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Please, Mr. President, Stop Bashing

By Frank Holmes
CEO and Chief Investment Officer

With markets as jittery as they are, why would President Obama want to further undermine investor confidence?

In his latest weekly radio address, the president set up a straw man – privatization of Social Security – and then used it to once again scare Americans by saying their retirement savings were at "the whims of Wall Street traders."

I have two big problems with his comments.

First, he starts with a flawed premise – there is no effort now underway in Washington to "privatize" Social Security in any way. At least two non-partisan watchdog groups analyzed the president's statement and said it didn't pass a truth test.

Second, the president is fanning fear for no good reason. He's using his bully pulpit to tell Americans to be afraid to invest because the capital markets are a crooked cabal of "Wall Street traders" that spends its time scheming up ways to steal their life savings.

The president is renowned for his use of words and imagery, so it's likely that his phrasing was intentionally and carefully crafted for effect. Which brings me back to the beginning of this commentary – why?

And why now? This chart from State Street Global Markets shows that investor confidence in June and July was rising off May's 12-month low (and one of the lowest lows going back to January 2001) despite stubborn unemployment, mixed economic signals and the prospects of a double-dip recession. Surely the president's characterization will not help build this confidence further.

A Bloomberg story today may be onto something: "President Barack Obama and fellow Democrats have run out of time and tools to generate growth as a historic government intervention to rescue the economy runs up against the limits of the November election calendar."

The president has been bashing the financial sector since he was Candidate Obama, throwing around terms like "fat-cat bankers" and deriding markets as "casinos." With midterm voting only a few months away and the Democrats increasingly vulnerable to big losses, it's no big stretch to think the president may be returning to an old reliable to whip up support at the polls.

But this should not be seen as an "us against them" issue. The fact is that some 50 million U.S. households have individual retirement accounts, and millions more have 401(k) accounts, 529 accounts for their children's education, pension accounts and the like to build wealth for their future. When the president undercuts confidence in the markets, these "Main Street" investors trying to plan for retirement and future college tuitions feel the impact, too.

The ultimate drivers of stock price performance are the underlying economic and financial conditions, not "the whims of Wall Street traders." When investors and business leaders feel confident about the future, the overall economy benefits. This is when jobs are created and productivity rises, and we certainly need more of both right now.

Good government policy is key to instilling confidence and creating an environment conducive to long-term business investment, and this will be reflected in the financial markets. Financial reforms have been approved by Congress and the president -- let's give them some time to see how they work.

In the meantime, the president's job is to lead us forward to better times, not to keep the country scared and living in the past.

Director of Research John Derrick contributed to this commentary.

Index Summary

• The major market indices were mixed this week. The Dow Jones Industrial Index fell 0.87 percent. The S&P 500 Stock Index declined 0.70 percent, while the Nasdaq Composite finished 0.29 percent higher.
• Barra Growth underperformed Barra Value as Barra Value finished 1.12 percent lower while Barra Growth fell 0.27 percent. The Russell 2000 closed the week with a gain of 0.21 percent.
• The Hang Seng Composite finished lower by 0.01 percent; Taiwan was higher by 0.45 percent and the Kospi gained 1.68 percent.
• The 10-year Treasury bond yield closed at 2.61 percent, down 9 basis points for the week.

August 20, 2010 Traffic Jam on the Superhighway	August 19, 2010 The Biggest City You’ve Never Heard Of	August 18, 2010 Chart of the Week: China’s Energy Needs

Domestic Equity Market

The figure below shows the performance of each sector in the S&P 500 index for the week. Three sectors gained and seven declined. The best-performing sector was technology, up 0.7 percent. Other better-performing sectors included materials and consumer discretion. The three worst-performing sectors were energy, financials and healthcare.

Within the technology sector, the best-performing stock was Juniper Networks Inc., up 6 percent. Other top-five performers in the sector were NetApp Inc., Tellabs Inc., Agilent Technologies Inc. and Cisco Systems Inc.

Strengths

• The application software group was the best performer for the week, up 7 percent. The group's largest member, Salesforce.com Inc., reported second-quarter earnings and revenue above the consensus estimate, guided current-quarter earnings and revenue above consensus, and raised full-year earnings guidance. Intuit Inc. also rose after reporting fiscal fourth-quarter earnings and revenue above consensus.
• The home improvement retail group was the second-best performer, rising 4 percent. Home Depot Inc. reported second-quarter earnings above consensus and raised fiscal 2010 earnings guidance. Lowe's Companies Inc. reported earnings slightly below consensus, but said it still expects same-store sales to rise about 2 percent for the fiscal year, which some analysts viewed positively. The shares of both home improvement retailers rose for the week.
• The communications equipment group outperformed, gaining 3 percent on the rise in Cisco Systems Inc. and Juniper Networks Inc. In the prior week, Cisco sold off on a disappointing sales forecast and dragged down other stocks in the communications space.

Weaknesses

• The food distributors group was the worst performer, down 5 percent, led by its single member, Sysco Corp. The firm reported quarterly earnings below the consensus estimate.
• The life & health insurance group lost 4 percent. The New York Attorney General's office issued additional subpoenas this week in an investigation of what is known in the industry as "retained-asset accounts."
• The food retail group underperformed, losing 4 percent. An analyst downgraded his ratings on Safeway Inc. and Kroger Co. after a survey of retailers showed aggressive discounting. Also, BJ's Wholesale Club Inc. lowered its guidance for the year citing intense competition from Wal-Mart Stores Inc.

Opportunities

• There may be an opportunity for gain in M&A (merger & acquisition) transactions in 2010. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• Should investors' expectations for an improving economy not come to fruition on a reasonable time frame, it could be a threat to stock prices.
• As governments around the world begin to wind down the monetary and fiscal stimulus programs put in place during the economic crisis, it will likely present a headwind for stocks.

The Economy and Bond Market

Treasury bonds rallied for the fourth week in a row as the market reacted to weak employment data, the potential for additional quantitative easing and what that implies for inflation.

The chart on the right shows the 10-year Treasury bond, which is now at the lowest level since March 2009 and is potentially sending an ominous message about the prospects for growth and inflation over the next six to 12 months.

Last week the Federal Reserve also announced its intention to maintain its quantitative easing bias by using the proceeds of maturing mortgage and Treasury securities to finance additional purchases of Treasuries. This week it acted on those intentions by purchasing $6.16 billion of Treasuries. The Fed also committed to keeping interest rates near zero for an extended period.

Strengths

• Mortgage rates hit a fresh new low of 4.42 percent, the lowest level since records began 39 years ago. In a related note, refinancing activity jumped 17 percent to the highest level in more than a year.
• Industrial production surprised on the upside in July, rising 1 percent.
• Leading economic indicators rebounded modestly this month, rising 0.1 percent.

Weaknesses

• Initial jobless claims continued to rise and are at the highest levels since November 2009 as the economy struggles to generate employment growth.
• Housing remains weak, even with low interest rates. Housing starts rose 1.7 percent, but much of this was driven by a spike in multi-family homes as single-family starts fell 4.2 percent to a new 15-month low.
• Japan's economy grew a meager 0.4 percent in the second quarter and highlights the struggle among developed economies to reignite growth.

Opportunities

• Inflation is unlikely to be a problem for some time and this gives central bankers and other policymakers around the world room for expansive policies.

Threats

• The bond rally that began in April may be at risk of running out of steam as the magnitude of the move has been dramatic. Anecdotally the bullishness in bonds may be nearing an extreme.

World Precious Minerals Fund - UNWPX • Gold and Precious Metals Fund - USERX

Gold Market

For the week, spot gold closed at $1,227.90 per ounce, up $12.40, or 1.02 percent, for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 3.32 percent. The U.S. Trade-Weighted Dollar Index was essentially flat.

Strengths

• Overall, we have had a good start to the seasonal uplift in gold and gold stock prices as we start to close out the summer.
• A deal or two involving senior gold miners buying their higher-growth intermediate competitors have emerged, raising speculation of more deals to follow.
• Notable hedge fund managers are still shown to be net accumulators of gold. This is increasing gold's appeal as a portfolio asset for institutional investors.

Weaknesses

• The broader equity market has been swinging between euphoria and total despair on a week-to-week basis.
• For the first six weeks of the third quarter, the S&P 500 Index outperformed gold stocks by as much as 1000 basis points. That gap has since narrowed to less than 100 basis points.
• Overall most media pundits are still telling investors to get long growth stocks after a decade of losses.

Opportunities

• Recent economic data has started to build support for those who foresee a double-dip recession.
• Interest rates are not going higher, which could have been a headwind to gold, and are now poised to fall further, particularly with the rising worry about a bubble in bonds.
• Adjusting the 1980 gold price high for inflation would give us a price today of about $2,300 per ounce, so it does not appear there is a bubble in gold at this time.

Threats

• The headwind is the lack of economic growth and hence economic opportunity.
• This is compounded by governments seeking to stay in power by funding social safety net programs in the short-term versus addressing some of the longer-term issues.

Energy and Natural Resources Market

Strengths

• According to China's ministry of industry and information technology, 159 metric tons of gold was produced in the first half of 2010, up 8.69 percent compared to last year.
• Japanese crude steel output rose 20 percent year-over-year to 9.22 million metric tons in July, the Japan Iron and Steel Federation said.
• The Baltic Index jumped 12 percent as a surge in iron-ore transportation costs led rents higher.
• Chinese coal imports gained 8 percent month-over-month in July, rising to 13.7 million metric tons.

Weaknesses

• China Steel Corp. may cut domestic prices by as much as US $40 per metric ton in October and November, the Economic Daily News reported.
• Macquarie Research noted that major suppliers of seaborne iron ore are reportedly reducing deliveries to some small steel mills in China that have still not formally settled pricing terms, according to Metal Bulletin.

Opportunities

• Glencore International and Credit Suisse plan to launch a physically-backed aluminum exchange-traded product on a Swiss exchange.
• BHP Billiton Ltd. made a $39 billion bid for Potash Corp of Saskatchewan Inc. this week as the global mining giant attempts to consolidate the fertilizer market.
• Rio Tinto Group's CEO sees economic expansion in China slowing to as low as 6 percent annually this decade after a 30-year run averaging 10 percent growth. This would still be robust compared to mature economies and still represents very large absolute levels of growth.
• In a comprehensive article studying the copper market, The Financial Times highlighted that consultancy Brook Hunt has calculated that the copper mining industry has undershot production expectations by an average of 6 percent per year in the past five years.
• China Petroleum & Chemical Corp., the country's largest oil refiner, plans to install electric car chargers at its 41 filling stations in Jiangxi province as the nation seeks to promote the technology. Sinopec, as the Beijing-based company is known, has won approval from the city government in Xinyu to provide electric charging and battery replacement services.
• Royal Dutch Shell Plc plans to spend as much as $50 billion in Australia over the next decade, more than in any other region, as Europe's largest oil company continues a shift to gas production.
• State-run Oil India Ltd. is planning to buy shale gas assets in the United States in partnership with GAIL India, the DNA newspaper reported this week quoting an unidentified official in the firm.

Threats

• Devon Energy has seen service costs surge in the first half of the year and expects further increases through this year and into next. John Richels, who heads the U.S. independent, said service costs had risen 13 percent so far this year and he expected them to increase another 5 percent. Though he has seen particular price increases for pressure pumping services, the increases have come "across the board" and covered both unconventional natural gas and oil plays and oil sands projects.

Emerging Markets

Strengths

• Hong Kong's unemployment rate fell to a lower-than-expected 4.3 percent in July, lowest in 19 months, from 4.6 percent in June.
• Malaysia's GDP expanded 8.9 percent in the second quarter from a year earlier, ahead of consensus, as resilient exports and strong private consumption drove inventory restocking and fixed-capital expenditure.
• India's headline inflation rate declined to a lower-than-expected 10 percent year over year in July from 10.6 percent in June and 11.1 percent in May, owing to abating food price inflation as a result of favorable monsoon.
• Taiwan's GDP growth surprised on the upside in the second quarter, rising 12.5 percent on a year-over-year basis, largely reflecting strong exports in addition to accelerating public investment and private consumption.
• Peru's GDP grew by 11.9 percent in June, higher than expected by market participants. Manufacturing, up 21.6 percent year over year, and construction, up 22.7 percent year over year, were the main drivers of the growth. Unemployment in July fell to 7 percent from 7.6 percent a prior month.
• Chile's GDP in 2Q grew by 6.5 percent year over year, higher than expected.
• Colombia is also recovering fast, with industrial production growing by 8.5 percent in June. The automobile and steel sectors were the main contributors.
• Banco do Brasil reported strong second-quarter results, with net income rising 35 percent year over year.
• PKO BP, the leading Polish bank, reported second-quarter results that surpassed the market expectations. Net income grew by 30 percent year over year.

Weaknesses

• Singapore's exports growth in July trailed expectations. Exports rose 18.2 percent year over year, but were down from June's 28.5 percent due to moderating shipments of pharmaceuticals and electronics.
• Thailand's exports rose 20.6 percent in July from a year earlier, a slower rate than expected. This led to a trade deficit of $940 million as external demand subsided for electronics and rice.
• Vietnam devalued its currency against the U.S. dollar for a third time since November. The central bank lowered the reference exchange rate by another 2 percent to shore up exporters.
• BIM, the Turkish retailer, disappointed with second-quarter results. Net income fell by 11 percent compared to the sequential quarter, well below consensus. While revenue fell only 1 percent, expenses increased by 8 percent.

Opportunities

• Upcoming mid-autumn festivals and the National Day holiday season, coupled with recent adverse weather, may intensify the demand-supply imbalance in China's market for food and agricultural products. Chinese fertilizer producers should continue to benefit from potentially higher food inflation in the country going forward.
• Turk Telekom emerged as one of the bidders for a 40 percent stake in Serbja Telekom, an integrated telecom provider. Other bidders include Deutsche Telekom, Telefonica and Orascom Telecom.
• According to the latest opinion poll in Brazil, support for presidential candidate Dilma Rousseff increased to 41 percent from 36 percent in the previous month. Support for her main rival, Jose Serra, slipped to 33 percent from 37 percent.

Threats

• Based on the past 43 months, a combination of lower housing prices and higher housing transaction volume would typically accompany an uptrend in Chinese property stocks, given the Chinese authorities' mandate to protect social stability. So far these constructive ingredients have been missing, as Chinese property developers remain reluctant to publicize price cuts, and it is uncertain whether transaction volume would respond to initial price declines since buyers may expect further declines. If this scenario persists, the Chinese property sector may continue to face uncertainties.

• The Polish banking system faces uncertainty as the Ministry of Finance considers a special bank tax that would be based on the assets in the system. The proceeds would be used to reduce the nation's budget deficit, as has been done in Hungary. The prospect of higher taxes had a negative impact on the shares of the Polish banks in the last two weeks.

Leaders and Laggards

The tables show the performance of major equity and commodity market benchmarks of our family of funds.

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.

An investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

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

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund's returns and share price may be more volatile than those of a less concentrated portfolio.

The Eastern European Fund invests more than 25 percent of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund's performance more volatile.

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.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5 percent to 10 percent of your portfolio in these sectors. 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.

Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. Each tax free fund may invest up to 20 percent of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. Bond funds are subject to interest-rate risk; their value declines as interest rates rise. The tax free funds may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.
Past performance does not guarantee future results.

These market comments were compiled using Bloomberg and Reuters financial news.

Holdings as a percentage of net assets as of 06/30/10:
Juniper Networks Inc.: 0.0%
NetApp Inc.: Holmes Growth Fund: 1.09%
Tellabs Inc.: 0.0%
Agilent Technologies Inc.: 0.0%
Cisco Systems Inc.: 0.0%
Salesforce.com Inc.: All American Equity Fund: 3.10%
Intuit Inc.: 0.0%
Home Depot Inc.: 0.0%
Lowe's Companies Inc.: 0.0%
Sysco Corp.: 0.0%
Safeway Inc.: All American Equity Fund: 0.90%
Kroger Co.: 0.0%
BJ's Wholesale Club Inc.: 0.0%
Wal-Mart Stores Inc.: 0.0%
China Steel Corp.: 0.0%
Glencore International: 0.0%
Credit Suisse: 0.0%
BHP Billiton Ltd.: 0.0%
Potash Corp. of Saskatchewan Inc.: 0.0%
Rio Tinto Group: 0.0%
China Petroleum & Chemical Corp.: 0.0%
Royal Dutch Shell Plc: 0.0%
Oil India Ltd.: 0.0%
GAIL India: 0.0%
Devon Energy: All American Equity Fund: 1.60%
Banco do Brasil: Global Emerging Markets Fund: 0.87%
PKO BP: 0.0%
BIM: Eastern European Fund: 0.74%
Turk Telekom: Eastern European Fund: 0.72%
Serbja Telekom: 0.0%
Deutsche Telekom: 0.0%
Telefonica: 0.0%
Orascom Telecom: 0.0%

*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
The S&P BARRA Growth Index is a capitalization-weighted index of all stocks in the S&P 500 that have high price-to-book ratios.
The S&P BARRA Value Index is a capitalization-weighted index of all stocks in the S&P 500 that have low price-to-book ratios.
The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.
The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.
The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.
The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.
The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
The MSCI Russia Index is a free-float weighted equity index developed in 1994 to track major equities traded in the Russian market.
The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.
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.
The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.
The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500.
The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500.
The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500.
The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500.
The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500.
The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500.
The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.