The Fed Awakens: A New Hike

Author: Frank Holmes
Date Posted: December 18, 2015 Read time: 52 min

What were you doing in June 2006? Did you know that’s when the Federal Reserve last raised interest rates, just a year after the last Star Wars flick hit theaters?

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

Up to a third of money managers working today are more likely to have attended a midnight screening of the last Star Wars movie than experienced rising interest rates.

What were you doing in June 2006?

Did you know that’s when the Federal Reserve last raised interest rates, just a year after the last Star Wars flick hit theaters? The biggest movie at the time was Adam Sandler’s “Click,” the hottest song, Shakira’s “Hips Don’t Lie.” The best-performing S&P 500 Index stock for the month was C.H. Robinson Worldwide. And as for Janet Yellen, she was president of the Federal Reserve Bank—of San Francisco.

If June 2006 doesn’t seem that long ago, consider this: Up to a third of asset managers working today have never experienced a rate hike professionally.

On Wednesday, Chair Yellen announced that, for the first time in seven years, easy money will become slightly less easy. The target rate will be set at between 0.25 and 0.50 percent, which doesn’t sound like much, but it’s important that the Fed ease into this cycle cautiously and gradually. Plus, this comes at a time when fellow industrialized nations and economic areas around the globe are considering further monetary easing measures.

Effects and Possible Ramifications: Keep Calm and Invest On

Up to a third of money managers working today are more likely to have attended a midnight screening of the last Star Wars movie than experienced rising interest rates.

Rising rates, of course, have a noticeable effect on mortgages, car loans and other forms of credit. Savers will finally start earning interest again.

The question on investors’ minds, though, is what effect they might have on their investments. After all, the last couple of days have been challenging for stocks, with the S&P 500 dropping 1.5 percent on Friday alone. Is the Fed decision to blame?

To answer this, CLSA analyzed what happened to the U.S. dollar and stocks in the S&P 500 Index 60 trading days before and after the initial rate hike in past cycles and then calculated the averages. It’s important to keep in mind that, aside from rising interest rates, a multitude of unique factors—from geopolitics to economic conditions to the weather—played roles in influencing the outcomes. Nevertheless, CLSA’s research is constructive.

The group finds that, on average, the U.S. dollar peaked 10 trading days before the rate hike, and then afterward slid lower for four to five weeks. This created an agreeable climate for gold and other precious metals and commodities, as their prices typically share an inverse relationship with the dollar.

Opportunity for Commodities: U.S. Dollar Average Performance Around Time of First Rate Hike
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As for equities, they traded up for 60 trading days following the initial rate hike, 70 percent of the time.

S&P 500 Index Has Historically Risen for 60 Trading Days Following First Rate Hike
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But CLSA’s analysis looks only at possible near-term scenarios. What about the long-term?

In the past, the results were just as reassuring—most of the time. Barron’s records S&P 500 returns 250 and 500 days following the initial rate hike in six monetary tightening cycles going back to 1983. The findings suggest that the market went through an adjustment period, with average returns falling from 14 percent before the rate hike to 2.6 percent 250 days afterward. But by 500 days, returns returned to their pre-hike average of around 14 percent.

Equities Survived Previous Fed Rate Hikes
S&P 500 Index Returns Before and After Rate Increases
Performance Before/After Initial Rate Hike
Date of Initial Hike 250 Days Before 250 Days After 500 Days After
5/2/1983 36.60% -1.10% 12.20%
12/16/1986 19.10% -5.90% 11.20%
3/29/1988 -11.40% 11.70% 30.60%
2/4/1994 5.30% 0.60% 34.10%
6/30/1999 19.70% 6.00% -10.70%
6/30/2004 14.80% 4.40% 9.10%
Average 14.00% 2.60% 14.40%
Past performance does not guarantee future results.
Source: Barron’s, U.S. Global Investors

Again, many other factors besides interest rates contributed to market behavior in each instance. And this time is especially different, as the market was given an unusually long runway, allowing it to price in the full effects of the liftoff before it finally happened.

I can’t say whether the same trajectory will be taken this time as before, but what CLSA, Barron’s and others have found should be encouraging news for commodities and stocks.

I should also point out that according to the presidential election cycle theory developed by market historian Yale Hirsh, markets do well in a presidential election year.

The consumer price index came out this week and, with an inflation rate of 2 percent, the 5-year Treasury yield is now negative. (The real interest rate is what you get after subtracting inflation from the 5-year government bond.) This bodes well for gold. Also, the 10-year bond yield is lower than it was six months ago.

Investors Flee Junk Bonds and Defaulting Energy Companies, Find Comfort in Tax-Free Muni Bonds

In 2008, the Fed trimmed rates to historically-low levels in response to the worst financial crisis since the 1930s. Most people would agree that this helped put the brakes on the U.S. slipping further into recession.

But low rates were also partially responsible for driving many investors into riskier investments over the last few years—corporate junk bonds among them—as they sought higher yields.

Junk bonds, or high-yield bonds, are known as such because they have some of the lowest ratings from agencies such as Moody’s and Standard & Poor’s. Because they carry a higher default risk than investment-grade bonds, they offer higher yields.

But with corporate default rates nearing 3 percent for the year, and at least one large high-yield bond fund cutting off all redemptions, investors are facing liquidity problems and learning the hard way why these equities are commonly called “junk.”

Late last week, it was announced that a high-yield bond fund—whose assets under management were worth $2.5 billion as recently as 2013—would be closing after suffering nearly $1 billion in outflows this year. This sent the junk bond market into panic mode, with several similar funds experiencing near-record outflows. Fears intensified when legendary investor Carl Icahn tweeted last Friday: “Unfortunately I believe the meltdown in High Yield is just beginning.”

To make matters worse, high-yield bonds have fallen into negative territory, giving investors little reward for the risk.

Corporate High-Yield Collapses, Short-Term Munis Climb
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Energy companies, highly leveraged since oil began to spill value in the summer of 2014, top the default list for the year. JPMorgan estimates that the industry’s overall default rate might hit 10 percent next year.

“Junk bonds will likely be dead money for at least several years,” says Tony Daltorio, writing for Wyatt Investment Research. “Put your money elsewhere.”

But where, exactly, is “elsewhere”?

With rates now on the rise, many investors have turned to investment-grade, short-term municipal bonds, which have seen inflows at the fastest pace since January.

U.S. Investors Pile into Muni Bonds Despite Rate Hike
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Savvy investors know that bond prices move in the opposite direction of interest rates, but shorter-term munis are less sensitive to rate fluctuations than longer-term bonds. Put another way, bonds that are more sensitive to changes in the interest rate environment will have greater price fluctuations than those with less sensitivity.

“As municipal bonds head toward the strongest returns in the U.S. fixed-income markets this year, investors say the end of near-zero interest rates will do little to knock state- and local-government debt off its stride,” Bloomberg writes.

Over the past seven years, low rates certainly contributed to one of the strongest bull markets in U.S. history. Now that easy money is coming to an end, we can expect to see more volatility. But as the CLSA and Barron’s data show, there’s still plenty of room for growth.

It’s important, therefore, to stay diversified. Focus on high-quality, dividend-paying stocks; investment-grade, short-term municipal bonds; and, as always, gold—five percent in gold stocks, the other five percent in bullion.

Have a joyful weekend, and stay safe during this festive, holiday season!


What's Gold's Touchdown Pass This Week?

Index Summary

  • The major market indices finished down this week.  The Dow Jones Industrial Average lost 0.79 percent. The S&P 500 Stock Index fell 0.34 percent, while the Nasdaq Composite declined 0.21 percent. The Russell 2000 small capitalization index lost 0.23 percent this week.
  • The Hang Seng Composite gained 1.56 percent this week, while Taiwan was up 1.74 percent and the KOSPI rose 1.37 percent.
  • The 10-year Treasury bond yield rose 7 basis points to 2.2 percent.

Domestic Equity Market

S&P 500 Economic Sectors
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  • First Solar Inc. was the best performing company in the S&P 500, as its price surged by 14.75 percent. The company, which is a producer of solar panels, experienced tremendous surges after both the Paris Climate Summit and the decision by Congress to extend the investment tax credit for an additional five years to companies working in the renewable energy space.
  • The best performing sector this week was utilities, which gained 2.76 percent, compared to a negative 0.31 percent loss by the S&P 500 overall.
  • This week, announced that it is considering leasing twenty Boeing 767 freight planes in an effort to take more control over its delivery methods and costs. Although air delivery is a service few businesses are large enough to handle on their own, Amazon continues to set the standard for fast, inexpensive delivery in e-commerce.


  • The Williams Companies, Inc. was the worst performer in the S&P 500 this week, falling 9.11 percent. The company is an energy infrastructure company focused on connecting hydrocarbon resources within various regions and communities.
  • The worst performing sector in the S&P 500 was the materials sector, which fell 3.05 percent, compared to a negative 0.31 return for the S&P 500.
  • This week, Citigroup Inc. announced that it plans to cut at least 2,000 jobs at the start of 2016. According to Citigroup CFO John Gerspach, “The bank will take a charge of about $300 million in the fourth quarter to help resize our infrastructure and our capacity to deal with the continuing low-revenue environment.” Reportedly, the bank had already started holding discussions with employees about the upcoming changes.


  • The S&P telecommunication services sector traditionally outperforms during economic recessions and/or when overall profits contract. While the former is not assured, the latter is already underway. Manufacturing is already on the verge of contraction and industrial output growth is negative. In contrast, consumer spending on telecom services has picked up and industry pricing power has made a rare expansion. Among the ten broad sectors, telecom services has enjoyed the most robust pricing power gains in recent months as most sectors are either on the cusp of or in deflation. These divergences could allow telecom services relative forward earnings to continue outpacing the overall market. At cheap multiples, the telecom services sector could be an under the radar pick for 2016.
  • Small caps have a history of struggling against large caps when the Fed lifts interest rates. The volatility around lift-off pushes up the small cap risk premium and capital flows into large caps. Wage pressure in the small business sector is accelerating and is fueling a big profit margin gap between small and large cap companies which should continue to widen as deflation undermines domestic economic growth. Thus, large caps retain an attractive bias versus small caps in the short-term.
  • The consumer staples sector has been steadily outperforming for some time and that trend is likely to persist on the back of earnings outperformance. A particular group of emphasis is the S&P retail drug store index. Booming drug demand should ensure that pharmacy foot traffic continues to grow. Pharmaceutical shipments have shot up in the past few months while soaring hospital employment reinforces that health-care facilities are staffing up for a sustained increase in patient volumes, which is consistent with a prolonged period of robust top-line growth at retail drug stores. Rising store traffic is already having a positive impact on pricing power, according to the latest producer price index.


  • The S&P 500 is testing the low end of its recent trading range. Breadth is poor and only a few overpriced, momentum-driven stocks have registered decent gains this year. The lack of participation strongly resembles previous major market peaks. Industry groups trading above their 52-week moving average has steadily deteriorated this year, coinciding with increased volatility, but illusory market resilience. Topping processes in the late-1990s and 2007/2008 period followed similar patterns.
  • According to BCA, their bearish take on the S&P oil & gas refining index is rooted in their view that the crude oil glut will shift to a refined product surplus at a time when the industry is trading at historically high relative valuations. Refining margins are already under pressure from the vanishing gap between West Texas Intermediate (WTI) and Brent oil prices. Refiners are operating at full throttle, even though consumption growth is starting to cool. Vehicle miles-driven have rolled over, refined product exports are in retreat, and refined product consumption is contracting. As a result, distillate crack spreads have plunged in recent weeks. While gasoline cracks are holding up better, and are a larger earnings driver, the risk is that excess supply sets in as driving season winds down for the winter, without any export outlet to provide an offset. The implication is that there is a window of risk for refining margins to narrow, leading to profit disappointment.
  • The S&P financial sector has struggled to make gains and it is unlikely that higher short-term interest rates will bring broad-based relief as the yield curve will remain a headwind for financials. There has been a large divergence between short and long-term Treasury yields. The former have been heavily influenced by the timing of the first Fed interest rate hike. In contrast, 10-year yields have moved with the terminal rate and the expected path of rate hikes, both of which are sensitive to the tightening in financial conditions that has already occurred on the back of U.S. dollar strength. These differences suggest that the yield curve may flatten further as the long end of the curve will continue to be impacted by deflation pressures undermining the domestic economy.

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The Economy and Bond Market


Markets were highly volatile this week, as investors digested the first U.S. interest rate hike in nine years. Global stocks fared better overall than U.S. indices, which gave back initial gains after the rate hike. Other data were mixed, and included modest signs of recovery in China and the eurozone. The Chicago Board Options Exchange Volatility Index (VIX) straddled 20 for much of the week, down from its previous-week peak but above the mid-teens, where it has been for much of the year. The yield on the 10-year U.S. Treasury note settled at 2.20 percent after breaching 2.30 percent briefly Wednesday following the U.S. Federal Reserve rate hike. The price of crude oil continued to slide to multiyear lows on a global supply glut, with U.S. WTI and Brent crude priced near $35 and $37.50 per barrel, respectively, on Friday.


  • Housing starts rebounded 10.5 percent month-over-month in November to 1.173 million units, surpassing expectations of 1.13 million. Both October and September were revised up, with the former increasing to 1.062 million from 1.060 million and the latter up to 1.207 million from 1.191 million.
  • The U.S. Consumer Price Index was flat in November while core CPI –– excluding food and energy –– rose 0.2 percent. For the year, CPI rose 0.5 percent while core prices were up 2.0 percent.
  • Initial jobless claims improved to 271,000 for the week ending December 21, falling from 282,000 in the prior week. This was a bit better than market expectations of 275,000.


  • A contraction in annual industrial production growth has historically preceded recessions. According to the November data, industrial production is contracting at a yearly rate of over 1 percent. While one shouldn’t rely on one indicator and the structure of the economy has evolved over time to be less manufacturing based, there are only rare occasions that the U.S. has escaped recession once industrial production turns negative and none of these rare periods have occurred in the past 35 years.
  • The current account deficit widened notably to $124.1 billion in the third quarter from $111.1 billion (revised from $109.7 billion) in the second quarter, coming in worse than expectations of $118.6bn. This was the largest deficit since the fourth quarter of 2008.
  • The Philadelphia Fed index stumbled down to -5.9 in December, more than reversing the gain to 1.9 in November. This was worse than expectations of a slight decline to 1.0 and brings the index back into contraction territory. There have now been negative readings in three of the last four months, suggesting that the brief positive reading in November was a one-off and the manufacturing sector in the Philadelphia Fed district continues to struggle.


  • According to BCA, market expectations for inflation over the next year are too low in the U.S. while expectations are too high outside the U.S. The current negative contribution from import prices to U.S. inflation has been huge, at 2 percentage points. The U.S. consumer goods price index has the highest sensitivity to changes in import prices of the major countries. However, if the dollar and commodity prices stabilize, the contribution to inflation will move close to zero by the end of 2016. This would add back almost 2 percentage points to headline CPI inflation, taking it well above current market expectations.
  • The Fed has thus far focused primarily on the labor market as its threshold for rate hikes. However, this week’s Federal Open Market Committee statement and press conference suggested that the evolution of underlying personal consumption expenditures (PCE) inflation will now play a more important role in determining the pace of rate hikes. The next core PCE inflation print is on December 23.
  • The backdrop to the consumer sector is positive with em­ployment in a steady uptrend and wage growth likely to strengthen modestly as the labor market tightens. Housing investment is still running below the level implied by de­mographic trends, so that sector should continue to improve.


  • The plunge in oil prices to new lows together with continued weakness in base metals such as iron ore has depressed breakeven inflation rates. Thirty-year bond yields in the major countries have dropped back to near levels that preceded the European Central Bank (ECB)’s disappointing QE2 announcement. However, the rout in the commodity space is a positive for bonds on two dimensions. First, there is the direct deflationary impact. Second, it puts more pressure on some central banks that are failing to meet their inflation targets, such as the ECB and Bank of Japan, to provide more stimulus that would spill over into other developed country bond markets.

Deflation Shock Continues
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  • The Fed implemented the first rate hike after years of speculation and debate. Now the focus shifts to the pace of rate hikes. Fed Chair Yellen emphasizes that she will proceed "gradually," as specified by the dot plot. (The targets for appropriate federal funds rates by FOMC participants is plotted in a chart that has come to be known as the “dot plot.”) The problem is that investors appear to believe that "gradual" means something much slower. The median dots project four quarter-point rate hikes in each of 2016 and 2017, compared to half that amount implied by the bond market. If the FOMC proceeds with regular rate hikes in line with the dots next year, then it will not be long before market expectations for 2017 and 2018 move up toward the Fed’s projection. Such an outcome would likely be disruptive for risk assets, and would warrant a cautious positioning towards equities.
  • Recent data clearly shows that the U.S. manufacturing sector is struggling. Should the weakness spread to the services sector and start showing up in the labor market, it would increase concerns that the Fed embarked on raising rates too soon. Some of the key U.S. releases for the coming week are durable goods orders and personal spending, both on December 23.

Gold Market

For the week, spot gold closed at $1,066.15 down $8.59 per ounce, or 0.80 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 4.89 percent. Junior miners outperformed seniors for the week as the S&P/TSX Venture Index gave up only 0.16 percent. The U.S. Trade-Weighted Dollar Index rose 1.19 percent for the week.

Date Event Survey Actual Prior
Dec-15 GE ZEW Survey Current Situtaion 54.2 55 54.4
Dec-15 GE ZEW Survey Expectations 15 16.1 10.4
Dec-15 US CPI YoY 0.40% 0.50% 0.20%
Dec-16 EC CPI Core YoY 0.90% 0.90% 0.90%
Dec-16 US Housing Starts 1130k 1173k 1060k
Dec-16 US FOMC Rate Decision (Upper Bound) 0.50% 0.50% 0.25%
Dec-17 US Initial Jobless Claims 275k 271k 282k
Dec-22 US GDP Annualized QoQ 1.90% 2.10%
Dec-23 US Durable Goods Orders -0.70% 2.90%
Dec-23 US New Home Sales 505k 495k
Dec-24 US Initial Jobless Claims 270k 271k


  • Palladium followed by platinum was the best performing precious metals this week, up 2.87 percent and 2.23 percent, respectively.  The platinum group metals responded positively to news that automobile demand continues to be strong globally, boosting platinum and palladium prices. The European Automobile Manufacturers Association reported over 1 million more car listings in November. The number of vehicle sales in China rose nearly 20 percent.
  • It seems that bullish gold investors may be able to breathe a little easier after the Fed finally made its decision to raise rates 25 basis points earlier this week. Bob Haberkorn, a senior market strategist at RJO Futures in Chicago, commented that sentiment has shifted, and traders are seeing less downside potential in the gold price.
  • Goldcorp CEO Chuck Jeannes also said that he thinks the increase in rates will be a net benefit for the gold mining company, now that the uncertainty around the Fed’s action is behind us.  Newsletter writer Dennis Garman was interviewed by and he opined that we have likely seen the low in gold prices now.


  • With the hike in interest rates and the ensuing strength in the dollar the next day, it is not too much of a surprise that gold came in at the bottom in terms of price performance this week.  What is nice is that this is the third Fed meeting in row that gold was stronger on the day of the announcement.  Absent was the manipulative middle of night plus $1 billion dumping trades of gold bullion to push gold down on the Fed meeting dates.  Fortunately for the perpetrators, the regulators were asleep.
  • More rate hikes could be on the way, warn some analysts. Macquarie analyst Matthew Turner said that if the economy continues to strengthen after this rate increase, then the Fed may go ahead with further tightening. Historically, gold doesn’t perform well in periods of tightening monetary policy with rising real interest rates.
  • Gold is headed for the third annual loss, according to BloombergBusiness. Societe Generale’s Alain Bokobza said bullion will likely drop to $955 per ounce by the end of the year.


  • Klondex Mines announced this week its acquisition of the Rice Lake Mine near Bissett, Manitoba. For the total purchase price of $32 million, Klondex is acquiring a fully operational mine, mill and fleet of equipment that was recently put on care and maintenance as the property went into receivership earlier in the year.  Over $375 million of capital improvements have been made on the property since 2007 and the mobile equipment fleet was appraised at close to $20 million. Klondex plans to calculate a new resource for the operation and design a new mine plan for developing the ore in a profitable manner.  It will likely be fourth quarter of 2016 before they start production back up.  In our opinion, the prior operator had oversized the mill and dropped the cutoff grade to try and grow the number of ounces produced.  To accomplish this they also got overextended on the debt side.   Klondex has a great opportunity here to do the proper work and right size the operation so it can be profitable.  Klondex Mines still offers investors an attractive opportunity to participate in the turnaround of Rice Lake.
  • According to research from Cornerstone Macro, the dollar has historically appreciated before the first hike and typically has depreciated afterwards. If the historical pattern is any indication, the dollar will not strengthen further as many of the flapping mouth airheads have pontificated, of course without looking at the facts.

Trade-Weighted Dollar Six Months Before and After First Rate Hike
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  • China’s money supply far exceeds that of other developed nations. Bloomberg Intelligence noted this presumed spending power seems to indicate that China still has plenty of room for additional gold demand.

China's M2 Money Supply Soars Past All Others
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  • Commodity headwinds continue, as the Bloomberg Commodity Index closed at the lowest level in 16 years on Monday. The slowing commodities demand from China continues to affect the diversified mining companies, as China shifts to a service-driven economy.
  • Former U.S. Treasury Secretary Lawrence Summers and economist Nouriel Roubini said earlier this week that the Fed policymakers may be making a mistake if the rate hike was premature. There is still much uncertainty in the global markets about the prospects of growth and stalling growth rates in the U.S.
  • Deutsche Bank views gold miners as a possible hedge against global uncertainty. DB notes that the combination of deficit spending, poor merger & acquisition decisions and the China commodity demand slowdown have resulted in “toxic” levels for balance sheets. Markets have been watching these disturbing credit conditions, as Goldman Sachs noted that “U.S. corporate credit quality has deteriorated to the weakest level in a decade.” In this environment, DB favors a defensive posture in companies with stronger balance sheets and non-integrated names.

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Energy and Natural Resources Market



  • This week, Congress approved a five year extension of the investment tax credit for renewable energy, particularly benefitting solar and wind power producers. Although the decision to allow these investment tax credits to continue until the end of 2021 came as part of broad budget deal, solar and wind energy companies appreciated the most within the broader energy space.
  • The best performing sector in the global resources space was the S&P 500 Utilities Index, which gained 2.76 percent this week, outperforming the S&P 500 which had a negative 0.31 percent return.
  • U.S. chemicals producers have been enjoying a cost advantage as gas prices continue to slip. Among the best performing companies in the space was LyondellBasell Industries, up more than 2.2 percent this week. The company takes advantage of the low costs that shale gas has given U.S. chemicals makers, which has helped its earnings before interest, taxes, depreciation and amortization (EBITDA) grow by 40 percent since 2011.


  • This unusually warm winter season has done much to curb demand for natural gas, which traded at the lowest levels since 1999. In addition to tumbling prices, natural gas producers often find themselves with a sizable debt, and their excess inventories make it more difficult for the producers to pay down that debt.
  • Oil plummeted to the lowest level in more than six years, closing the week at $34.55, while crude oil inventories in the U.S. climbed to the highest level for this time of year since 1930. The current stockpiles have created a storage glut, but with seemingly nobody in the market willing to take a long position, the excess inventories could be difficult to deplete.
  • This week’s worst performing sector was the S&P Oil & Gas Exploration & Production Index, which fell 6.71 percent this week. This developed after many of the index’s constituents were informed by Moody’s Investors Services that a number of companies would be reviewed for possible ratings downgrades.


Cushing Crude Oil Stocks Approaching April Highs
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  • Tanker rates continue to trend higher as conventional onshore crude oil storage facilities near their maximum capacity. While oil supply continues to grow without evidence of demand increasing, oil tankers have become the equivalent of offshore storage platforms, leading tanker rates to increase together with the oil contango.
  • Base metals nickel, copper and zinc have declined steeply in 2015, but this week, Morgan Stanley chose them as their top picks for 2016. This comes as Chinese producers ramp down their output, while miners outside China have also started taking measures to reduce global supply. The producers of these base metals seem to acknowledge that trade flows remain intact, but that some form of commodity trade rebalancing is necessary in response to record low prices, which suggests that the downside price risk could be limited.
  • Mexican oil fields are opening up to foreign production for the first time in almost eighty years.  This could present a tremendous opportunity for junior developers, since Mexico has 9.8 billion barrels of proven oil reserves, a majority of which are undeveloped. International Frontier’s Steve Hanson notes that there are, “very few opportunities globally where you see the denationalization of large hydrocarbon producing areas,” and considers this, “one of the largest opportunities that’s come in decades.”


  • The Chicago Research Bureau commodity price index has been around since 1947 and remains one of the most followed and traded indices in the world, however this week, the index revisited levels last seen in June 1973. The index has dropped more than 64 percent off its 2008 high – the single biggest drop in its 68 year history. These 42-year lows are occurring while 3 million barrels of excess oil are produced each day and governments continue to pay farmers to not plant crops. Signs like these seem to reconfirm the apparent imbalance between commodities producers and commodities consumers.
  • This week, 30 U.S. oil and gas exploration and production companies already beset with industry challenges received word that Moody’s Investors Services would be reviewing them for possible downgrades. Moody’s commented that despite oil and natural gas prices plummeting to multi-year lows, exploration and production companies will be stressed with much lower cash flows, difficulty selling assets and limited capital-markets access. Should ratings downgrades occur for these exploration and production companies, the difficult days they face in the future could likely become even more challenging.
  • Front-month WTI crude oil futures fell below $35 for the first time since February 2009, continuing the decline in crude oil prices. This comes less than two weeks after OPEC made the decision to abandon the 30 million barrels a day production ceiling and instead increase production, rather than take measures to address the current global oversupply.

China Region



  • Chinese A-Shares was the best performing market in Asia this week, as China officially announced its intention to manage its currency against a trade weighted basket ahead of the Federal Reserve’s decision to raise the interest rate.  The Shanghai Composite Index gained 4.21 percent this week. 
  • Consumer discretion was the best performing sector in Asia this week, driven primarily by Korean auto and consumer electronics makers as both were perceived as beneficiaries of an even stronger U.S. dollar post Fed’s rate hike.  The MSCI Asia Pacific ex Japan Consumer Discretion Index advanced 2.90 percent this week.
  • The Indonesian rupiah was among the best performing currencies in Asia this week, strengthening by 0.25 percent, as the country’s central bank left interest rates unchanged ahead of the Federal Reserve’s decision to hike rates.   


  • Malaysia was the worst performing market in Asia this week, as crude oil prices made fresh 52-week lows amid intensifying concerns over excess global supply against scant signs of demand recovery.  The FTSE Bursa Malaysia Index edged up only 0.37 percent this week. 
  • Industrials was the worst performing sector in Asia this week, led by Chinese companies exposed to marine transport as both crude oil and dry bulk shipping rates continued to register new lows. The MSCI Asia Pacific ex Japan Industrials Index finished up only 0.64 percent this week.
  • The Chinese renminbi was among the worst performing currencies in Asia this week, weakening by 0.40 percent, as the country’s latest move to “re-peg” its currency to a trade weighted basket was interpreted by investors as allowing the renminbi to depreciate even if the U.S. dollar strengthens further post Fed rate hike. 


  • South Korean equities should prove relatively resilient after the U.S. Federal Reserve raises interest rates for the first time since 2006, given the country’s robust fiscal status, recovering domestic demand, rising shareholder returns, and attractive valuation.  Indeed, index-dominant technology exporters in Korea are likely to benefit from potential further strength in the U.S. dollar, and based on the last five years, according to Morgan Stanley, a weaker Korean won against the U.S. dollar tends to correlate with outperformance of Korean equities versus the rest of Asia, with a three month time lag. 

Cushing Crude Oil Stocks Approaching April Highs
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  • November’s accelerated improvement in new home pricing in China’s major cities may be viewed as the latest signs of benign responses to government policy accommodation towards the property sector.  Sustained market expectation of further policy easing from the ongoing Central Economic Work Conference should keep investor sentiment buoyant towards quality local residential property developers still trading below historical average valuation.
  • As global investor risk appetite retrenches after the Federal Reserve’s decision to hike interest rates this week and intensifying declines in crude oil sent U.S. junk bond spreads soaring anew, cash as the ultimate defensive asset class may once again outperform as volatility picks up in various asset classes around the world.


  • The local economy of Hong Kong, which has synchronized monetary policy with the U.S. because of a pegged Hong Kong dollar, is likely to be more vulnerable than during the 2004-2006 Federal Reserve tightening cycle, given over 200 percent private sector debt to GDP, a peaking property cycle, and a continuously slowing Chinese economy.  Equities of Hong Kong real estate and retail oriented sectors might bear the brunt of any negative impact from even a gradual pace of interest rate hikes.
  • Continued depreciation of the Chinese renminbi this week after China’s decision to “re-peg” its currency to a trade weighted basket might reignite investor fears of a “tail event” similar to late August when a sudden devaluation of the Chinese currency spooked global equity, currency, and commodity markets, and invited questions on whether China remains committed to fostering consumerism and able to maintain control of its increasingly porous capital account.
  • The recent mini-recovery in Malaysian stocks might not be sustainable, given the prospect of slowdown in both private consumption, led by weaker income growth and high household indebtedness, and public investment due to fiscal retrenchment next year.  Lingering uncertainties on crude oil prices and domestic political scandal might continue to weigh on the Malaysian ringgit and investor sentiment.

Emerging Europe



  • Greece was the best performing market this week, gaining 7.74 percent.  Greece and its creditors agreed on a new set of economic overhauls the government must implement to receive the next slice of one billion in financial aid. The latest agreement relates to the country’s banking sector, the design of privatization fund and the partial privatization of the country’s power grid operator. Discussion on bad loans, pension system and higher tax measures will take place in the months ahead.
  • The Turkish lira was the best performing currency this week, gaining 2.6 percent against the dollar. Turkey reopened talks with the eurozone on joining the 28- nation bloc and was promised 3 billion euros of financial aid as part of the package of economic and political incentives for Turkey to house refugees within its borders.  Next week the Central Bank of Turkey is expected to hike its main rate from 7.5 percent to 8 percent.
  • The industrial sector was the best performing sector among Eastern European markets this week.


  • Russia was the worst performing market this week, losing 7 basis points. On Thursday, the Russian ruble dropped to a record low close of $71.21 against the dollar. The same day crude oil, Brent closed at $37.06 per barrel, a price level last seen in the year of 2008.
  • The Czech koruna was the worst performing currency, losing 1.3 percent against the dollar. The central bank of Czech Republic left its main interest rate unchanged at a record low of .05 percent.
  • The energy sector was the worst performing sector among Eastern European markets this week.


  • Hungary has proposed capping its banking tax at less than half the current level next year and setting incentives for banks to lend more. Governor Gyorgy Matolcsy, who designed several economic reforms and a key ally of Prime Minister Viktor Orban, said that there is a need to transform the thinking and the working of the banking sector. Banks have kept a lot of money at the central bank instead of lending and they should pick up the pace of lending.
  • European shares appreciated after the Federal Reserve announced a 25 basis point rate hike.  The beginning of a new tightening cycle in the U.S. gave investors a sign of a confidence in the world’s biggest economy. Many Bloomberg analysts predict further strength in the dollar and weakening eurozone currency. A weaker Euro should boost the eurozone’s economic growth.
  • Eurozone’s Manufacturing PMI rose to 53.1 above the prior and expected figure of 52.8, signaling a twenty month high. A reading of less than 50 indicates a contraction of activity, above 50 points to an expansion.


  • The Polish zloty, bonds and stocks have all dropped since the Law & Justice party won the elections on October 25. The declines have been driven by concerns that increased social spending will put pressure on the budget, raising it above the EU’s ceiling of 3 percent.  The Polish government announced that the fiscal gap will reach 2.8 percent of gross domestic product in 2016, and is basing its budget draft on 3.8 percent economic expansion and 1.7 percent average inflation next year. Most Bloomberg economists predict 3.5 percent expansion next year, and Poland’s central bank projects inflation at 1.1 percent next year.

Polish market Declines Following October 25 Election
click to enlarge

  • On Friday Brent crude oil closed at $36.68 per barrel, slightly above its prior low level from December 2008 at $36.61 per barrel. The decline in oil prices negatively affects Russian oil exporters and it may result in higher budget shortages in Russia. Brent lost 50 percent of its value last year and 37 percent year to date.
  • Japanese electric company Toshiba CIS is closing down its Russian division for TV sets and kitchen appliances due to high competition and the instability of the Russian currency.  The Bosh-Siemens factory near St. Petersburg in Russia halted production of washing machines due to missing parts supposed to come from Turkey. Western sanctions and geopolitical instability weighs on the Russian economy.

Curious About the Gold Market? Read Frank Holmes' Latest Insights

Leaders and Laggards

Weekly Performance
Index Close Weekly
DJIA 17,128.45 -136.76 -0.79%
S&P 500 2,005.52 -6.85 -0.34%
S&P Energy 438.48 -4.66 -1.05%
S&P Basic Materials 266.87 -8.39 -3.05%
Nasdaq 4,923.08 -10.38 -0.21%
Russell 2000 1,121.05 -2.55 -0.23%
Hang Seng Composite Index 2,994.37 +46.13 +1.56%
Korean KOSPI Index 1,975.32 +26.70 +1.37%
S&P/TSX Canadian Gold Index 129.28 -5.27 -3.92%
XAU 44.54 -2.87 -6.05%
Gold Futures 1,065.50 -10.20 -0.95%
Oil Futures 34.56 -1.06 -2.98%
Natural Gas Futures 1.77 -0.22 -11.01%
10-Yr Treasury Bond 2.20 +0.07 +3.38%


Monthly Performance
Index Close Monthly
DJIA 17,128.45 -608.71 -3.43%
S&P 500 2,005.52 -78.06 -3.75%
S&P Energy 438.48 -62.94 -12.55%
S&P Basic Materials 266.87 -19.76 -6.89%
Nasdaq 4,923.08 -152.12 -3.00%
Russell 2000 1,121.05 -50.70 -4.33%
Hang Seng Composite Index 2,994.37 -71.34 -2.33%
Korean KOSPI Index 1,975.32 +12.44 +0.63%
S&P/TSX Canadian Gold Index 129.28 +5.80 +4.70%
XAU 44.54 -0.94 -2.07%
Gold Futures 1,065.50 -3.40 -0.32%
Oil Futures 34.56 -6.19 -15.19%
Natural Gas Futures 1.77 -0.58 -24.54%
10-Yr Treasury Bond 2.20 -0.07 -3.25%


Quarterly Performance
Index Close Quarterly
DJIA 17,128.45 +743.87 +4.54%
S&P 500 2,005.52 +47.49 +2.43%
S&P Energy 438.48 -23.93 -5.18%
S&P Basic Materials 266.87 +3.46 +1.31%
Nasdaq 4,923.08 +95.85 +1.99%
Russell 2000 1,121.05 -42.29 -3.64%
Hang Seng Composite Index 2,994.37 -19.87 -0.66%
Korean KOSPI Index 1,975.32 -20.63 -1.03%
S&P/TSX Canadian Gold Index 129.28 +0.88 +0.69%
XAU 44.54 -4.13 -8.49%
Gold Futures 1,065.50 -73.10 -6.42%
Oil Futures 34.56 -10.12 -22.65%
Natural Gas Futures 1.77 -0.83 -32.02%
10-Yr Treasury Bond 2.20 +0.07 +3.09%

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*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 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 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 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 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.
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.
Chicago Board Options Exchange (CBOE) Volatility Index (VIX) shows the market’s expectation of 30-day volatility.
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.
The Philadelphia Federal Index is a regional federal-reserve-bank index measuring changes in business growth. The index is constructed from a survey of participants who voluntarily answer questions regarding the direction of change in their overall business activities. The survey is a measure of regional manufacturing growth. When the index is above 0 it indicates factory-sector growth, and when below 0 indicates contraction. Also known as the "Business Outlook Survey".
The PCE Deflator is a nation-wide indicator of the average increase in prices for all domestic personal consumption.
The S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index is market capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to remove companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, will be greater than 0.05% of the index.
The Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.
S&P Commodity Producers Oil & Gas Exploration & Production Index includes the largest publicly-traded companies involved in the exploration and production of oil and has around the world.
The Reuters/Jefferies CRB Index is an unweighted geometric average of commodity price levels relative to the base year average price.
The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.
The FTSE Bursa Malaysia Index Series is a broad range of real-time indices, which cover all eligible companies listed on the Bursa Malaysia Main and ACE Markets. The indices are designed to measure the performance of the major capital segments of the Malaysian market, dividing it into large, mid, small cap, fledgling and Shariah-compliant series, giving market participants a wide selection and the flexibility to measure, invest and create products in these distinct segments.
The MSCI Asia ex-Japan Index is a free float-adjusted, capitalization-weighted index measuring the performance of all stock markets of China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand, India and Pakistan.