Is Europe Ready to Take Off?

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

One year ago, European Central Bank President Mario Draghi announced that the central bank had the political will to do “whatever it takes” to save the euro. Now, the worst may be over, as suggested by stronger economic data coming out of Europe. It appears the Continent is finally on the road to a sustained recovery.

For the past few years, the U.S. has been one of the best places to invest. In fact, the S&P 500 Index has experienced its strongest bull market ever, according to LPL Financial. Highlighted by Bloomberg Businessweek yesterday, since the market bottomed in March 2009, the S&P 500 Index has “bested all bull runs since 1949,” climbing 154 percent over the past four years.

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This year alone through July 26, the S&P 500 Index increased 20 percent. By comparison, the Stoxx Europe 600 Index is up about 10 percent. Although European stocks underperformed, the area offers a better potential value, as equities sell at “11.8 times estimated 2014 earnings, compared with price-to-earnings multiples of 13.7 for the S&P,” says Barron’s.

After the U.S.’s huge run, is it possible the country will be handing off the baton across the Atlantic for the next leg of the relay race? Here are a few areas of strength that could send European stocks higher:

1. Europe is taking analysts by surprise

Take a look at the sudden divergence in Citigroup’s Economic Surprise Index in Europe compared to the U.S. The indices calculate the difference between economic data releases and survey data. A positive reading suggests economic releases are beating expectations; a negative reading indicates that the market expects better economic data than is actually released.

Recently, economic surprises in Europe have spiked to a reading of nearly 57. This is significantly higher than the U.S.’s, which has been hovering under zero since April.

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2. Europe’s economic growth is improving

The European Union (EU) has had its share of difficulties, but “the Continent seems to have turned a corner,” reports Barron’s. This is shown in the chart below, where GDP has had negative year-over-year growth each quarter over the past year. Looking forward, the area is anticipated to make significant progress. By the end of 2014, the growth rate could be around 1.7 percent.

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Even though Europe has had pockets of turbulence, such as the event in Cyprus, “the eurozone has overcome the threat of systemic failure and dispelled concerns about its long-term viability. The economy is being rebuilt,” says Barron’s.

3. Some of the riskiest European stocks are showing relative strength

Airlines are considered one of the most economically sensitive areas of the market, with stock prices especially volatile during times of weakness. So when you see certain airline companies gaining relative strength, it’s time to take a closer look.

Relative strength is a metric we use to compare the performance of different groups of stocks or sectors to identify areas of the market that are recent strong performers. Being quick to recognize relative strength can provide an edge, as long as you act quickly. In short, we believe investors should buy into strength and avoid the weak.

Of the entire airline industry, European and U.S. carriers dominate the positive momentum list, according to data from BMO Capital Markets. Asian carriers, on the other hand, are showing significant weakness, says BMO.

Themes to Capitalize On

Make sure your portfolio takes advantage of the many opportunities throughout Europe.

Emerging Europe especially benefits from a European recovery, says Portfolio Manager Tim Steinle of the Emerging Europe Fund (EUROX). These developing countries are economically tied to their western counterparts through established export trade, putting them in an excellent position to benefit from the Continent’s recovery.

Here are only a few examples: More than 80 percent of Czech and Hungarian exports head to Western Europe and about 50 percent of Polish and Turkish goods are exported to Western Europe.

In addition, we expect a continued convergence of European countries. The integration process is currently underway, with emerging countries in the east working to meet the European Union’s standards that include living standards, GDP, environmental standards, regulatory standards and infrastructure. See Turkey’s concentrated efforts here.

“The quest for membership is a vote of confidence in Europe and its institutions,” says Barron’s. Next year, Latvia likely will join the EU, giving up its own currency in exchange for the euro. Lithuania also is expected to join the euro, according to Barron’s.

It appears that Europe is ready for a take off. Is your portfolio on board?

Index Summary

• Major market indices finished mixed this week.  The Dow Jones Industrial Average rose 0.10 percent. The S&P 500 Stock Index fell by 0.03 percent, while the Nasdaq Composite rose 0.71 percent. The Russell 2000 small capitalization index fell 0.19 percent this week.
• The Hang Seng Composite appreciated 2.91 percent; Taiwan rose 1.08 percent while the KOSPI gained 2.11 percent.
• The 10-year Treasury bond yield rose 8 basis points this week to 2.56 percent.

Domestic Equity Market

The S&P 500 ended essentially flat for the week as earnings reports caused some choppiness. Earnings season is in full swing and that was definitely a driver this week as technology and housing related names disappointed as a group.

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Strengths

• The healthcare sector was the best performer this week as earnings reports were well received. Boston Scientific, Celgene, Actavis, Eli Lilly, McKesson and Edwards Lifesciences all rose by more than 5 percent.
• The technology sector was also a strong performer this week, but there was significant bifurcation underneath the surface. The index heavyweight Apple rose 3.77 percent and was a significant driver of overall sector results. QUALCOMM also responded favorably to earnings, rising by more than 5 percent this week.
• TripAdvisor was the best performer in the S&P 500 this week rising 21.99 percent as the company’s earnings and revenues beat Wall Street’s expectations.

Weaknesses

•  The industrial sector was the worst performing sector this week on disappointing results from Norfolk Southern, which dragged downed the rail stocks. Caterpillar also disappointed and fell by more than 4 percent for the week.
• The energy sector lagged as oil prices retreated from recent highs and midcap energy service companies generally disappointed.
• Expedia was the worst performer in the S&P 500 for the week, falling 26.75 percent. The company reported disappointing earnings results citing stiff competition in the online travel segment.

Opportunity

• The current macro environment remains positive as economic data is still robust enough to give investors confidence in an economic recovery, but not too strong as to force the Federal Reserve to change course in the near term.
• Money flows are likely to find their way into domestic U.S. equities and out of bonds and emerging markets, which should help the market find a floor.
• Earnings season rolls on next week with Pfizer, Merck, Amgen, Mastercard and Exxon Mobil all reporting.

Threat

• A market consolidation could continue in the near term, as macro concerns could dominate for the next couple of weeks while the market waits for earnings.   
• Higher interest rates are a threat for the whole economy, so the Fed must walk a fine line. The likelihood for policy error is potentially large.
• Second quarter GDP is scheduled to be released next Wednesday, along with a Federal Open Market Committee (FOMC) meeting the same day. GDP estimates have been coming down in recent weeks and if the Fed sticks to its “tapering schedule” the market may react negatively.

The Economy and Bond Market

The treasury market sold off modestly this week as yields moved higher on Fed quantitative easing (QE) tapering uncertainty. There really were two issues in play this week. The first revolves around potential Fed action in reducing the current $85 billion a month QE program, which many believe will be reduced at the September 17-18 FOMC meeting and which makes the bond market nervous. The market will be looking for clues from next week’s FOMC meeting. The other issue is Fed Chairman Ben Bernanke’s upcoming retirement and his likely replacement. The two frontrunners are current Federal Reserve Vice Chairman Janet Yellen and former Treasury Secretary Larry Summers. The market views Yellen as more dovish and likely to continue the current QE program, while Summers is viewed as more bearish and likely to end QE sooner rather than later. These two issues are what drove mid-week volatility in the treasury market and while we will get some clarity next week, the next Fed Chairman likely will not be determined until this fall.

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Strengths

• U.S. consumers reported being more upbeat with the University of Michigan Confidence Index rising in July ahead of expectations. Bloomberg’s Consumer Comfort Index also hit its highest reading since January 2008.
• While housing data has been mixed recently, new home sales rose 8.3 percent and mortgage rates fell for the first time in eleven weeks.
• International data was generally better this week. South Korea’s GDP rose 1.1 percent in the second quarter and ahead of expectations, the U.K.’s economy grew 0.6 percent in the second quarter, and the German Ifo Business Climate Index rose for the third straight month and slightly above forecasts.

Weaknesses

• HSBC’s flash PMI for China unexpectedly fell to an eleventh-month low.
• Gasoline prices rose $0.12 this past week with higher prices expected in the next few weeks.
• Home loan applications hit a two-year low and commentary from homebuilders this week indicated the housing market is already being hurt by rising mortgage rates. 

Opportunity

• Despite recent commentary, the Fed continues to remain committed to an accommodative policy.
• Key global central bankers, such as the European Central Bank (ECB), Bank of England and the Bank of Japan, are still in easing mode.
• The recent sell-off in bonds is likely an opportunity as higher yields will act as a brake on the economy and potentially become self-fulfilling, thus postponing Fed tapering.

Threat

• Inflation in some corners of the globe is getting the attention of policy makers and may be an early indicator for the rest of the world.
• Trade and/or currency “wars” cannot be ruled out which may cause unintended consequences and volatility in the financial markets.
• The recent bond market sell-off may be a “shot across the bow” as the markets reassess the changing macro dynamics.

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

Gold Market

For the week, spot gold closed at $1,333.30, up $37.20 per ounce, or 2.87 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 6.68 percent. The U.S. Trade-Weighted Dollar Index lost 1.15 percent for the week.

Strengths

• As we reported on June 21, open interest figures in COMEX showed U.S. banks turned their record short gold position into a record long. Following up on that note, Germany’s Commerzbank announced it is upgrading its gold price forecast, saying the yellow metal would rise to $1,400 by the first quarter of 2014. Similarly, Commerzbank said that a rebound for gold would help silver get to $21 in the fourth quarter and $23 in the first quarter next year. While the forecast upgrades are not very sizeable, it is interesting that a large bank raises its gold price forecast. For many months, forecasts have gone only in the other direction. Further to that, Goldman Sachs announced it is sticking to its average forecast of $1,413 for an ounce of gold this year as it does not see sharp reductions in U.S. Federal Reserve stimulus, after fears of such cuts drove bullion prices to near three-year lows recently.
• Much has been said about bullion ETFs listed in the U.S. seeing significant outflows this year, but investors in their newer Asian counterparts are a different story. A net $33.5 million was added to Asian gold and precious metals miners’ funds in the second quarter. The inflows are not very large in size, but they serve to reinforce the idea that Asian appetite for gold is relentless. On another note, Russia, the fourth-largest gold producer, announced plans to set up a stock exchange for junior gold and other mining companies to encourage exploration. Such a move likely will help miners raise funds to address the concern of dwindling global gold reserves.
• Alamos Gold made its second recent small cash transaction by acquiring Orsa Ventures. The transaction adds longer-term leverage to gold prices for a low premium of $3.5 million, which makes for a clever move in this type of environment. Orsa Ventures holds rights to the title to the Quartz Mountain Property in Oregon, with inferred resources of 2.85 million ounces of gold at 0.80 grams per ton. On a second transaction this week, Orsu Metals Corporation, a precious metals exploration and development company, announced that Goldfield completed a subscription for 25 million units of the company at a price of $0.40 Canadian per unit; more than 10 times the trading price of $0.04 Canadian prior to the announcement. These two transactions serve to reinforce the idea that companies with good prospective assets traded down with the market and may offer an exciting entry point for investors. 

Weaknesses

• Credit Suisse’s commodity specialists published a commentary this week in which they discussed the negative mood for gold investors has moderated somewhat recently with a stabilization in gold prices. The specialists highlight investors are citing the seasonal uptick in gold demand as a reason to buy into the space. However, it is their opinion that the tightening import restrictions in India announced this week imply a demand reduction of about 500-700 tons. It is our opinion that the relentlessness of Asian gold demand is misunderstood by many commodity analysts, since they make little effort to understand the historical and cultural implications of gold in these cultures. As such, we expect the Indian bullion market to find alternative methods to overcome this import/export restriction. After all, the Reserve Bank of India has been implementing restrictions for nearly two years with very limited success.
• The South African miners’ wage negotiations have been pushed into an arbitration hearing as the gap between the offer by gold producers and demands by the miners barely changed since negotiations earlier this month. The collective body representing the gold miners increased its proposal to raise miners’ salary by 5 percent while the miners’ union (NUM) pushed for a 60 percent wage increment. Such a wage increase is totally unaffordable for the mining companies and the country. In addition, the loss in labor productivity has been material, making any further wage increase unsustainable, evidenced by the fact that South Africa gold mined has fallen from 400 tons in 2002 to 167 tons in 2012.
• AngloGold Ashanti announced the pricing of an offering of $1,250 million aggregate principal amount of 8.5 percent coupon notes due 2020. Gold analysts are somewhat surprised by the high coupon demanded by investors considering that Barrick Gold’s 2022 notes are trading at a 5.1 percent yield. By AngloGold biting on this transaction, it likely will set a precedent for future debt offerings in the gold space at higher costs to companies.

Opportunities

• Stockhouse, the Canadian financial portal, published data on junior gold miner valuations showing that the average valuation of 50 junior gold miners it tracks on the Toronto Stock Exchange and the TSX Venture Index (with a minimum 1 million ounces measured and indicated resource), have come close to $11 in market capitalization per gold ounce last week. Even though they have since recovered from that low and currently sit near $12.40 per ounce, they remain in extremely oversold territory, even when factoring in current gold prices. There was evidence already this week, albeit only in the mid- and senior-producer space, that gold valuations have reached depressed levels where negative earnings’ reports barely budge valuations.

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• The first quarter of 2013 saw net de-hedging of 352,000 ounces (11 tons), leaving the global hedge book at 3.59 million ounces (112 tons), the lowest since quarterly series began in 2002.  A total of 32 companies reduced their positions during the period, while the positions of just three companies increased.  Preliminary second-quarter data suggests miners took the opportunity to further reduce hedging, as covering their hedges became cheaper as gold prices fell sharply in April. On a different note, COMEX open interest in gold options surged to a new record high of about 5,600 tons, or about two years’ total annual mine production, on Wednesday. This move is indicative of still very strong trading interest in gold, and implies that speculators are taking a view on potentially higher prices for the third quarter.
• The ratio of puts per call for the iShares Silver Trust ETF declined to its lowest level since March 2009. The reason the measure tumbled is the fact that the number of puts dropped 17 percent since the end of April, while the number of calls increased by 9.4 percent in that time. This decline in the ratio signals that silver may rise 38 percent to $28 an ounce by early next year, according to Tom Power, a senior commodity broker at R.J. O’Brien & Associates in Chicago.

Threats

• The Reserve Bank of India (RBI) said this week it would be mandatory for gold buyers to set aside 20 percent of bullion imports for re-export as jewelry as it seeks to control the nation’s current account deficit. The consensus appears to be that imports may tumble significantly in the second half of the year. However, we see an opportunity for both jewelers and bullion importers to work together as their interests are aligned. What most likely will happen, in our opinion, is that bullion importers will set a scheme in which they will purchase export credits from the jewelers by acting as intermediaries between the jewelers and the export market. The demand for physical gold in India is unrelenting, and there are multiple legal alternatives to circumvent the RBI’s abusive policies.
• Gold analysts at Stifel Nicholaus reminded us this week of a potential catalyst for the global economy and the price of gold coming as soon as this September. The debt ceiling debate in 2011 that led to the downgrade of the credit rating in the U.S. and the gold rally to $1,900 is coming up again. In the note, Stifel states there is zero confidence that the debt ceiling debate will be resolved in a manner that satisfies the rating agencies.
• The International Monetary Fund (IMF) issued a warning saying any Fed stimulus tapering runs the risk of destabilizing the eurozone as it recovers from its debt crisis and may push the weakest countries into a debt deflation spiral. But it is not only the IMF telling the Fed it cannot do any tapering; the markets sold off dramatically last time Bernanke hinted at the possibility of it occurring later this year.

July 25, 2013 How Far is Gold Off Course?	July 22, 2013 Challenging a Long-Held Assumption about Commodities	July 15, 2013 Commodities 2013 Halftime Report: A Time to Mine for Opportunity?

Energy and Natural Resources Market

Strengths

• Steel reinforcement-bar futures in Shanghai traded near a three-month high after Chinese Premier Li Keqiang said the nation will accelerate railway construction in central and western regions to spur growth.
• U.S. coal production increased by 2 percent from last week and over the past year to an eight-month high of 20 million tons.
• China’s natural gas output rose 13.4 percent year-over-year to 9.30 billion cubic meters in June. The country produced 58.80 billion cubic meters of gas in the first six months of the year, according to the National Development and Reform Commission.

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Weaknesses

• The International Copper Study Group (ICSG) released data for the copper market balance through April 2013. According to the data, the refined copper market surplus has persisted in the first four months of 2013, and year-to-date the group estimates that before adjusting for seasonality, the copper market has been in a surplus of 266 kilo tons.
• Caterpillar reported lower revenue for its Resource Industries segment due to lower capital expenditures by mining companies. Caterpillar reported a 34 percent year-over-year fall in the second quarter of 2013 in the resource segment. Although production of most mined commodities is near or above a year ago, after several years of increasing capex, miners have reduced spending across the mining industry. While sales for both new equipment and aftermarket parts declined, a majority of the decrease was for new equipment.

Opportunities

• More U.S. steelmakers are pushing for further U.S. hot rolled coil (HRC) gains. AK Steel followed Severstal and hiked flat-product prices by $25 per ton, effective immediately. This took HRC prices to $675 per ton versus $565 per ton in early June.
• The Eagle Ford Shale play in South Texas has been a big success story over the past few years, where production has risen from 207 million barrels of oil per day (mbbl/d) at the start of 2010 to around 1,031mbbl/d through April 2013. The play also has been responsible for a massive infrastructure build-out and strong associated gas production, and has played a big role in the boom of inland light oil growth that has put the U.S. back towards record output.
• More than 1,400 companies must shut down outdated production capacities until the end of September, the Chinese central government announced on Thursday. The companies, representing 19 industries including steel, coke, ferro-alloy, cement and paper-making, should also permanently remove the obsolete production capacities by the end of the year, the Ministry of Industry and Information Technology said in a statement.  The firms are on publicized lists and are not allowed to relocate their outdated capacities to other regions.

Threats

• The Federal Reserve is reviewing the decision that first allowed regulated banks to trade in physical commodity markets in 2003. On July 30, the Senate Banking Committee will be holding its first hearing on the issue.

• Activity in China’s industrial sector slowed to an 11-month low in July as new orders contracted and the job market weakened, suggesting China’s manufacturing sector is still losing momentum. The flash HSBC Purchasing Managers’ Index (PMI) fell to 47.7 from June’s final reading of 48.2. This makes a third-straight month below the 50 line, which divides expansion from contraction and is the weakest level since August 2012.

China Region Fund – USCOX  •  Emerging Europe Fund – EUROX
Global Emerging Markets Fund – GEMFX

Emerging Markets

Strengths

• On Wednesday, flash composite PMI data for the eurozone came in better than expected, propelling shares to an eight-week closing high. Flash composite PMI data, featuring components for the manufacturing and services industry, rose to an 18-month high in July. The reading came in at 50.4 compared to June’s reading of 48.7. A reading above 50 separates expanding activity from contraction.
• Brazil’s consumer price index (CPI) fell 0.11 percent in the month ending the third week of July, marking the lowest reading since July 2011. Deutsche Bank reports that transportation, food and apparel continued to put downward pressure on inflation, as they fell by 0.80 percent, 0.42 percent and 0.54 percent, respectively. The drop in transportation was mainly due to a 3.1 percent drop in bus fares. The reading gives Central Bank Governor Alexandre Tombini confidence that the latest round of monetary tightening is having its desired effect in reining consumer price rises.
• China’s Premier Li Keqiang spoke in the State Council meeting late last week, stating that the “floor” for GDP growth would be 7 percent, and that China will focus on transforming into a consumption-based economy while continuing to invest in infrastructure, particularly railway and urban transit. China is currently fine tuning its economy using targeted stimulus such as supporting advanced manufacturing, information infrastructure, the environmental protection industry, as well as social services.
• In the National Development and Reform Commission (NDRC) railway meeting, China’s Premier Li Keqiang stated that the nation will speed up railway construction, with a focus on the central and western parts of the country. China recently raised its 2013 railway construction budget to Rmb 690 billion, and also raised the 12th Five-Year-Plan rail spending to Rmb 3.3 trillion from Rmb 2.8 trillion. This is part of the targeted stimulus plan to maintain the GDP growth floor at 7.5 percent for 2013, and 7 percent for the foreseeable future.
• China’s Ministry of Industry and Information (MIIT) submitted a plan to the State Council to cut overcapacity in 19 industrial sectors including cement, steel, copper, and shipping industries. It is reported that a plan to develop China’s energy saving, environmental protection industry also was submitted to the State Council for approval. Additionally, it was reported that China is planning to invest Rmb 1.7 trillion in air pollution reduction. China seems to be making progress in transforming its economy.  The country also will enact tax reductions for small private companies, estimated to number more than 6 million.
• Korea’s GDP growth in the second quarter of 2013 came in at 2.3 percent, which is higher than the market expectation.
• Fiscal revenue in the Philippines grew 13.7 percent in June and gained 10.3 percent for the first half of the year. The country achieved a fiscal surplus of 8.5 billion Philippine pesos, versus the 10.8 billion Philippine pesos deficit. This it is not necessarily good news since the government is expected to spend the money as budgeted. Primary fiscal expenditures grew 12.3 percent in June and gained 13.7 percent for the first half of the year. This week the government proposed an infrastructure spending increase of 29.2 percent for 2014. Finally, the Philippines kept the policy rate unchanged at 3.5 percent.

Weaknesses

• According to HSBC, positioning data for June shows that global equity funds reduced their weight in emerging markets from 8.8 percent in May to 7.9 percent in June. These are the lowest weights since October 2009. All sectors had negative flows during the month of June, which in turn pushed three-month averages into negative territory. It is worth mentioning that higher-frequency fund flow data that is published weekly shows that the pace of outflows from emerging market equity funds collapsed, and even turned slightly positive this week.

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• Economists forecasted that Russia’s GDP growth will advance 3 percent from a year earlier during the third quarter, which is down from the 3.1 percent forecast in June’s poll. Furthermore, economists now believe there is a 30 percent chance of a recession next year, up from a 20 percent chance a month ago. The weakness has become evident with investment contracting down 3.7 percent from a year earlier in June. This is the biggest decline since February 2010, with GDP growth slowing to 1.7 percent in the first half of 2013, down from 3.4 percent last year.
• China’s HSBC flash PMI was at a low of 47.7 versus the consensus of 48.5, and 48.2 in June. A manufacturing PMI reading below 50 indicates industrial activities are in contraction territory. Since China’s HSBC flash PMI samples mainly include small to medium export-oriented companies, the lower-than-expected PMI signals weak exports and slower industrial activities in the country. Zhou Xiaochun, the governor of the central bank, the People’s Bank of China (PBOC), wrote in an article published in China Daily that the Chinese economy faces downward pressure. He stated that the central bank needs to maintain stable and flexible monetary policy in order to help stabilize economic growth and transformation.
• Thailand’s manufacturing output contracted 3.5 percent in June versus the expectation for a 2.7 percent contraction. Despite the negative manufacturing surprise, the Thai government estimated that the seasonally-adjusted index grew 1.7 percent month-over-month during the month, breaking two straight intra-month declines.
• In Indonesia, foreign direct investment (FDI) growth slowed to 15 percent year-over-year during the second quarter, down from 23 percent during the first quarter. However, growth for domestic investments was robust at 60 percent, which primarily went to manufacturing rather than coal and mining.
• Taiwan’s June export orders contracted 3.5 percent year-over-year after dropping 0.4 percent in May. In the period of January to June, export orders fell 1.7 percent. Export orders are an indication of potential shipments in the next one to three months.

Opportunities

• The cover of Barron’s magazine this week suggests that Europe’s economy has hit bottom and is taking its first steps toward recovery. After almost six years of crisis, economic indicators suggest the worst is over. The European Commission expects the twenty-seven nation European Union (EU) to emerge from recession in the fourth quarter of this year, with economic expansion accelerating to 1.4 percent in 2014. The eurozone, comprising seventeen countries that use the common currency, is projected to expand by 1.2 percent.  The current economic environment, prioritizing easy monetary policies, and the scaling back of austerity measures, bode well for a recovery and led to this expansionary projection.

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• Mexico’s President Enrique Pena Nieto’s infrastructure plan lays out goals for $320 billion in public and private investment in highways, passenger rail and energy through 2018. At such a pace, infrastructure spending may average 5.3 percent of economic output through 2018. This is a feat the country can afford, taking advantage of its improved debt maturity profile, which boasts the longest duration of any sovereign debt in the continent. Similarly, the plan will boost activity for construction and material companies which have been under pressure this year, as public infrastructure outlays were 21 percent lower than in the same period of 2012, according to UBS.
• As shown in the graph below, China announced a plan to boost installed solar generating capacity for the country by threefold over the next three years. China also will increase investment in air pollution reduction, having already submitted the plan to the State Council for approval.

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Threats

• The Reserve Bank of India is tightening banks’ access to cash a week after it increased interest rates, as it employs desperate measures to support the rupee after the currency plunged to a record low earlier this month. The central bank raised the daily balance requirement for the cash reserve ratio to 99 percent from 70 percent, which will be effective July 27. Despite the fact that this policy redesign shows the central bank’s serious resolve to address the rupee weakness, the intensity of the monetary tightening may prove excessive for the market to bear in the short term. This could lead to increased downward pressure for the rupee resulting from equity and bond outflows.
• Corporations are balking at sponsorships for the 2016 Olympics in Brazil, as costs escalate to levels three times as high as previous games, boosting the chances that organizers will ask the government to foot the bill. According to Senator Alvaro Dias of the opposition, the current situation is merely a repeat of the 2014 World Cup, which was supposed to be financed privately and now is 97 percent financed by the taxpayers. The implications of the government having to bail out the organizers will add pressure to President Dilma Rousseff’s efforts to quell unrest by protesters upset with the  approximately $15 billion being spent on World Cup-related projects. This comes at a time when the country lacks adequate funding for social investment.
• In Indonesia, it is common that FDI leads local investment. After FDI growth slowed to 15 percent in the second quarter from 23 percent growth in the first quarter, the market is concerned that local investment will also slow in the future.
• China’s Premier Li Keqiang’s speech last week, which was welcomed by the market, provided clarity about the direction of government policy and fiscal actions such as targeted stimulus plans. However, China’s lower-than-expected HSBC flash PMI of 47.7 for July shows the economy still faces downward pressure, and growth is unstable.

Leaders and Laggards

The tables show the weekly, monthly and quarterly performance statistics 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 Emerging Europe 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 6/30/13:

Boston Scientific Corp.: 0.0%
Celgene Corp.: All American Equity Fund, 1.16%; Holmes Growth Fund, 1.25%
Actavis, Inc.: All American Equity Fund, 0.96%; Holmes Growth Fund, 1.38%
Eli Lilly and Co.: 0.0%
McKesson Corp.: MegaTrends Fund, 2.13%
Edwards Lifesciences Corp.: All American Equity Fund, 0.85%; Holmes Growth Fund, 0.92%; MegaTrends Fund, 0.92%
Apple, Inc.: MegaTrends Fund, 0.91%
QUALCOMM, Inc.: MegaTrends Fund, 0.97%
TripAdvisor, Inc.: Holmes Growth Fund, 1.17%
Norfolk Southern: 0.0%
Caterpillar, Inc.: 0.0%
Expedia, Inc.: MegaTrends Fund, 1.07%
Pfizer, Inc.: All American Equity Fund, 0.92%
Merck & Co., Inc.: MegaTrends Fund, 2.06%
Amgen, Inc.: All American Equity Fund, 0.85%; Holmes Growth Fund, 0.89%; MegaTrends Fund, 1.83%
Mastercard, Inc.: All American Equity Fund, 4.37%; Holmes Growth Fund, 4.24%
Exxon Mobil Corp.: All American Equity Fund, 0.92%
Commerzbank AG: 0.0%
Alamos Gold, Inc.: Global Resources Fund, 0.20%; Gold and Precious Metals Fund, 1.55%; World Precious Minerals Fund, 1.62%
Orsa Ventures Corp.: 0.0%
Orsu Metals Corp.: Emerging Europe Fund, 0.20%; Global Emerging Markets Fund, 0.21%; World Precious Minerals Fund, 0.08%
Goldfield Corp.: 0.0%
AngloGold Ashanti Ltd: Gold and Precious Metals Fund, 0.01%; World Precious Minerals Fund, 0.01%
Barrick Gold Corp.: Gold and Precious Metals Fund, 2.18%; World Precious Minerals Fund, 0.12%
iShares Silver Trust: 0.0%
AK Steel Holding Corp.: 0.0%
Severstal: 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.
The Bloomberg Gold Bear/Bull Sentiment Indicator charts the percent of respondents in a weekly Bloomberg News survey of traders, investors, and analysts predicting gold prices will rise the following week. The number of participants in the survey, which is completed every Friday, may vary.
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/TSX Global Gold Index is an international benchmark tracking the world’s leading gold companies with the intent to provide an investable representative index of publicly-traded international gold companies.
The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. The HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years.
The Citi Economic Surprise Index is a measure that tries to capture how well the data is coming in relative to economic expectations.
The Dow Jones STOXX 600 Index is an index of 600 stocks representing large-, mid- and small-capitalization companies in the developed countries of Europe.
The University of Michigan Confidence Index is a survey of consumer confidence conducted by the University of Michigan.  The report, released on the tenth of each month, gives a snapshot of whether or not consumers are willing to spend money.
The Bloomberg Consumer Comfort Index is a weekly, random-sample survey tracking Americans’ views on the condition of the U.S. economy, their personal finances and the buying climate.
The Ifo Business Climate Index is a widely observed early indicator for economic development in Germany.
The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns.