- September 8, 2011
- Chart of the Week - Can Russia Stay #1?
Siberia’s western oil fields have been a mainstay of Russia’s economic growth for decades, but the world’s largest producer of oil is now looking elsewhere in its country to replenish its stagnating supplies. Western Siberia’s oil fields have historically proven to be fertile hunting grounds for Russian oil companies, producing nearly 70 percent of the country’s exported oil.
But according to a recent report from Merrill Lynch, most of Western Siberia's oil fields are considered brownfields—regions where roughly 75 percent of fields have been exploited. The firm says oil and gas firms must now consider the “big picture” to maintain long-term sustainable growth of their natural resources. East Siberia is home to the country’s best greenfield prospects—sites that remained untouched—and are Russia’s “next big hope,” Merrill Lynch says.
Merrill Lynch analysts say East Siberia has remained untouched by development due to its “harsh climate, remote location and lack of infrastructure.” But with noticeable declines on the western front, the Russian government is encouraging exploration in this region and others, including: East Siberia, the Baltic Sea and the northern fields of Vola-Urals and Timan-Pechora. These locations are expected to play a large part in Russia’s long-term promise to supply Europe and Asia with oil and gas.
The Russian government relies heavily on oil exports for tax revenue from oil and gas companies, which currently account for more than 50 percent of the consolidated budget. Recently, the Russian government has reversed its burdensome tax code and now offers tax incentives to “spur production, sustain output and coax more production out of stagnating Russian fields,” Reuters says.
One of Russia’s largest state-owned oil companies, Rosneft, is largely benefiting from these tax breaks to fund and explore new greenfields projects in East Siberia. With tax incentives in hand, the company is using innovative technology and new drilling techniques to dig deeper wells in cold climates, to unlock estimated reserves of three billion barrels of oil and 180 billion cubic meters of gas. Rosneft reported recovering nearly 92 million barrels of crude oil in East Siberia last year, according to the report.
CSI analysts say pairing these types of tax incentives with new discoveries will become vital to sustaining Russian’s oil output in the future. While the region still has a ways to go to compete with its western counterpart, Merrill Lynch predicts the region could account for 80 percent of growth and 15 percent of total oil output by 2018.
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 article were held by one or more of U.S. Global Investors Funds as of June 30, 2011: Rosneft.
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- August 26, 2011
- Ocean’s 2011: Venezuelan Gold
Now might be a good time for Daniel Ocean to start assembling his gang of 11. Venezuelan President Hugo Chavez announced last week that he was ordering the country’s ample gold reserves back to Caracas for safe keeping. Not a bad idea given the global geopolitical environment, but with some 211 tons of 400-ounce gold bars to be moved from bank vaults in London, President Chavez has a logistical nightmare on his hands.
How do you transport vast quantities of gold nearly 4,000 miles from one continent to another?
Reuters blogger Felix Salmon had an interesting piece this week breaking down the major options.
The most direct route would be to fly the gold home, but there are a couple of problems with that option. It would take roughly 40 different shipments to transport 211 tons of gold, the Financial Times says. Intercepting just one shipment would net a robber $300 million, Salmon says, and if not successful, you would have 39 more chances. It’s unlikely there’s an insurance company out there that would take on the responsibility.
Another option is to ship by boat using the Venezuelan Navy. The obvious risk here is piracy. Europe-to-South America shipping routes have a long history of piracy. Throw in the Bermuda Triangle, hurricanes and the incredibly slow pace—you’d have a month’s worth of $12 billion hand-wringing in Caracas.
The most inventive idea Salmon puts forth is to exchange it upon delivery. Gold stored in the Bank of England generally receives a 2 percent premium for its safety and prestige. Chavez could trade his Bank of England bars with another country upon the safe delivery of their own gold bullion in Caracas. This would cost Venezuela at least the 2 percent premium, but save the headache of transporting so much gold.
Even if the gold reaches Caracas safely, the challenge of securely storing it is immense. Salmon calls gold “the perfect heist: anonymous, untraceable, hugely valuable.” The transfer is so risky; this would be the world’s largest transfer of gold since 1936. There’s no official word on where Chavez will store Venezuela’s gold, but he said last week that “if there isn’t enough room to store the gold in the central bank vaults, I can lend you the basement of the Miraflores presidential palace.”
For the record, the U.S. houses its 8,100 tons of gold reserves in Central Kentucky at Fort Knox. The bullion vault lies in the center of a 110,000 acre base that’s also home to more than 10,000 troops and the mechanized tank division of the U.S. army—a security system even Ocean’s 11 couldn’t crack.
We’ll have to wait and see how this story develops, but it’s certain others on both sides of the law are watching closely as well.
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 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 its/their content.
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- August 23, 2011
- Finding a Silver Lining in the Markets’ Dark Clouds
Call it choppy, volatile, fickle or lively, market action continued to disappoint last week. Frightened investors pulled out more than $40 billion from long-term mutual funds for the week ended August 10, according to the Investment Company Institute.
The eurozone crisis fueled the outflows as economic growth figures for several eurozone countries disappointed—a hard trend to break given the austerity measures being implemented. Relatively, U.S. stocks have only suffered a fraction of the pain (down roughly 5 percent year-to-date as of August 16) felt by investors in the U.K. (down 9.2 percent), Germany (down 13.2 percent), France (down 15.1 percent) and Italy (21.9 percent).
Given this landscape, the International Strategy and Investment Group (ISI) lowered its forecast for global growth to 2.5 percent in 2012. That’s down from the 4-5 percent growth level many were estimating.
There is a silver lining: Despite all the negative news out there, the global economy will continue to grow.
In fact, the U.S. economy has had several positive developments recently. The four-week average for unemployment claims dropped to 402,000 during the week ending August 13. There is still a large chunk of America unable to find a job, but that group has shrunk 13 percent since August 2010 and is about 40 percent of peak 2009 levels.
Many S&P 500 Index companies have leveraged strong economic growth in emerging markets and a weaker U.S. dollar into higher profits. Second-quarter 2011 earnings for companies in the S&P 500 Index have been superb with nearly 71 percent of company earnings beating expectations, per ISI.
According to Citigroup, this continues a trend established in 2010 when year-over-year earnings for the S&P 500 were up more than 38 percent, more than double the historical average during the first full year following a recession.
In addition, the strong earnings report is across all sectors. These companies are also sitting on nearly the largest cash cushions as a percent of market capitalization (about 11 percent) we’ve seen in 20 years, Citigroup says. Markets have historically bottomed when cash as a percentage of market cap reaches 9 percent.
We’ve also seen a surge in U.S. money supply (M2). ISI says M2 has surged $460 billion (about 5 percent—38 percent on an annualized rate) over the past eight weeks. Though the rise is largely due to a plunge in institutional money funds, increased money supply means more funds are available to be lent out, pushing down borrowing rates. Access to this “cheap capital” can increase confidence and entice businesses to put cash to work.
Around the globe, two recent bright spots have been Taiwan and Russia. Taiwan’s equity market is technology heavy, says BCA Research, and the market’s performance tends to track the global information technology sector, not global markets. BCA says that Taiwan is set to outperform because “after two decades of stagnation, domestic demand has been showing signs of reviving…[and] equity/currency valuations remain attractive.” In Russia, strong cash positions and subdued credit flows since 2008 mean Russia’s “equity and credit markets are likely to outperform in the months ahead,” BCA says.
Stock market corrections are always difficult but they also create opportunities. One tried and true method which allows investors to compare similar companies is through relative valuation. This same process can be applied to asset classes. The S&P 500 currently yields about 2.27 percent—that’s higher than a 10-year Treasury bond which yields roughly 2.07 percent. The choice between the two is obvious for long-term investors: Equities.
If you were to buy the 10-year Treasury today, you would likely earn about 2 percent a year and get your principal back (barring disaster) in 10 years. However, by investing in stocks today, you could receive more in annual income plus the potential growth and appreciation over that time. Granted, the latter hasn’t always been positive. Just look at the past 10 years of returns for the S&P 500. But that’s been one of the worst periods in history for investing in stocks and it is unlikely stocks will suffer the same fate over the next 10 years.
The average annual total return for the S&P 500 during the 20th Century was 10.44 percent—the strongest period coming during the Tech boom in the late 1990s, research from Citigroup shows. Meanwhile, the total return on a 10-year Treasury bond was 4.68 percent over the same time period. Since 1961, there have been 18 years where the S&P 500 rose more than 15 percent compared to only 13 years of declines.
Those investors who have been waiting for a bounce in the markets may not have to wait too long. We mentioned last week that the S&P 500 has historically experienced strong upward moves after the CBOE Volatility Index (VIX) reaches extreme levels. Research from Citigroup backs up this assertion, showing the average return for the S&P 500 is 5.5 percent (three months), 9.4 percent (six months) and 18.9 percent (12 months) following a breach of the 35-40 on the VIX.
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 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. M1 Money Supply includes funds that are readily accessible for spending. M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds. M3 money supply is the broadest monetary aggregate, including physical currency, demand accounts, savings and money market accounts, certificates of deposit, deposits of eurodollars and repurchase agreements. Chicago Board Options Exchange (CBOE) Volatility Index (VIX) shows the market's expectation of 30-day volatility.
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- June 8, 2011
- Is Peru’s Humala Jekyll or Hyde for Mining?
The Peruvian stock market has had a very strong reaction to the recent outcome of the country’s presidential election. With Keiko Fujimori’s surprise loss to Ollanta Humala, many Peruvian stocks saw share prices sink before quickly recovering the following day.
Grana y Montero, a large engineering company in Lima, saw its stock endure incredible volatility, reaching a three-month high shortly before the election, and then plummeting nearly 20 percent following election results.
The election has been a topic of discussion among our investment team, as we digest the outcome and discuss the implications a shift in Peru’s government policies would have on the country’s economy and largest industries.
Most of our conversations have focused on the possible ramifications for Peru’s mining industry, as it is vital to supplying the world with many important metals. The country is the world’s largest producer of silver, second-largest producer of copper and zinc, and sixth-largest producer of gold.
We’ve also been impressed with Peru’s recent economic success. The country’s GDP was 8.6 percent in 2010, outpacing Latin American countries including Chile (5.8 percent), Colombia (4.9 percent) and Mexico (4.5 percent). Due to heavy investments in the mining sector and emerging consumer demand, Peru should see its GDP hit 7 percent this year, one of the highest expected in the region.
The problem is most people don’t know where Humala’s intentions lie and opinions vary whether you live in the country or reside in the U.S. According to Bloomberg, investors are worried that Humala “could reverse policies the government expects will attract $50 billion of mostly mining investment and fuel average annual economic growth of 6 percent over the next three years.”
Our global strategist, Jacek Dzierwa, is optimistic for the long-term. He would be surprised to see Humala discard all of Peru’s recent successes and thinks the new president will seek to be more like Brazil’s Lula than Venezuela’s Chavez. But until the country’s finance minister and the head of central bank are named, this Jekyll or Hyde debate will continue to have its effect on markets, particularly mining stocks. As long-term investors, we’re mindful of the volatility but believe it’s not prudent to trade on this news without additional clarity from Peru’s new leader.
The following securities mentioned above were held by one or more of U.S. Global Investors Fund as of 3/31/11: Grana y Montero
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- May 18, 2011
- Chart of the Week: Emerging Europe’s Middle Class
Middle-class, affluent, bourgeois, white-collar … they all describe a group of people who enjoy a comfortable life, have access to healthcare and, most importantly, have discretionary income. And across developing nations, there is a growing group of affluent people that are just settling in to this lifestyle.
A few weeks ago we discussed how economic power is gradually shifting eastward and highlighted a McKinsey Global Institute report that showed China, Latin America and South Asia are projected to account for most of the middle class children by 2025. (Read: Middle-Class Middleweights to be Growth Champions).
Those regions aren’t the only ones. Our emerging markets team uncovered this chart for last week’s Investor Alert which shows a surging middle class exists in Eastern Europe as well. China leads the developing world with a middle and affluent class of 149 million—roughly the same size as the combined total populations of Japan and Taiwan.
While China is far ahead of all developing market countries with 149 million members of the middle and affluent class, investors shouldn’t overlook another important trend: The combined middle and affluent classes of the Czech Republic, Hungary, Poland, Romania, Russia and Turkey equal that of China. Among emerging market nations, Russia has the second-largest middle and affluent class with 70 million people; Poland’s rivals that of India.
Turkey, which currently ranks seventh, has especially strong prospects. Already, its middle class is second among emerging markets in terms of GDP per capita at $17,586. In addition, this class is expected to grow at a 5.1 percent annual rate through 2029.
The Development Centre of the Organisation for Economic Co-operation and Development (OECD) Development Centre identifies the middle class population as the “consumer class” because of its importance on consumption levels. We agree with this designation as this class identifies an important global driver of economic growth.
We believe that people with discretionary income will seek to improve their way of life by buying their first vehicle, upgrading their home, purchasing appliances and gaining access to the Internet. For years to come, these middle and affluent classes should drive demand for new or improved infrastructure and needed commodities, thereby contributing to the substantial economic growth in several emerging nations around the world.
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