- April 23, 2012
- Weighing the Evidence of Oil and Gold Stocks
The MSCI Emerging Markets and the S&P 500 indices have increased double digits since the beginning of the year. Investors should be thrilled, but instead of cheers, the only sounds the markets are hearing are crickets. Many have been asking, where are the investors?
Since January 1, another $12 billion left U.S. stock mutual funds while about $100 billion went into bond funds. This continues a mutual fund outflow trend that has been ongoing for several months now.
After leading markets since the rebound began in 2009, natural resources and gold took a break while severely punished stocks saw a big bounce in the first quarter of 2012. Taking a look at the returns below, the S&P Global Natural Resources Index rose only 4 percent and the NYSE Arca Gold Miners Index (GDM) lost 9 percent.
Year-to-Date Total Return
From 12-30-11 to 4-19-12
MSCI Emerging Markets Index 12.26% S&P 500 Index 10.17% S&P Global Natural Resources Index 4.27% NYSE Arca Gold Miners Index -9.37% Source: Bloomberg
As investment managers, we continuously weigh the evidence, dissecting macro factors in the market and comparing historical data. We believe this is the best way to find the next opportunity for our shareholders. Using history as our guide, we compared the performance of oil and gold companies against the results of the underlying commodities over the past three years.
West Texas Intermediate (WTI) crude oil has seen a tremendous rise over the past three years. In April 2009, the price of oil was $46 per barrel; today, it’s $104. The SIG Oil Exploration & Productions Index closely followed the rise of Texas tea from April 2009 until August 2011. That’s when the disparity between oil and oil stocks began to gradually increase.
Over the past three years, the price of oil and the index have had an average ratio of 0.21. Currently, it’s 0.26. That may not seem like a big difference but today’s ratio represents a three-year high and is a 3.13 standard deviation event. This means the divergence between oil and oil stocks is in “extreme territory” and, under normal assumptions, there is a 99 percent probability that the gap will close. Either the price of oil should come down or oil stocks go up, or a combination of both.
Gold and gold stocks are also experiencing extraordinary circumstances.
As we mentioned last week, gold equities continue to lag the price of gold, with the trend accelerating recently. Below, you can see that for most of the last three years, gold stocks have outperformed gold. Recently, though, bullion has surpassed gold stocks while gold companies have significantly declined.
The price of bullion and the NYSE Arca Gold Miners Index (GDM) have had a three-year average ratio of 0.94. Similar to oil and oil stocks, the ratio is now 1.28, a 3.06 standard deviation event.
CIBC commented earlier this week on the extreme disparity, saying the minor drop in bullion compared with the huge drop in gold stocks suggests that “a massive oversold position for the equities has occurred in the last month.” This is an “unprecedented” period for gold stocks, says CIBC.
Case Study: Newmont vs. Treasuries
Many American investors already have a stake in one of the world’s largest gold producers but they may not be aware of it. As a member of the S&P 500, you’ve probably acquired shares of Newmont Mining through a fund that tracks the broad index as it is the only gold company included in the index.
The company also boasts the highest dividend yield in the industry with an annualized dividend yield of nearly 3 percent. This is at least a percent higher than the 5- and 10-year Treasuries.
Through dividends, gold companies including Newmont make a commitment to return capital to shareholders. While gold stocks remain at depressed levels, dividends are especially attractive, as investors get “paid to wait” for shares to appreciate.
We believe in thinking contrarian and keeping a close eye on historical trends to discover inflection points, as stocks tend to eventually revert to their means. For example, in March 2009, we noted significant changes signaling the market had hit rock bottom; following that time through the end of the first quarter, the S&P 500 Index rose more than 100 percent.
Today’s extreme divergence in oil and gold stocks and their underlying commodities presents a rare opportunity: what these stocks need now are investors to take advantage of it.
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 Fund as of 3/31/2012: Newmont Mining.
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.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The S&P Global Natural Resources Index includes 90 of the largest publicly-traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified, liquid and investable equity exposure across 3 primary commodity-related sectors: Agribusiness, Energy, and Metals & Mining. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Philadelphia Oil Exploration & Production Index is an equal-dollar-weighted index composed of 22 companies that own, lease, and operate oil and natural gas facilities.
Share “Weighing the Evidence of Oil and Gold Stocks”
- October 11, 2010
- Why Commodities and International Investing Are Key Success Factors for a Diversified Portfolio
Commodity and international investments have a reputation for being risky. But once you get to know them, you might consider inviting them into your portfolio.
Roger Gibson, best-selling author of Asset Allocation: Balancing Financial Risk, joined us a few weeks ago to discuss portfolio construction and the benefits of diversification. A replay of the webcast is available for a limited time here.
Which asset class would you expect to have generated the best performance over the past four decades or so – domestic stocks, commodity-linked securities or a portfolio split evenly between the two?
Here is Roger’s chart showing a hypothetical investment of $1. He uses the S&P 500 Index for U.S. stocks and the S&P GSCI Commodity Index for commodities. For the combined portfolio, he assumes annual rebalancing to maintain the 50-50 allocation.
His math shows that an investment of $1 in the S&P 500 in 1971 would have grown to $36.26 by the end of 2009, and an identical investment in the S&P GSCI would have increased to $32.07.
But look what happens when you split that dollar between the two starting in 1971. By the end of 2009, that original dollar would be supersized to nearly $52.
As Roger put it in the webcast, “The whole outperformed the components. And it did so as a result of the reduction in volatility relative to the components. That is also an outcome that you did not ever have to predict what was going to happen in the short run. All you had to do is have balanced representation and keep rebalancing and keep holding.”
Even if it has the potential for lofty returns, portfolios also can’t be built on a mountain of risk. Optimal performance achieves the highest return with the lowest amount of risk.
To illustrate the importance of portfolio diversification, Roger set up an assortment of portfolios formed from different combinations of four asset classes:
- Asset Class A – U.S. Stocks (S&P 500 Index)
- Asset Class B – Non-U.S. Stocks (MSCI EAFE Index—labeled B)
- Asset Class C – Real Estate Securities (FTSE NAREIT Equity REITs Index)
- Asset Class D – Commodity-linked Securities (S&P GSCI Index)
Roger then back-tested these portfolios over the past 37 years, to gauge how each performed. You can see how each combination of asset classes fared from the chart. The y-axis measures each portfolio’s return while the x-axis measures its volatility, represented by its standard deviation. An ideal portfolio would show up in the upper left-hand corner of the chart—the highest returns with the lowest volatility.
This illustration shows just how powerful commodities are for a portfolio. In the upper left-hand corner (circled in red), you’ll see that the best-performing portfolios all have an allocation to commodities (Asset Class D). Adding a dash of international securities to the mix (Asset Class B) can increase the return but it also comes with an additional amount of volatility.
The chart also illustrates the long-term benefits of diversifying into multiple asset classes and rebalancing on a regular basis. You can see that a combination of all four asset classes outpaced the individual performance of any one asset class and with less volatility.
This webcast is only available for a limited time so I encourage you to listen to the replay soon. This week I spoke week with CNBC’s host Larry Kudlow about gold. If you haven’t already had a chance to watch the interview, you can do so here.
Diversification does not protect an investor from market risks and does not assure a profit. 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. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P GSCI Spot index tracks the price of the nearby futures contracts for a basket of commodities. The MSCI EAFE (Europe, Australia and Far East) Index measures the performance of the leading stocks in 21 developed countries outside North America. The FTSE NAREIT Equity REITS Index is a broad-based index consisting of real estate investment trusts (REITs). Investing in real estate securities involves risks including the potential loss of principal resulting from changes in property value, interest rates, taxes and changes in regulatory requirements.
Share “Why Commodities and International Investing Are Key Success Factors for a Diversified Portfolio”
- October 27, 2010
- Chart of the Week - Shifting Energy Demand
Global energy consumption fell for the first time in nearly three decades last year as slowed manufacturing and idled factories drove consumption lower. Overall, global energy consumption fell 1.1 percent in 2009, the largest decline since Ronald Reagan’s inauguration.
Contracting consumption in the developed world was the largest driver of the decline.
This week’s chart breaks down share of global energy consumption by developed markets—the U.S., Western Europe, Japan and others represented by the Organization for Economic Co-Operation and Development (OECD)—and the rest of the world. You can see that the OECD’s share of global energy consumption has tumbled from nearly 70 percent in 1965 to well below 50 percent last year.
Meanwhile, the lights are shining bright in emerging markets. Emerging markets’ share of global energy consumption has more than doubled since the 1960s. More importantly, the speed of advance by emerging markets has accelerated the past few years, stealing away more than a 10 percent share of the total since 2003.
Credit Suisse expects oil demand to grow 9.3 percent in China, 4 percent in Latin America and 4.4 percent in the Middle East in 2010. In contrast, it expects oil demand to contract by nearly 2 percent in Western Europe and manage only meager growth in North America.
The global recession has allowed emerging markets to gain ground as activity in the developed world slowed to a crawl, but the long-term trend is a significant one and will likely continue. Improving economic conditions in the developing world means more people have more money to spend on personal cars and electricity for their homes. Also, a wealthier population consumes more goods and electronics which leads to more manufacturing activity and increased energy demand.
Share “Chart of the Week - Shifting Energy Demand”
- March 7, 2012
- The Apple Doesn’t Fall Far From the Global Resources Tree
After Apple reached $500 billion in market capitalization, it was inducted into a very elite club of businesses that have reached this size. Only Cisco, ExxonMobil, General Electric, Intel and Microsoft have made it to the $500 billion mark, says CNNMoney.
Apple’s rise in market cap has been driven by spectacular stock performance. Since October, the tech company’s stock has increased nearly 40 percent, making it the top driver of the S&P 500 rally. This increase caught the attention of many analysts, including Thomas Lee from J.P.Morgan, who declared that the moonshot rise of Apple’s stock has made the company a “sector unto itself.” At a market cap of just under $500 billion, Apple represents 3.7 percent of the S&P 500 Index. Lee says the “sheer magnitude” of the company’s weighting means that…
- Apple is the largest cyclical stock in the S&P 500
- Among 65 industries, Apple would be the 6th largest industry
- Among 10 sectors, Apple would be the 8th largest sector
- Apple’s size makes it larger than the Materials, Utilities and Telecom sectors
While it’s a significant driver of the S&P 500’s performance, the business doesn’t operate in a vacuum. Rather, Apple is a chip off the ol’ building blocks of global resources, namely, utilities, materials and energy companies.
In the U.S. alone, Apple relies on wireless networks AT&T, Sprint and Verizon to distribute millions of iPhones to their customers. After the exclusivity agreement between AT&T and Apple ended, Verizon’s market share exploded. Last fall, Sprint boldly agreed to purchase 30 million Apple phones over the next four years, which provides an indication of how optimistic the company is about its iPhone sales.
In China, China Unicom was formerly the country’s only official iPhone carrier, but an additional player has just entered the field. The third-largest telecommunications company in the country, China Telecom, just launched the iPhone, and by all reports, “enthusiasm is high and competition appears good for the market,” says Forbes.
The Wall Street Journal surmised this morning that the new iPad may boost Verizon if Apple’s latest product contains a wireless broadband technology that depends on a monthly subscription plan. The newspaper writes that in 2011, “70 percent of the tablets that were purchased around the world featured Wi-Fi-only connectivity.” This iPad may encourage consumers and businesses to fork over a monthly payment in exchange for a speedy wireless connection.
Beyond communications and wireless businesses, materials companies worldwide benefit from supplying the glass, batteries, wiring and metals for Apple’s products. The New York Times points out that 700,000 people outside the U.S. work for Apple’s contractors, engineering, building and assembling its products. Semiconductors in the iPhone 4 and 4S are manufactured in Austin, Texas; the iPhone’s glass is made in a Corning factory in Kentucky.
In addition, energy companies benefit from keeping millions of iPhones, iPads and iPods charged.
At its live event, Apple said that there are 550,000 mobile apps available now, with 25 billion downloads in over four years. Apps provide opportunity for hundreds of thousands of companies across all sectors. Our iPad and iPhone apps give our investors an interactive way to access and read this blog, our Investor Alert and slideshows.
With rising wealth among emerging markets, we expect millions of new customers will be lining up to purchase their first Apple products over the coming years, while consumers in the developed world seek to upgrade their iPhones, iPads and iPods. We believe this demand will fuel not only Apple, but also its building blocks.
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 were held by one or more of U.S. Global Investors Fund as of 12/31/11: AT&T Inc, Apple, Exxon Mobil Corp, General Electric, Intel Corp, Verizon Communications.
Share “The Apple Doesn’t Fall Far From the Global Resources Tree”
- March 5, 2012
- Will Oil Continue Heading Higher?
Does it feel like it costs an arm and a leg to fill your car these days? While consumers may continue to feel the bite from higher gasoline prices, investors can use these rising prices to their advantage.
Beginning in March, crude oil has a seasonal wind at its back. For nearly 30 years, the third month of the year has been the best month for crude oil. As you can see in the chart below, over the past 5-, 15- and 30-year cycles, West Texas Intermediate crude oil prices head higher in March, and have generally continued to climb through September.
On Yahoo! Finance earlier this week, Daily Ticker host Aaron Task and I discussed the many factors that should continue to drive oil higher over the next year. While many would like to attribute the rise in oil to the geopolitical developments in Iran, there are more global supply and demand fundamentals to consider. Credit Suisse points to the world’s dwindling inventories of oil as an example. Currently, the number of days of oil demand cover is at a low of about 57, the same level we saw in 2004 and late 2007. This low supply to cover demand means that any disruption in supply will likely drive prices higher.
We expect inventories to be further depleted, as demand continues, especially from emerging markets. Inventories for February and March should show a further reduction, as “oil demand growth was building positive momentum in the fourth quarter in all our regions except Europe,” says Credit Suisse.
According to Bloomberg News, China plans on stockpiling more oil to reduce its local price fluctuations. Countries such as the U.S. generally store emergency oil to ensure its residents, businesses and manufacturers have plenty of stock at a price that’s not too high. As part of a three-phase program to increase its strategic petroleum reserves, China is building four emergency oil-storage facilities across western China, in the east and in the south. By the end of this year, its oil facilities are “expected to bring national crude-storage capacity to 270 million barrels” when construction is complete, says Bloomberg.
By comparison, the U.S. currently has the largest emergency petroleum supply in the world, stockpiling about 570 million barrels of crude oil at four sites located along the Gulf of Mexico.
China is not the only emerging market expected to consume more oil. When I was in Bogata, Colombia a few weeks ago, I saw gas stations posting prices around $5 a gallon. And its citizens can only fill up their gas tanks a few times a week. Yet the economy is booming and the streets are jammed with cars. There’s still tremendous demand in this country, as well as many other growing emerging markets, even with higher gasoline prices.
One question I’m asked when oil jumps in price is, will it hurt the U.S. economy? I don’t believe so. Many analysts believe the economy is in a better position to adjust to higher prices, especially when you compare last year’s oil spike to this year’s.
In 2011, fuel prices rose more than 50 percent in a matter of only a few months, says BCA Research. This “very quick and forceful advance” occurred at the same time that U.S. consumers were driving more miles, the number of unemployed workers was at a high, and job creation was nonexistent, says BCA.
This year, the rise in fuel costs has been more gradual, says BCA. What’s more important to BCA is that “consumers are in better shape than they were last year,” with job creation, unemployment, and income expectations all posting improved numbers. In addition, the U.S. has experienced an unseasonably mild winter, giving furnaces a welcome respite and their owners lower heating bills, making the higher payment at the pumps a little more palatable.
In addition, central banks around the world are in “full-on expansion mode,” says BCA. This needed liquidity and support for growth provides an injection of confidence directly into the global consumers’ veins.
Beware of biases by oil analysts: Deutsche Bank research going back to 1999 found that analysts “consistently underestimate” the Brent oil price by an average of 27 percent. The chart below shows the forecasted price made by analysts compared to the actual Brent oil price outturn. Every year, analysts have underestimated how strong Brent will be, ranging from as little as 2 percent to as high as 54 percent. Using the average forecasting error, Brent could be as high as $135 a barrel.
We expect there to be corrections in the price of oil throughout 2012, just like the ups and downs commodities experience from year to year. While the world is hungry for energy, there’s no free lunch on the Periodic Table of Commodities, and historically, from year to year, commodities fluctuate. Crude oil, for example, has seen its share of ups and downs: In 2008, oil lost 53 percent; in 2009, it increased a substantial 78 percent.
On our interactive version of the Periodic Table of Commodity Returns, you can see this for yourself. Click on a particular commodity and see how it has performed each year over the past 10 years.
While oil may remain elevated, use these higher prices to your advantage by owning natural resources companies that benefit from higher prices. The Global Resources Fund (PSPFX), which invests in global materials and energy stocks, gives investors a way to potentially offset those higher gasoline bills.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
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.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Share “Will Oil Continue Heading Higher?”