3 Airline Stocks to Consider as We Head into the Busy Summer Travel Season

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As investors, our greatest assets are our children and grandchildren. Ensuring their safety is of utmost importance. On behalf of everyone at U.S. Global Investors, I urge our elected leaders and public officials to not rest until a workable solution to school violence is reached.

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Summer is right around the corner, and traditionally that’s when families pack their bags and get away for a well-deserved vacation. Since this is the first summer travel season in three years that feels like the before times, airlines and airports are bracing for what is expected to be a particularly busy three months.

A couple of airlines, in fact, upgraded their second-quarter revenue projections this week, citing higher-than-expected demand. On Thursday, Southwest Airlines said it expected revenues from April to June to increase 12% to 15% from the same quarter in 2019, up from earlier projections of 8% to 12%. That comes despite higher fuel prices, which should be “more than offset” by increased revenues.

Based on current trends, Southwest “expects solid profits and operating margins” in the second quarter and for all of 2022, the Dallas-based carrier said in an investor update.

JetBlue Airways similarly announced on Thursday that bookings continue to “exceed expectations” and that it may be on track to collect record revenues this summer. The carrier expects “June revenue per available seat mile to be up more than 20%” compared to the same month in 2019.

As you may know, JetBlue is still trying to outbid Frontier Airlines in an effort to acquire rival low-cost carrier Spirit Airlines, even though Spirit has already agreed to merge with Frontier. This should tell you that airlines are scrambling to gobble up as much market share as possible ahead of an anticipated leisure travel boom.

I’m very pleased with how well airline stocks have performed so far this year relative to the market. The Dow Jones U.S. Airlines Index was up more than 3% year-to-date through Friday. Although the STOXX Europe Total Market Airlines Index was down 8% over the same period, that was still ahead of the S&P 500, which has sold off largely on inflation concerns.

That said, below are three airline stocks I’m keeping my eye on as we head into the busy summer leisure travel season.

Southwest Airlines (LUV)

I’ll just say up front, Southwest has long been one of my favorite domestic carriers. As the original low-cost, no-frills airliner, it’s had decades’ worth of experience operating at the intersection of comfort and affordability.

There’s much more to love about Southwest than what I’ve already mentioned. The company has the number one position in 23 of the top 50 markets in the U.S., and the focus right now is on restoring the network to pre-pandemic levels—something that could be achieved by 2023, if not sooner.

Southwest is also focused on maintaining its low-cost advantage. This includes coming up with more efficient flight plans, optimizing maintenance planning and modernizing its revenue management system. In December, the company signed a new credit card co-brand agreement with Chase until 2030, which is already very lucrative. All combined, these initiatives are expected to add between $1.0 billion and $1.5 billion to earnings before interest and taxes (EBIT) by 2023.

Rising jet fuel prices are a concern, but the good news is that Southwest is approximately 64% hedged for the rest of this year at around $60 per barrel. This puts the company in a better position than many of its larger peers, including American Airlines, United Airlines and Delta Air Lines, which are currently unhedged.

Alaska Airlines (ALK)

The more I learn about Alaska, the more I find it attractive. Right now, the company appears to have the best balance sheet in the industry with a 49% debt-to-capitalization ratio. Since the start of the pandemic, Alaska was the first airline to reach no cash burn, the first to become cash flow positive and the first to become profitable.

As the number five U.S. carrier by fleet size and passenger numbers, Alaska is moving toward a low-cost structure that should match Southwest’s this year or next. The airline has regularly outperformed the domestic industry on operating margin over the past 20 years.

Unlike other airliners, Alaska is working toward having a single-type fleet, which should lead to millions in cost savings in aircraft swaps, maintenance and reduced pilot training. For mainline operations, Alaska will use the Boeing 737, while the Embraer will be used for regional operations. These initiatives are expected to more than offset higher labor costs and airport costs.

Similar to Southwest, Alaska hedges its fuel costs. Half of its fuel requirements are hedged until the end of this year at a cost of $71 per barrel.

In 2016, Alaska merged with Virgin America with the goal of becoming the premiere West Coast carrier. Today its market share in key hubs continues to rise, including in Seattle, Portland, Anchorage, San Francisco and Los Angeles. About 50% of its loyalty participants are in the Pacific Northwest.

Ryanair Holdings (RYAAY)

Now for something a little different, let’s jump across the Atlantic to Ireland, where ultra-low-cost carrier Ryanair is headquartered. The largest airline in Europe, with flights to nearly 40 destination countries, Ryanair is well-positioned to capture an increase in leisure travel demand as Europe drops its Covid-related measures and restrictions.

To give you an idea of just how busy Europe may be this summer, the European airspace manager EUROCONTROL recently said it expects traffic in the upcoming months to stand at 90% of pre-pandemic levels. This could be a huge boon for Ryanair, which reported an average of 2,815 flights per day in April.

Ryanair has been a leader in attracting climate-conscious customers, something that’s increasingly important in the European market. In June last year, the company took delivery of the Boeing 737-8200 “Gamechanger” aircraft, which purports to reduce fuel consumption by 16% per seat. As of March 2022, Ryanair has taken delivery of 61 of these aircraft and reportedly plans to increase this by an additional 70 within the year.

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Index Summary

• • The major market indices finished up this week. The Dow Jones Industrial Average gained 6.24%. The S&P 500 Stock Index rose 6.17%, while the Nasdaq Composite climbed 6.84%. The Russell 2000 small capitalization index gained 6.23% this week.
  • The Hang Seng Composite fell 0.43% this week; while Taiwan was down 10.72% and the KOSPI fell 11.40%.
  • The 10-year Treasury bond yield fell 4 basis points to 2.74%.

Airline Sector

Strengths

• The best performing airline stock for the week was Make My Trip, up 15.5%. EasyJet’s booked fares are trending above 2019 levels at 5% and 15% higher for fiscal third and fourth quarter, ahead of commentary from its European peers. Management attributes this to strong pent-up demand, particularly in the U.K. EasyJet has also benefitted from its focus on higher yielding primary airports, which shields it from the harshest competition.
• The CPI Index for airfares in March/April was 10.7%/18.6%, respectively, as airlines demonstrate pricing power benefiting from strengthening demand (including corporate recovery in late March and April) and constrained supply. There does not appear to be any demand slowdown.
• United Airlines raised its second quarter TRASM (total revenue per seat mile) guidance and stated this is the strongest environment it has ever seen. While no other airline provided an official guidance update, all cited a continuation of demand and pricing strength heard during earnings season. Many airlines commented that with the current strength of demand, revenue management systems are holding back some inventory for summer in order to not sell out too quickly.

Weaknesses

• The worst performing airline stock for the week was Air France, down -18.2%. Similar to last week, APAC and North American markets once again drove the bulk of this week’s reductions in scheduled capacity. Total May capacity was reduced another 1% this week (now 75% recovered to 2019 levels) driven primarily by a 3% cut in APAC (mostly China domestic).
• Mesa Airlines is seeing more First Officers leave than Captains, with 2-3 times higher attrition to major carriers. The airline cited it needs to hire and train about 200 pilots for next year before it reaches a more comfortable level to return to historical operations. While Mesa currently has a lower pay scale than its peers, a new contract with higher pay rates could curb employee departure.
• Air France-KLM has entered into exclusive talks with private equity firm Apollo for a 500-million-euro capital injection, reports Reuters, for one of its engineering and maintenance units to help repay French state aid. “The proceeds of the transaction would enable Air France-KLM and Air France to partially redeem the French state perpetual bonds,” according to the airline.

Opportunities

• Summer bookings have trended at 13% above 2019 levels for the past 10 weeks, with 36% booked in and at yields of over 15% versus 2019. This is the strongest yield increase highlighted by a European airline since the beginning of the pandemic, and above consensus. EasyJet maintained its third quarter capacity guidance of 90% of 2019 levels, and expects to fly 97% in the fourth quarter, with loads of over 86% and 90%, respectively.
• ARC system pricing remains strong and is up 9.1% versus 2019 (compared to up 6.6% last week) as both domestic and international pricing improved this week. Domestic pricing turned positive versus 2019 during the week while international pricing inflected to positive during the week.
• European airline bookings improved in the week, with strong growth in international flights offsetting a decline in Intra-Europe flights. Intra-Europe net sales declined by 20 points to -15% versus 2019 and were down by 11% week-on-week. International net sales increased by 11 points to -11% versus 2019 and grew by 12% week-on-week. This led to a two-point increase in system-wide net sales to -12% versus 2019, up 4% this week.

Threats

• It is important to note that Spirit Airlines’ opposition to the North East Alliance is consistent with its pre-M&A stance. Moreover, one important and valid point Spirit makes is that a JetBlue-Spirit deal is likely to take longer to finalize than a Frontier-Spirit deal, in part because the latter was initiated in February and in part due to the North East Alliance litigation.
• While Hong Kong’s recent partial easing of travel restrictions lends support to Cathay Pacific’s travel restart plan, uncertainty over the city’s broader re-opening pace, particularly considering Mainland China’s strict “zero-COVID” stance, has cast doubt on a swift capacity ramp-up. Moreover, Cathay’s larger-than-regional-peers’ right-sizing (laid off 30% of employees with the closure of several overseas cabin bases) poses challenges to its plan to rebuild capacity and linkages for both passenger and cargo flights. The high and rising fuel cost environment and global pilot shortage also add headwinds to its recovery trajectory, despite its fuel hedge policy.
• There are a handful of proposals to potentially alleviate the current pilot shortages. Policy changes such as the extension of the average retirement age (from 65 to 67) or elimination of/exemption to the 1,500-hour rule should bring near-term relief, particularly to the regional airline industry (and small communities they serve); however, if the industry does not coordinate with flight schools/colleges, there could be medium-term supply issues from the lack of sufficient flight instructors at these institutions.

Emerging Markets

Strengths

• The best performing country in emerging Europe for the week was Romania, gaining 2.9%. The best performing country in Asia this week was Indonesia, gaining 1.6%.
• The Polish zloty was the best performing currency in emerging Europe this week, gaining 2.8%. The South Korean won was the best performing currency in Asia this week, gaining 2.0%.
• Preliminary Eurozone PMI numbers corrected in May but remain well above the 50 level that separates growth from contraction. Manufacturing PMI was reported at 54.4, Service PMI at 56.3 and Composite PMI at 54.9.

Weaknesses

• The worst performing country in emerging Europe for the week was Hungary, losing 7.5%. The worst performing country in Asia this week was China (via the Shanghai Stock Exchange), losing 0.5%.
• The Russian ruble was the worst performing currency in emerging Europe this week, losing 8.1%. The Vietnamese dong, was the worst performing currency in Asia this week, losing 0.13%.
• Hungarian equites slumped this week following an unexpected announcement by Prime Minister Victor Orban. Orban launched his new government by declaring a state of emergency in Hungary, reports Bloomberg. This came less than a week after he shared a plan to override the checks and balances of liberal democracy to take control of a country.

Opportunities

• Shanghai continues to re-open its economy. Middle and high school students will be able to return to classrooms starting June 6. Shipping firms in Shanghai are reporting shipping rates reaching 95% of normal operation levels and new COVID cases continue to fall nationwide, including in Beijing and Shanghai.
• China cut its five-year loan prime rate by 15 basis points while a cut of only 5 basis points was expected by Bloomberg economists. The People’s Bank of China (PBOC) announced tax cuts for small businesses and set aside more than $21 billion as loans to micro and small businesses. The government also announced subsidies for struggling companies and measures to support supply chains.
• Chinse technology/interest stocks are oversold, and technical charts point to an upcoming bounce. This week, Baidu and Alibaba reported revenue for the first quarter that beat the average analyst estimate. Baidu shares gained 10.4% and Alibaba moved higher by 7.6%. More technology/internet stocks could move higher on growing optimism on China emerging from lockdowns and the PBOC taking steps to support the economy.

Threats

• Over the weekend, Ukraine President Zelensky announced that Russia has blocked Ukraine from exporting 22 million tons of food product. This week after growing international criticism, Russia announced that it will open sea corridors for international shipping from Ukraine’s seven ports. Ukraine is a major global food producer and exporter and further food disruption from Ukrainian ports could lead to food shortages and higher inflation.
• Two more brokers downgraded China growth forecasts for 2022. UBS cut its GDP growth forecast for the year to 3.0% from 4.2%. JPMorgan lowered its full year forecast to 3.7% from 4.3%. Earlier in the year, the Chinese government projected the economy to grow somewhere between 5% and 5.5%. This growth target may be challenging to achieve.
• As reported by Reuters, world leaders in Davos are suggesting that the global economy is facing four crises: 1) high inflation, 2) energy crisis, 3) food poverty and 4) climate crisis. The overall tone in Davos implies that the economic outlook has darkened, with some predicting a global recession.

Energy & Natural Resources

Strengths

• The best performing commodity for the week was natural gas, up 6.7%. U.S. natural gas rallied to the highest levels since 2008 amid a forecast for hotter-than-usual summer temperatures and growing concern over the tightness of global supply this year. Nymex gasoline and diesel cracks are over $40 per barrel and jet fuel is at $35 per barrel. Refining margins are well above mid-cycle levels and analysts believe this is still not reflected in Street estimates and will drive upward estimate revisions.
• Inflation will take commodities to the moon, reads one Bloomberg headline this week. Inflation is turning the investment axioms of the last two decades on their heads as stocks and bonds fall, making it difficult for money managers. “In times of rapid change, experience can be your worst enemy,” reads a maxim of J. Paul Getty who made his fortune in oil. Investing in commodities will become increasingly unavoidable for money managers forced to widen their net in order to harvest positive real returns, the article reads.
• The U.S. is contemplating a temporary six-month lift of sanctions on potash exports from Belarus in exchange for allowing Ukrainian exports through the region, according to a Wall St. Journal article. The Russia-Ukraine conflict has shut-off exports of Ukrainian wheat through the Black Sea. An alternative shipping route would be to rail grain from Ukraine through Belarus to a port in Lithuania (Klaipeda). Ukraine accounts for about 4% of global wheat production and 10% of global wheat exports based on the 2021/2022 marketing year. Russia and Belarus account for approximately 40% of global potash production and exports.

Weaknesses

• The worst performing commodity for the week was aluminum, down 3.27%, as metal markets pulled back on China Premier Li Keqiang’s warning that its economy was faring worse than at the start of the pandemic in 2020. With China being the world’s largest consumer of industrial metals, negative sentiment cast a shadow on brighter expectations in the near term. Nickel, tin, lead, and aluminum led the week in losses.

• Glencore Plc will pay $1.5 billion to settle U.K. and U.S. investigations into alleged wrongdoing by the commodities trader, writes Bloomberg. The settlement will be announced Tuesday, and Glencore declined to comment on the figure. In a statement earlier, however, the company said it will appear in court in the U.S. and U.K. this week in connection with “proposed resolutions” investigations into its activities.
• Russia shut off natural gas shipments to Finland on Saturday, just days after Finland formally applied to join NATO, and following similar action against Poland and Bulgaria last month. Notably, all three have refused to pay for Russian gas in rubles, consistent with European sanctions.

Opportunities

• Nano One Materials Corp., a clean technology innovator in battery materials, announced that it has entered into a binding agreement to acquire all of the outstanding shares of Johnson Matthey Battery Materials Ltd. (“JMBM Canada”) for approximately C$10.25 million. The acquisition is fully funded and is on a cash-free, debt-free basis, subject to certain working capital adjustments. JMBM Canada includes a team with over 360 years of collective experience, including R&D, pilot to commercial scale cathode production, and product qualification and quality assurance systems expertise for tier 1 automotive lithium-ion cell manufacturers. JMBM Canada also includes a 2,400 tonne per annum capacity LFP production facility located in Candiac, Québec, occupying approximately one tenth of the 400,000 square foot property. This move solidifies Nano One’s entry into the supply chain for LFP bases batteries which are cheaper to manufacture and best suited for mass adoption of cheaper electric vehicles.
• Lithium miner Albemarle raised its financial forecasts for the second time in 20 days, reports Barron’s. Lithium pricing and demand remains hot. This is a headwind for electric vehicle makers trying to lower the cost of batteries going into their vehicles but is a plus for companies mining the metal. Monday evening, Albemarle raised its financial forecasts for the full year, saying it expects its 2022 sales to be between $5.8 billion and $6.2 billion. That is up from what management said less than three weeks ago. On May 3, Albemarle was predicting sales of between $5.2 billion and $5.6 billion.
• Billionaire Robert Friedland is joining efforts to help America reduce its dependence on China for supplies of critical minerals like copper that are used in everything from batteries to electric cars. Ivanhoe Electric Inc. is seeking a listing on the NYSE American and Toronto stock exchanges under the ticker symbol IE, according to a regulatory filing Tuesday. The company has interests in mines producing copper, gold and silver and it owns a battery-based energy storage business. Friedland is the chief executive officer. The exploration and development company has a focus on developing mines from mineral deposits principally located in the United States.

Threats

• U.K. Chancellor of the Exchequer Rishi Sunak just slapped a £5 billion ($6.3 billion) levy on energy companies to help fund support for Britons facing a cost-of-living crisis. Other big dividend payers, including miners and consumer-goods firms, could be next. U.K. dividends are seen reaching about £92 billion this year thanks to a boost from commodities companies, according to consulting firm Link Group Plc. Miner Rio Tinto Plc is forecast to be the single biggest paying stock in the FTSE 100 Index, data from AJ Bell shows, with Glencore Plc and Anglo American also expected to be among the top 10 payers, alongside British American Tobacco Plc, Unilever Plc and AstraZeneca Plc.
• Bloomberg reports that there is record volume of Russian oil onboard tankers that are heading to India and China to offload their cargos. Volumes in transit are estimated between 74 to 79 million barrels, more than double the 27 million barrels from just before February. The U.S. has been trying to court India to pull back on purchases, but notes they are only buying for economic reasons.
• The Atlantic could unleash up to 21 storms this hurricane season. Hurricanes threaten agriculture, financial and energy markets. Major hurricanes like Ida last year risk shuttering much in their path. Along with the agriculture and energy markets, storm surges threaten nearly 8 million homes, according to a 2021 CoreLogic report. The seventh straight above-average hurricane season is expected.

Luxury Goods

Strengths

• The rich are getting richer, and this is a boon for the luxury industry, according to Rachid Mohamed Rachid, CEO of Mayhoola – the investment fund that owns Valentino and Balmain. In a speech at Davos this week, Rachid reminded attendees that there is a lot of money to be spent among the wealthy, and they want to spend it on luxury goods.
• British packaged holiday retailer, On the Beach Group Plc, reported a spike in sales of luxury holidays. Sales for premium holidays with five-star hotels rose 95% in the first half of its fiscal year versus the same period in 2019. On the other hand, sales for three-star hotels were 30% lower. It seems travelers prefer booking luxury hotels for summer holiday trips after nearly two years of pandemic and lockdowns.
• Nordstrom, Inc. was the best performing S&P Global Luxury stock for the week, gaining 26.37%. Nordstrom announced a positive outlook for earnings and revenue for 2023. The company is optimistic that high-income earners will continue to spend despite record-high inflation. Nordstrom sales increased 19% to $3.47 billion in the fiscal quarter ended April 30 and saw revenue growth from 6% to 8% this year. Earnings per share increased from $3.38 to $3.68. This week, Ralph Lauren also announced expectations of margin growth thanks to resilient luxury demand.

Weaknesses

• The S&P Global Luxury Index declined 23% in one year. This year alone, luxury stocks have slumped 29% due to imposed COVID restrictions in China, rising inflation and talks about rate hikes. The luxury sector looks oversold and due for a rebound.
• LVMH Moet Hennessy Louis Vuitton, one of the largest global luxury names, hit a 52-week low this week. The stock is down 25.4% year-to-date. Europe’s Stoxx 600 Personal & Household Goods Index, which includes luxury brands such as Dior-owner LVMH and beauty-products maker L’Oreal, underperformed all of the region’s other industry subgroups.
• Sands China, a hotel and casino operator in Macau, was the worst performing S&P Global Luxury stock this week, losing 7.19%. Macau casinos and hotels have been underperforming due to COVID restrictions. The Macau casino stocks are at levels last seen in 2010, and China Sands has been the biggest drag on the casino index during the month of May.

Opportunities

• ESG (Environmental, Social and Governance) is now considered a new and critical marketing tool for luxury brands, according to Michele Della Vigna, a Goldman Sachs Group analyst, because wealthy consumers are more focused on what´s green and what´s not. ESG incentivizes companies to reduce their carbon footprint, Vigna explains. Nowadays, “low-carbon products are becoming high-quality offerings.” ESG offers luxury companies the opportunity to innovate processes in order to create more attractive offerings and to reach new markets.
• Major Food Group announced a big luxury housing project in Miami, Florida. The building will be called Major and will have 259 apartments between $1.6 million to $11 million, not including penthouses, private clubs, and high-quality restaurants. “It’s a premium product that will certainly garner a premium price,” says CEO Michael Stern. The new project shows how the luxury industry shows up in various sectors as construction is solid, even with high inflation numbers.
• Automaker Hyundai Motor is looking to upscale its global image through redesigned models of the luxury Genesis brand. The company leads South Korea´s luxury car market and is looking to close in on its rivals in the U.S. Genesis’ sales during the first quarter of this year were 7.3% of Hyundai’s total U.S. unit sales, up from 6% in 2021. Increased market competition will force car makers to improve the attractiveness of their offerings to potential consumers.

Threats

• According to Bloomberg, the preliminary U.S. Manufacturing PMI, that measures the activity level of purchases in the manufacturing sector, declined to 57.5 in May from 59.2 in April. This is a result of the lockdowns in China, delays on the supply chain overseas, and the war between Russia and Ukraine. The index remains above 50, indicating continued expansion in the sector, however many economists worry it may fall further due to lack of materials for all industries, including for luxury goods.
• According to analysts at Jeffries, up to a quarter of the growth seen in the luxury goods market last year was due to the outstanding performance of cryptocurrencies at that time. Investors gained substantially and therefor spent a lot, particularly on luxury goods. However, the price of Bitcoin has declined more than 50% from its peak in November of last year, which could negatively impact customer spending habits on luxury brands.
• Lockdowns in China, shortages in the supply chain, as well as shipping delays, continue to impact the global economy. COVID continues to be the biggest concern for luxury stocks right now, explained an analyst with Bernstein. China is an important market for the luxury industry and is one of the primary sources of sales for big companies such as Cartier, Swatch and Burberry.

Blockchain and Digital Currencies

Strengths

• Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Sweet SOL, rising 1,027%.
• Sumitomo Mitsui Trust Holdings is teaming up with a Japanese crypto firm to create a trust company to manage digital assets for institutional investors, writes Bloomberg. The bank has signed a memorandum of understanding with crypto exchange operator bitbank inc. to offer custody services for public blockchain-based crypto assets, including NFTs.
• Bitcoin is regaining its dominance in the cryptocurrency universe. It now accounts for 44% of total crypto market value, the most since October 2021. Bitcoin’s renewed hegemony reflects how the collapse of the TerraUSD stablecoin earlier this month has ravaged smaller tokens like Avalanche and Solana, writes Bloomberg.

Weaknesses

• Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Tifi Token, down 100%.
• Bitcoin drifted near the $30,000 level that it has been hovering around since the collapse of the TerraUSD algorithmic stablecoin triggered a selloff in cryptocurrencies. Bitcoin has struggled in recent weeks as inflation remains elevated even with central banks in rate-hiking mode, boosting prospects for more monetary tightening, writes Bloomberg.

• Bitcoin might be registering tepid moves as of late but that doesn’t mean investors have become less anxious about the largest cryptocurrency’s prospect for further declines. The put-to-call ratio on the coin hit a 12-month high at 0.72, meaning that many traders are loading up on hedges in the event it embarks on another leg lower, and its losses deepen, according to Bloomberg.

Opportunities

• British regulators intend to amplify the enforcement of cryptocurrencies and make stablecoins a payment method, according to CoinTelegraph. During the annual Queen’s Speech, Prince Charles informed the Parliament of two bills that will support “the safe adoption of cryptocurrencies” and “create powers to more quickly and easily seize and recover crypto assets.”
• Sagging crypto prices and the collapse of the TerraUSD stablecoin are no deterrent for venture capitalists who still see a lot of promise in the industry. In the latest example of that commitment, Andreessen Horowitz said Wednesday that it raised a $4.5 billion crypto fund, the industry’s largest to date, writes Bloomberg.
• Binance Holdings has received regulatory approval for a local entity from Italian authorities, three weeks after securing a nod from the French government, writes Bloomberg. The world’s largest cryptocurrency exchange by trading volume is one of 14 virtual asset operators to be registered by the Organismo degli Agenti e dei Mediatori (OAM), which supervises crypto operators in Italy.

Threats

• The collapse of one of decentralized finance’s most ambitious experiments has knocked more than $83 billion off the sector’s total value, as investors fled for safer havens, writes Bloomberg. A crash in the prices of stablecoin TerraUSD, or UST, and its sister token Luna in the first half of May sent shock waves through the DeFi sector, the article explains. The total value locked across all major protocols has slumped to $112 billion from $195 billion at the start of the month, data from industry tracker DeFi Llama show.
• Turkey is crafting legislation that would establish greater control over the cryptocurrency market and possibly impose a tax on some transactions involving digital assets, writes Bloomberg. The governing AK Party of President Erdogan is expected in the coming week to submit bills to parliament setting out new rules for local cryptocurrency exchange platforms, said Turkish officials familiar with the matter.
• Europe’s top securities regulator has warned that soaring inflation may drive retail investors into risky crypto assets and called for a formal legal framework to govern the industry across the bloc. Regulators are intensifying their pressure on crypto amid choppy action in the market with Bitcoin down 58% and Ether down 62% from their November highs. The European Central Bank has stepped up calls for tighter regulation after the stablecoin TerraUSD tumbled from its intended dollar peg earlier this month, according to Bloomberg.

Gold Market

This week gold futures closed the week at $1,857.10, up $8.70 per ounce, or 0.47%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 1.01%. The S&P/TSX Venture Index came in up 3.15%. The U.S. Trade-Weighted Dollar tumbled 1.45%.

Strengths

• The best performing precious metal for the week was palladium, up 6.34%, despite hedge funds increasing their bearish weighting on palladium to an 18-week high. The first U.S. Bitcoin-futures backed exchange-traded fund (ETF) is turning into a target for crypto bears. Short interest in the $748 million ProShares Bitcoin Strategy ETF (ticker BITO) as a percentage of shares outstanding is nearly 11%, close to the highest since the fund’s October 2021 inception, IHS Markit data show. Meanwhile, the fund’s ratio of open interest in bearish put contracts to call open interest has soared since mid-April to all-time highs. That suggests that crypto bears are flocking to BITO as a way to short sell the token as they wait for the rollout of inverse Bitcoin ETFs, which would bet against it. .
• Guggenheim Partners Chief Investment Officer Scott Minerd said he expects Bitcoin to fall to $8,000 and that cryptocurrency has become a market of “a bunch of yahoos.” “Bitcoin and any cryptocurrency at this point has not really established itself as a credible institutional investment,” Minerd said Wednesday during a Bloomberg Television interview from the World Economic Forum in Davos, Switzerland. “Everything is suspect.” Minerd said his firm bought Bitcoin at $20,000 and sold when it reached $40,000. Guggenheim no longer holds Bitcoin. If the firm were to take a position it would be to short the digital token, he said.
• India’s central bank’s gold reserves are up 9.4% on year at 760.4 tons, Swansy Afonso of Bloomberg reported. The Reserve Bank of India boosted its gold holdings by 65 tons in the year ended March to 760.4 tons, according to the central bank’s annual report. NOTE: The central bank boosted its gold reserves for a fourth year. Of the 760.4 tons, about 295.8 tons are held in India as backing for notes issued and the rest is held overseas as assets of the banking department, the Reserve Bank of India (RBI) said in the report.

Weaknesses

• The worst performing precious metal for the week was platinum, but still up 0.35%. A reluctance by precious metals traders to handle Russian-produced palladium is creating an unusual and persistent dislocation between the world’s two main markets. In the European hubs of London and Zurich, traders can select the origin of metal they receive, while those taking delivery of a New York Mercantile Exchange futures contract don’t get the same choice. The threat of receiving Russian ingots has helped push New York futures to about a $30-an-ounce discount to similarly dated forwards in London and Zurich.
• The Biden administration on Wednesday is outlining new pollution restrictions that would thwart a long-stalled plan to mine for gold near Alaska’s Bristol Bay. Under the proposed requirements, the Environmental Protection Agency (EPA) would broadly bar developers of the planned Pebble Mine from disposing waste near the site because of the potential harm to the area’s thriving, $2 billion salmon fishery.
• The U.S. diesel price jumped Monday to $5.57 a gallon, up from $3.25 a year earlier, according to the Energy Department’s weekly survey, although big trucking operations have some protection from sudden price surges through contracts with suppliers. In the U.S., trucks and trains are the biggest diesel users but mining companies can also face headwinds. More than 60% of U.S. mining and fuel production equipment is diesel-powered. Diesel prices will probably remain high for longer than gasoline prices because diesel inventories have fallen to multiyear lows, said Patrick De Haan, head of petroleum analysis for Gas Buddy. Energy Department data released Tuesday showed inventories of distillates, a category that includes diesel, sit 22% below the five-year average for this time of year.

Opportunities

• John Authers penned an excellent note this week on how investors might position their portfolio with regards to inflation. It’s well known by now that protracted high inflation is really bad for both stocks and bonds, reports Bloomberg, with a fascinating demonstration coming from an exercise by Jim Reid of Deutsche Bank AG. To summarize, Reid and his team divided the stocks and bonds of 15 different countries into valuation deciles. A low number suggests both stocks and bonds look universally cheap, while a high one suggests both look too expensive. It’s inflation that makes both cheaper at once, and the lack of it that allows them to grow more expensive together. The higher the valuation, the lower the subsequent returns are likely to be.The chart below shows that long-term assets are now as expensive as they have been in more than two centuries, the article explains. The last great inflation period ended in 1981 with stocks and bonds as cheap as they had ever been. So, the current reading suggests neither stocks nor bonds are going to fare well over the next several years. Authors cites research that suggests commodities and precious metals tend to produce better real returns during periods of high inflation.
• Gold is headed for the longest run of gains in more than a month as investors sought safety in the haven asset amid disappointing economic data. Sales of new U.S. homes plummeted in April, falling well short of all estimates, dented by the combination of high prices and a steep climb in mortgage rates. Meanwhile, a gauge of business activity settled back to a four-month low in early May as costs ballooned and high selling prices tempered demand at service providers.
• It is important to note that B2Gold, a Canadian mining company listed on both the Toronto Stock Exchange and the New York Stock Exchange, has made an offer to buy the Australian gold mining company Oklo Resources for AUD0.1725 per share, valuing the company at AUD90 million (nearly $64 million). The bid price placed a 103.92% premium on the valuation of Oklo with the shares closing up 90.79% for the day. The acquisition of Oklo is expected to provide B2Gold with an additional landholding of 1,405 square kilometers covering highly prospective greenstone belts in Mali, West Africa, including Oklo’s flagship Dandoko Project (550 square kilometers) but illustrates how the extreme disconnect between where junior exploration and mining companies are trading and the recent 100% premiums to acquire them. The major mining companies recognize they can buy the asset cheaper than they could do the exploration and development work themselves to have the asset at the current state of development.

Threats

• China will allow foreign institutional investors to trade bonds on its smaller exchange market in its latest step to attract more capital inflows by opening its financial markets, after a record selloff of Chinese holdings by foreign investors. Qualified foreign institutional investors, which can include central banks, sovereign funds, commercial banks and pension funds, will be allowed to invest in bonds on the exchange market, the People’s Bank of China (PBOC) said in a statement published on its website. The move would “help expand capital inflows to China,” it added. In addition, this could be competition for the dollar, if yields in Chinese debt can establish a stable market.
• After falling more than 2 million ounces off the mid-April peak, global gold ETF holdings ticked higher late last week as equity markets came under further selling pressure. Nonetheless, around 5 million ounces of new ETF holdings created so far this year likely remain underwater at gold prices around current spot levels. This will remain a major overhang in the coming weeks the interplay between potential ETF outflows and Asian physical dip-buying keeping prices in a range averaging between $1,850 an ounce and $1,800 an ounce in the coming weeks. Upcoming economic data and the next Fed meeting will still way heavy, but gold has remained resilient, and the U.S. dollar fell hard this week.
• Zimbabwe is using its gold and platinum resources to access credit lines from abroad, as the southern African nation saddled with $13 billion of debt is ineligible to borrow from international financial institutions. “We have some structures where we are able to access credit lines from abroad and certain banks using our gold,” according to a transcript published Monday of remarks Finance Minister Mthuli Ncube made to lawmakers May 19. “The gold is supporting access to those credit lines that we can borrow and support projects. We also have some credit lines that are supported by platinum.” If their counterparty is China, this could be a cheap way to acquire resources on debt for commodity settlement.

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Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (03/31/2022):

EasyJet PLC
United Airlines
Spirit Airlines
Air France-KLM
LVMH Moet Hennessy Louis Vuitton
Burberry Group Plc
Cartier Resources
Swatch Group AG/The
Alibaba Group Holding Ltd.
Southwest Airlines Co.
JetBlue Airways Corp.
American Airlines Group Inc.
Delta Air Lines Inc.
Alaska Air Group Inc.
The Boeing Co.
Embraer SA
Ryanair Holdings PLC
Nano One Materials
B2Gold Corp.

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

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