.
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- June 15, 2012
- The Right Formula for Markets
Last weekend, I had the chance to experience the thrill of Formula 1 Grand Prix du Canada in Montreal. Seeing the incredible fluidity and flexibility of every race car, it got me thinking about how F1 has evolved over the past 60 years. Cars are now aerodynamic like a jet fighter, designed with wings that use the same principle as an aircraft and tires that withstand tremendous forces. Even with all these incredible advancements in technology, rules and regulations have been streamlined to reduce costs and improve safety. Since 1994, there hasn’t been a fatal accident in the motorsport.
The ever-evolving rules seem to have improved competition as well. This year, the first seven races have resulted in a different winner each time, breaking a historical trend of only a few drivers dominating the track. When asked about this phenomenon, Peter Sauber, the team boss of Sauber-Ferrari, says he thinks fans are “delighted with the unpredictability, the sheer variety and the unbelievably close competition.”
F1’s fine-tuning of regulations to respect the risks and rewards of racing is the formula government policies should strive for when regulating businesses. Instead, as The Economist pointed out a few months ago, excessive regulations are acting as speed bumps today. Not only is the financial industry burdened with Sarbanes-Oxley and Dodd-Frank, companies in the telecommunications, materials and utilities are also highly regulated.
Thoughtful regulation in moderation is needed to maintain healthy competition. Sporting events need referees and officials to keep the game fair and exciting—no spectator wants them to control the outcome.
Excess regulation, on the other hand, can dilute the efforts of entrepreneurs and result in fewer innovations, lower profitability and less job creation. Compare, for example, the performance of the telecom, materials and utilities sectors to Apple. The company has been the “winning driver” of the market over the past decade and its business operates in a less regulated environment.
Shortly after his death, Bloomberg wrote that Steve Jobs was “not just a techie visionary, but the virtuoso executive who built the world’s second-most valuable company after Exxon Mobil.” As you can see below, Apple’s market capitalization has grown so significantly that J.P. Morgan declared the company a “sector unto itself.” AAPL is now bigger than all of the companies in the telecom sector, all of the materials stocks, and all of the utilities companies combined, generating more profit on an earnings before interest, taxes, depreciation and amortization (EBITDA) basis than any of those sectors.
Bloomberg says Jobs “embodied the Silicon Valley entrepreneur,” with an intensity and ingenuity that changed how people interacted with technology. How innovative could Steve Jobs be if Apple operated under an excessive regulatory environment?
Apple’s success is a great example of what can be accomplished in a free market with sufficient regulation. Rules and regulations are unquestionably needed, yet there shouldn’t be more officials than players, or more rules than plays. Sporting—and business—is at its best when there’s fluidity and flexibility.
I believe with policies that pursue a balance between prudent regulation and capitalistic risk-taking, America can maintain its competitive edge and create jobs for more Americans even in a challenging global economy like we have today.
This week I appeared on Bloomberg and CNBC to discuss oil, gold and precious metals. Head to bloomberg.com and cnbc.com to see the interviews.
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 security mentioned was held by one or more of U.S. Global Investors Funds as of 3/31/12: Exxon Mobil.
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- June 6, 2012
- Pocket of Strength: Texas Ranked Best for Business (Again)
For the eighth consecutive year, CEOs named Texas the best place to do business, according to the latest Chief Executive magazine. Its annual survey received feedback from 650 business leaders from all over the country on topics relating to tax and regulation, quality of workforce and living environment.
The state has been home to the U.S. Global Investors headquarters for more than 40 years and it’s been my home for over two decades. I recently talked about the Lone Star State’s pocket of strength, as nine Texas cities made Milken Institute’s 2011 Top 25 Best-Performing Cities list. San Antonio was the top best-performing city, along with El Paso, Austin area, Killeen-Temple-Fort Hood, Houston area, McAllen-Edinburg-Mission, Dallas area, Fort Worth-Arlington and Lubbock.
During the time I’ve been a business leader in the state, I’ve been amazed at the incredible growth across multiple industries—not only the petroleum sector, but also manufacturing, technology and alternative energy. In fact, Texas is now the leading state in wind energy production, according to the Energy Information Administration.
Texas is a right-to-work state, as are many of the top 20 in the Chief Executive survey. This doesn’t surprise the magazine, which says that “labor force flexibility is highly sought after when a business seeks a location.” Economists have found that right-to-work areas “grow faster than other states, have higher employment and attract more inward migration,” says Chief Executive.
There’s been quite a boom in job creation in Texas: From June 2009 through July 2011, the number of jobs in Texas grew by 328,000—this is nearly half of all the jobs added in the entire U.S.
And jobs attract people outside of Texas who have migrated from all over, moving approximately $17.5 billion net adjusted gross income into the state. Of the 808,000 people who have moved here from 2000 to 2010, about 225,000 came from California, bringing with them a net adjusted gross income of about $4.5 billion, according to the Tax Foundation’s new State to State Migration Data Tool. More than 100,000 people from Louisiana have moved to their neighboring state, followed by residents from Illinois, New York and Michigan.
Most People Leaving California for Texas
Migration To Texas From 2000 to 2010
Net AGI Into Texas
California 225,111 $4.5 billion Louisiana 107,360 $2.6 billion Illinois 56,822 $1.5 billion New York 40,663 $1.1 billion Michigan 39,167 $1.0 billion Source: Tax Foundation
It’s not surprising that Californians are moving east, as CEOs rank the state as the worst in which to do business. The Golden State is not so golden these days, as it has nearly the highest unemployment and, in 2011 alone, about 250 companies have moved some or all of their work out of California, says Chief Executive. The state is losing companies due to “the high cost of doing business due to excessive state taxes and stringent regulations,” says Chief Executive.
I believe this pocket of strength in Texas can be replicated across any of the 50 states. While regulatory policies are important and workforce and living environment differ, the magazine says states also need to have a “cooperative attitude and a willingness to work with the private sector.”
See how many people are coming into or leaving your state at Tax Foundation’s Migration Tool.
By clicking the links above, you will be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by the websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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- June 4, 2012
- Will the ECB and Fed Follow Where China Leads?
Every month, policymakers track purchasing managers’ indices (PMI) around the world as they consider fiscal and monetary actions. To us, a PMI is a measure of health of companies around the world, because it includes output, new orders, employment and prices across manufacturing, construction, retail and service sectors.
Today, the J.P. Morgan Global PMI for May came in lower at 50.6—just above the level indicating expansion—and China’s HSBC Manufacturing PMI fell to 48.4. Both numbers were below their respective three-month moving averages. Historically, we’ve seen China’s PMI number leading the year-over-year change in exports by three to four months, so when the PMI has increased, a few months later, Chinese exports have historically risen, and vice versa.
China’s HSBC PMI tends to be more reflective of export demand, as it is compiled by private parties, covers a smaller survey sample and is weighted toward smaller businesses. Therefore, a lower PMI number indicates lower export demand.
With Europe’s growth in a deep freeze, China is feeling the pain. While many think the U.S. is receiving most of the Chinese-made goods, Europe is actually China’s largest export partner. Nearly 22 percent of China’s exports head to Europe, contributing nearly 6 percent to China’s GDP; only 17 percent of exports from China are shipped to the U.S.
With fewer exports to Europe, China’s GDP growth could be affected, but probably much less than one might think. Listeners of our webcast a few months ago heard Andy Rothman from CLSA explain how China has become less dependent on the world for its growth. As you can see from the chart below, CLSA had already assumed net exports of goods and services out of China to be negative this year because of slower growth from Europe and the U.S.
Yet, China clearly has the upper hand in controlling growth. Take a look at what happened in 2009 when exports declined dramatically: The government stepped in with a massive stimulus package devoted to bank lending and infrastructure construction. This effort significantly boosted overall GDP growth and “pushed the Chinese economy out of a deep slump,” says research firm BCA Research.
Despite net exports falling about 4 percent in 2009, GDP actually grew more than 12 percent.
China won’t put the pedal to the metal like it did in 2009, though. Premier Wen Jiabao recently said that the government “should continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth,” according to Bloomberg News. China is more like Goldilocks: The government wants the economy to be not-too-hot or not-too-cold.
The important thing to remember is that the government will want to avoid the expansion that was “associated with the earlier plan that led to higher CPI, asset price inflation and a surge in lending to non-priority projects,” says J.P. Morgan. Rather, the focus is on making sure the country shifts to a “more sustainable trajectory of growth,” says the research firm.
With the renewed eurocrisis, “Chinese authorities are currently facing an extremely complex and unpredictable situation,” says BCA. They’ll continue to monitor the situation and not make any drastic moves; rather, “Chinese authorities will stay on high alert and act promptly to rescue growth in case of external shocks,” says BCA.
So what will they be tracking as they monitor the situation? We’ve heard the new Chinese Premier-to-be Li Keqiang is paying attention to three factors: power production, railroad freight volume and new bank loans.
Power production in April was slightly positive on a year-over-year basis, but still remained weak.
On May 31, railroad freight volume was released for April, and showed an increase of 3.3 percent over last year, the same reading as March.
New bank loans are down 7.8 percent year-over-year as of May 11, which we believe was the primary reason that China cut the required reserve ratio (RRR) on May 12. J.P. Morgan agrees, saying that together with the RRR cuts, “the seeming start of a new cycle of public spending and consumer stimulus should help to boost loan demand in the economy.”
Looking at the five year data above, all factors are near their lows and below their 3-month moving averages. In whatever shape or form, we expect policy easing to continue.
What appears to be overlooked by the mountain of negative economic news is the fact that China’s stock market is outperforming. In May, the A shares were the best-performing equities among all the developed and emerging stock markets we track. For the year, China’s investors still hold onto a gain of 7 percent, putting the country among the top half of the emerging markets and above all developed markets. This bifurcation may be signaling that the worst is behind us.
Keep in mind that negative news in the media may be a danger sign to some people; to Chinese policymakers, it’s a signal to act.
We believe the next government policy cycle might be just around the corner. In fact, we’ve already seen indications of stimulus from China, such as giving the “green” light to car buyers. Perhaps the European Central Bank and the Federal Reserve will follow suit to avoid a repeat of the last few summers.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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 Shanghai A-Share Stock Price Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares listed on the Shanghai Stock Exchange that are restricted to local investors and qualified institutional foreign investors.
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- May 29, 2012
- There’s No Place Like America
A conference with CEOs from around the globe recently brought me to Europe—the center of Western Civilization, the cradle of democracy, innovation and creativity, and the crux of today’s debt crisis. In Siena, I came across a medieval reminder of the effects of good and bad government inside the Palazzo Pubblico among the beautifully painted frescoes.
One mural, “The Allegory of Good Government,” personifies the virtues of justice, peace, virtue and wisdom, emphasizing the importance of a stable government. Two more frescos flank this painting, one depicting the effects of good government and another showing the effects of bad government.
Surrounded by historic beauty, it’s sad to see the disillusioned faces on the streets of Europe. If a picture is worth a thousand words, the one below might be more monumental than that. Business Insider featured this chart showing the rising unemployment rate among the youth throughout Europe. Since the 2009 global crisis through April 2012, youth unemployment has skyrocketed in Spain, Greece, Portugal, Italy and Ireland.
Ian McAvity recently shared some words of wisdom related to Europe’s colossal challenges: “When times get tough, economic nationalism and protectionism tends to rise because it is always easier to blame someone else for self-inflicted problems.”
The contrast of historic beauty against tragedy is one for Shakespeare. Back in the U.S., I am thankful for the entrepreneurial heart that beats throughout America. As the election grows closer, I’m confident it’ll beat louder to persuade the U.S. government to pursue thoughtful policies that embody essential American principles.
One should not underestimate what it means to be American; you don’t find a feeling quite like it outside the nation. In fact, emerging countries such as Singapore and China are now striving to replicate what my friend Alexander Green calls “American exceptionalism.”
He says the U.S. is the world’s economic superpower today not only because of geography, but, more importantly, the fact that entrepreneurs were free to innovate and create. Alex writes, “America cultivates, celebrates and rewards the habits that make men and women successful. It promises that anyone with ambition and grit can move up the economic ladder, that everyone has a chance to better his or her lot, regardless of circumstances.”
This feeling of empowerment has created a national group of well-informed and very engaged individuals. On the Organisation for Economic Cooperation and Development (OECD) “Your Better Life Index” based on 11 diverse measures of well-being, the U.S. is highly ranked. Each element measures a feeling of satisfaction with life, including health, education, environment, personal security, life satisfaction, and work-life balance. Here are a few of the highlights from OECD’s summary of the U.S.:
- The average income in the U.S. is nearly $38,000 a year, considerably more than the OECD average income of about $22,000.
- Almost 90 percent of adults in the U.S. have a high-school degree (or equivalent); the OECD average is 74 percent.
- Americans have a strong sense of community, as 92 percent know someone they could rely on in a time of need. The OECD average is 91 percent.
- Voter turnout was significantly higher than the world average: 90 percent of those registered participate in the U.S. political process, compared to 73 percent for the rest of the world.
- American households spend an average of only 20 percent of net disposable income on rent/home loans, gas, electricity, water, furnishings or repairs. The OECD average is 22 percent.
While a 2 percent difference in household spending isn’t striking, pennies add up. In a Deutsche Bank survey of how much a variety of goods cost around the world, the research firm found that New York “was found to be significantly cheaper than other major financial hubs even after accounting for taxes and other additional charges.”
According to its study, if I wanted to buy Apple’s iPhone in Europe, it would’ve cost me $845; filling a car with a liter of petrol would cost over $1 more than it does in the U.S. A pair of Levis is nearly double the price than the same pair in New York City. On multiple measures, New York City offers more for your money compared to Paris, Sao Paolo or Tokyo.
Nonetheless, consumers on the other side of the world willingly line up to purchase American-made goods, even at a premium price.
Affordability is partially why 60 million international tourists choose to immerse themselves in American culture each year. While Canada and Mexico make up the majority of these visitors, tourists from Brazil and China have been visiting in record numbers, according to data from the U.S. International Trade Administration. In 2011, visitors from Brazil increased 26 percent to 1.5 million people. About 1 million Chinese visited the U.S. in 2011, which was an increase of 36 percent over the previous year.
As the rising middle class in emerging markets gain more disposable income, they desire the same financial and social mobility that Americans take for granted. For that mobility, each visitor spends about $4,000 on travel, clothes, food and attractions.
Invest in America
In his article, Alex Green describes the traits that a typical American embodies: “an optimistic attitude, a can-do spirit, and an enthusiastic endorsement of the pursuit of happiness through individual initiative and self-reliance.”
Investors aren’t endorsing U.S. equities these days. With all the positive aspects mentioned above, today’s low participation in the U.S. stock market is perplexing. Here are two more reasons to invest today: 1) About 620 companies in the S&P 1500 Index are growing their revenues at more than 10 percent; and 2) 428 stocks in the index have an annualized dividend yield higher than the 10-year Treasury.
By clicking the links above, you will be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 1500 Composite is a broad-based capitalization-weighted index of 1500 U.S. companies and is comprised of the S&P 400, S&P 500, and the S&P 600. None of U.S. Global Investors Funds held any of the securities mentioned as of 3/31/12.
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