Trying to Stop a Bull Market Has Risks

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

U.S. stocks have been on a tear. The S&P 500 Index has climbed a surprising 20 percent so far this year, as a global synchronized recovery takes shape and funds flow back to equities. As I often say, investors take risks when they try to stop a bull run, and plenty of data suggest you might regret taking that action this year.

Consider the optimistic views from Joshua Brown, i.e. The Reformed Broker, as we have “all the rocket fuel we need for an explosion.” There’s no election, no war in Syria, and no taper talk. Banks are highly capitalized, stocks around the world are cheap and hedge funds’ short positions are the highest since January, says Brown.

If his post doesn’t convince you, we have even more ammunition, especially regarding cyclical and growth stocks.

1. Year-to-date returns of more than 20 percent are not abnormal

Did you know going back to 1900, the market’s annual returns have been more than 20 percent about one-third of the time? Take a look at the distribution of S&P 500 annual returns charted by Mebane Faber Research, which shows the possibility of stocks going higher.

If you were able to invest in the market during the entire 112 years, you would have pocketed an average of 11 percent. But even though the 2013 market return has been more than the average, there were more than 30 years when stocks increased more. Of course, we can’t guarantee future performance, but history has seen years when stocks increased 25, 30 or even 40 percent over the entire calendar year.

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2. Improving economic growth prospects point to cyclical stocks to lead the way

Last spring, our director of research, John Derrick, CFA, recognized an inflection point occurring in U.S. stocks, with cyclical areas of the market beginning to gain strength while defensive companies suddenly started lagging. Large-cap, relatively stable companies such as Procter & Gamble, AT&T and Clorox dropped sharply at that time. If you watched the market closely, you sensed a mean reversion taking place as expectations seemed too lofty for defensives and too gloomy for cyclicals.

This was a vital signal to growth investors, and those who were paying attention to the quiet ignition of cyclical stocks were wise to take advantage of this change.

On the chart below, you can see the abrupt switch in leadership from defensive stocks to cyclical sectors. The line plots the ratio of cyclical areas to defensive areas of the S&P 1500 Index. When the line is rising, cyclical companies (consumer discretionary, energy, financials, industrials, materials and technology) outperform; when the line is falling, defensives (consumer staples, health care, telecommunications and utilities) outperform.

Over the past decade, you can see that cyclical stocks outperformed from 2002 through 2005. But since the end of 2010, the longer-term trend for cyclicals has been heading downward—until recently. Now, after a prolonged period of underperformance, cyclicals appear poised to outperform.

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John continues to believe that with countries such as the U.S., Europe and China improving, cyclical and high-growth areas of the U.S. market will likely continue to take off. As investors have been reallocating out of bonds and cash into equities on expectations that interest rates may rise, chances are good that this money will find its way into cyclical areas of the market.

3. Rising industrial production is positive for cyclical stocks.

As a measure of output of the industrial sector, industrial production (IP) around the world has been building momentum. In August, the IP in the U.S. and the eurozone grew more than anticipated. In September, China’s IP rose 10.2 percent, which is the second-highest growth rate this year, according to China Daily.

Historically when the economy has had positive industrial production momentum, a higher percentage of cyclical companies experienced better-than-expected earnings. And companies that beat earnings typically experience a boost in stock prices.

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There appears to be plenty of gunpowder in the chamber for growth stocks, so if you are looking for a few ideas, consider growth strategies that have worked this year for U.S. Global.

Take the Holmes Growth Fund (ACBGX), for example. From the beginning of the cyclical rally on April 26 through October 18, the fund’s return is just about double the return of its benchmark S&P 1500, as it climbed more than 23 percent. The index rose only 12 percent.

The fund generally invests in companies that have better-than-average revenue growth and earnings growth while also providing a higher return-on-equity to investors. We believe these stocks have the characteristics that are the DNA of success for growth-at-a-reasonable-price investors. You can see the fund’s largest holdings here.

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As a side note, the All American Equity Fund rose nearly 17 percent and the MegaTrends Fund grew 12 percent, outperforming the S&P 500 Index, which returned 11.4 percent during the same timeframe. These funds invest in similar growth stocks, but take a different approach toward U.S. companies. See the top holdings of the All American Equity Fund and the MegaTrends Fund.

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Like I said above, trying to stop a bull market has risks. With $32 billion pouring into equity funds in September and another $12.7 billion into stock funds within the last week, many investors are jumping into the market. What action are you taking?

John Derrick, director of research, contributed to this commentary.

Expense ratios as stated in the most recent prospectus. The expense ratio after waivers is a voluntary limit on total fund operating expenses (exclusive of any acquired fund fees and expenses, performance fees, taxes, brokerage commissions and interest) that U.S. Global Investors, Inc. can modify or terminate at any time, which may lower a fund’s yield or return.

Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus (e.g., short-term trading fees of 0.05%) which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Index Summary

• Major market indices finished higher this week. The Dow Jones Industrial Average rose 1.07 percent. The S&P 500 Stock Index gained 2.42 percent, while the Nasdaq Composite soared 3.23 percent. The Russell 2000 small capitalization index rose 2.81 percent this week.
• The Hang Seng Composite rose 0.88 percent; Taiwan gained 1.10 percent while the KOSPI appreciated 1.36 percent.
• The 10-year Treasury bond yield fell 11 basis points this week to 2.58 percent.

Domestic Equity Market

The S&P 500 powered ahead by more than 2 percent this week as the government shutdown and the debt ceiling impasse reached a temporary solution, and earnings were generally well received. Earnings season kicked off in full force this week, and judging by initial results, the market liked what it saw. One interesting angle to the rally this week was that non-cyclicals tended to outperform, with telecom and healthcare among the leaders.

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Strengths

• The telecom sector was the best performer this week as Verizon Communications rose by more than 6 percent with third-quarter earnings better-than-expected, driven by wireless revenues.
• The financials sector also rallied this week as earnings reports were well received. Standout performers included Charles Schwab, Blackrock, American Express and Morgan Stanley. All four companies reported earnings and all rose by at least 6 percent.
• Google was the best performer in the S&P 500 this week rising 16 percent. The company beat earnings estimates on better mobile-ad revenue and optimism is high regarding future monetization of this trend.

Weaknesses

• The utilities sector was the worst performing group this week but rose nearly 1 percent for the week. This is a defensive sector that simply lagged in a strong market.
• It was a tough week for managed care companies, with UnitedHealth Group disappointing just as the market was growing accustomed to an earnings beat and raise. It did not continue in this quarter, taking the entire industry down with it.
• Teradata Corp. was the worst performer in the S&P 500 this week, falling 19.47 percent. The company preannounced disappointing quarterly results and cut their full year outlook. The company did not provide many details, leaving unanswered questions leading into the scheduled October 31 earnings report.

Opportunity

• The current macro environment remains positive as economic data remains 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.
• The improving macro backdrop out of Europe and China could be the catalyst for a rally into year end.

Threat

• A market consolidation could occur in the near term after such a strong year.
• Higher interest rates are a threat for the whole economy. The Fed must walk a fine line and the likelihood for policy error is potentially large.
• The debt ceiling and government shutdown has passed, but the economic fallout will likely be felt throughout the next weeks and even months as it negatively affects upcoming economic data releases.

The Economy and Bond Market

Treasury bond yields fell this week as the government reopened and the debt ceiling was raised, lifting the overhang of potential treasury default. Yet another outcome of the political wrangling is the likelihood that any tapering of quantitative easing (QE) will be delayed, possibly into next year. This was also a factor in bonds rallying this week. For a few months we have commented on the increasingly synchronized global recovery and this week we received more confirmation with strong results from the German ZEW investor sentiment index, which shows economic expectations roughly at four-year highs.

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Strengths

• The German ZEW investor sentiment index shows economic expectations are hitting close to four-year highs. This is a key investor sentiment index for Europe.
• European car sales rose 5.5 percent in September, the biggest increase in two years.
• China’s third quarter GDP accelerated to 7.8 percent year-over-year, and affirms the improving economic situation in China. This reading is key for Europe and many emerging market countries.

Weaknesses

• The government shutdown will likely have a negative impact on October and fourth quarter economic data.
• The Bloomberg Consumer Comfort Index fell to a two-year low this week. The likely culprit was the political shenanigans in Washington, DC.
• The Federal Reserve’s beige book reported signs of economic slowing in certain parts of the country.

Opportunity

• Despite recent conflicting commentary, the Fed continues to remain committed to an overall accommodative policy and is unlikely to raise interest rates in 2013 or 2014.
• Key global central bankers remain in easing mode such as the European Central Bank, the Bank of England and the Bank of Japan.
• The government shutdown damage is probably done and will likely push QE tapering into 2014.

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 $1,316.18, up $44.07 per ounce, or 3.46 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 5.56 percent. The U.S. Trade-Weighted Dollar Index lost 0.93 percent for the week.

Strengths

• Gold rose nearly 3 percent on Thursday following the resolution reached in Congress avoiding U.S. government default. However, as James Steel of HSBC argues, the resolution left investors sufficiently uncertain as to whether the suspension of the debt ceiling only delays another showdown in Congress come February. Yet, another important factor that acted to move gold on Thursday was a trade in the early hours of the New York morning, when gold trading is very thin, and a wave of buy orders worth over $2.3 billion surged into the market. Prices soared, puzzling many traders who have been rattled by a series of similarly abrupt, and largely unexplained, trade surges over the past two weeks. The key difference this time around is the fact that the overnight spike occurred at around the same time as Chinese rating agency Dagong’s downgraded the United States credit rating to A- from A. Reuters reports the agency suggested that, while a default has been averted by a last-minute agreement in Congress, the fundamental situation of debt growth outpacing fiscal income and GDP remains unchanged. Dagong’s ratings are hardly followed outside of China, yet they must have a respectable following capable of a $2.3 billion buy order.
• Mineweb reported that India had imported over 4,000 tons of silver year to date, which extrapolated over the full year, would mean India importing over 6,000 tons in 2013, or over three times last year’s imports. Not only has silver demand risen, gold premiums surged in China and India indicating continued strong physical buying from Asian consumers. Gold premiums in India hit a record $100 per ounce as the decline occurred amid India’s key gold buying season ahead of the gold-buying holiday, Diwali. The triple-digit price premium is a reflection of the inability of local merchants in India to secure supplies of imported gold.
• VTB Capital reports Russia’s first gold-backed ETF “The FinEx Physically Held Gold ETF fund” has been launched by FinEx Group and the Moscow Exchange. The new ETF is listed on the Moscow Exchange and cross-listed on the Irish Stock Exchange. The new ETF is following a similar product launched in Shanghai, while seeking to benefit from Russia’s increasing gold jewelry demand which rose 7.6 percent in 2012.

Weaknesses

• St. Joseph Partners weekly gold review brought to our attention an interview with Paul Singer, founder of $20-billion Elliott Management Corporation, which has had only two down years since its inception in 1977, and whose returns have roughly exceeded the markets by 40 percent over that period. In the interview, Singer remarks that his company has direct beneficial owners of about 130 million people, who in turn control several trillion dollars. His clients range from sovereign wealth funds to pension funds and endowments, meaning he has a wide investor base. However, the most concerning comment of his interview is the fact that out of his client base, Singer has yet to find one who has any position hedging them against inflation. Singer as a seasoned market veteran is aware that the first wisps of inflation are hard to detect, but those wisps may cause a self-reinforcing move in markets and have the potential to cause an “electrifying” move in gold because of the narrow, non-expandable supply of gold. Singer states that those who are under-invested in gold, and who think they can predict when the tide will turn, are making a large mistake.
• Scotia Capital predicts most mining company gold reserves and resources will be generally lower for the upcoming year-end reserves estimates as gold price assumptions will be lower than 2012 reserve estimates. In general, Scotia Capital also expects reserves will decline as higher cost ounces are removed, with the silver lining that these will result in an overall improvement in grade and profitability.
• Colossus Minerals is losing investors’ patience as its balance sheets wear thin, according to Haywood. Colossus Mineral’s Serra Pelada project in Brazil has encountered significant technical challenges brought on by water and challenging ground conditions. Haywood believes the options for raising new capital are few and expect that any future cash injections would likely be arranged under highly punitive terms. With the prospect of adding further financial burden to what is already a leveraged capital structure in the context of a soft metal price environment is of great concern to the analysts at Haywood. Given management’s failure to budget and operational challenges that remain, Haywood downgraded Colossus to a sell recommendation.

Opportunities

• Over the past 20 years, gold bullion is down 2 standard deviations (sigma) year-over-year as of October 11, 2013. A reading of 2 sigma or lower is an extremely rare occurrence, happening only 21 times over the last 20 years, or 0.04 percent of the time. The most curious fact is that these 21 occurrences all happened within the last four months. This analysis leads us to believe that gold is in extremely oversold territory and mathematically due for a reversal toward the mean. Often, when gold prices plummet, fear takes over and investors forget our recommendation to own 5 to 10 percent gold in a portfolio. Gold is a diversifier for almost every portfolio, and should be held as a store of value. We argue gold should not be considered as a way to get rich quick because the inherent volatility is too high.

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• The gold market has been hijacked by big sellers of paper gold according to Jeff Nichols, adding these transactions are being made with “nary an ounce of physical gold actually changing hands.” He warns “gold remains vulnerable and possibly quite volatile…but it is becoming increasingly attractive to long-term investors with a significant rise in the price all the more likely over the next three-to-five years.” The rationale is that the U.S. Fed continues to duck tapering, indirectly pumping more and more dollars into the economy. In addition, the U.S. economy is perhaps less robust than many observers believe. Yet the most important reason is the continuing demand in the East. Consider this: The U.K. exported 98.2 tons of gold to Switzerland in August 2013, roughly coincidental with the amount of bullion redeemed from gold-backed ETF products, which is transformed into bars and other products more conducive to Asian consumers. Gold imports from these two countries are set to reach record highs this year, even in the face of massive portions of gold being smuggled into the countries.
• John Hathaway, a renowned gold portfolio manager, commented last week how in his opinion a couple of bullion banks are using their balance sheets to sell gold they don’t possess. These entities are moving a major market by making leveraged bets, but they do it without having to take physical possession and short the way it would be done on a normal exchange. Perhaps these players believe that gold is such a small part of the global investment scene that it can be manipulated for their own benefit with total impunity. What they ignore is the fact that there are gold believers with virtually unlimited pockets – the Chinese in particular – who must be feeling every day is Christmas as they rake in physical gold at depressed prices, knowing that at some day in the future, the yellow metal’s price will soar. It will result in a massive short squeeze for these market manipulators.

Threats

• Tom Kendall, head of Precious Metals research at Credit Suisse, speaking on Mineweb’s Gold Weekly podcast, said the problem gold has at the moment, "is that even if you are an investor who believes that you should have a significant allocation to gold as a hedge against inflation or some other… risk hedge, you probably accumulated that allocation through 2009, 2010, 2011 and you don’t need to add to it at the present time, or until there is a feeling that there is a greater prospect of inflation on the horizon." Looking to China, he says, "the market certainly is not nearly as strong as it was during the first half of the year and the Chinese are as reluctant as any other buyer to buy heavily in a market which tends to be trending downwards.” In our opinion Mr. Kendall has not been reading the news lately, especially given HSBC and others are reporting gold demand across Asia will keep expanding as inflation spurs investment purchases. HSBC adds that in markets like India, Vietnam and China, consumers have few tools with which to protect their savings against rising prices, and “In recent years, rising inflation stoked demand for gold in a number of [these] markets.” To go even further, Kendall must have missed Gluskin Sheff David Rosenberg’s latest reports in which he has gone to great lengths to show the prospect of inflation is quite real, and already among us. To paraphrase just one of his most recent commentaries: Rosenberg shows it cost $9 to go to the top of the Empire State Building in 2001, today it costs $44. The MoMA entrance cost $10 in 2001, and now it costs $25. A taxi ride from JFK Airport to Manhattan cost $30 then, but now it starts at $52. If you were to plug those rates into the CPI calculation, we’d have 4.1 percent headline inflation, and 5.2 percent core inflation.
• Dundee Capital Markets reports that as we head into the final months of 2013, the season for tax loss selling is quickly approaching, which means a large number of funds and retail investors will be wrapping up their tax years in the calendar fourth quarter. Given the generally poor performance observed in precious metal equities over the past year, gold stocks have become likely candidates for tax loss selling this year.
• Last Friday’s large drop in gold was a result of one tremendously large sell order, which offered 500,000 gold ounces or about $650 million dollars for sale at market price. According to Seeking Alpha contributor Hebba Investments, no seller trying to get a fair price for their gold would sell in such a way, leading to the conclusion that the trade was made to ignite negative momentum. It is important to put the sell order into context given the size of this trade compared to the size of COMEX gold registered inventories. The order represents almost 70 percent of gold available for delivery at COMEX and would be most certainly impossible to deliver. To make it even more dramatic, this took less than one minute, meaning essentially all of the COMEX gold eligible for delivery was sold by one trader in less than one minute. If that doesn’t catch a regulator’s attention for market manipulation, then nothing will.

Energy and Natural Resources Market

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Strengths

• Average imports of crude oil in September stood at 6.25 million barrels per day (bpd), up 28 percent on the year and topping the previous record of 6.15 million bpd set in July. Net imports of 6.23 million bpd show that China overtook the United States in September as the world’s biggest net oil importer, a trend which the U.S Energy Information Administration said would continue through 2014.
• Copper imports by China, the world’s top consumer of the metal, reversed the fall in August and jumped 18 percent in September, as importers boosted orders ahead of a seasonal pickup. Imports of anode, refined copper, alloy and semi-finished copper products reached 457,847 metric tons in September, the highest since March 2012 and up 16 percent from a year ago. Copper stocks in bonded warehouses have fallen about 60 percent from a record high of around 1 million metric tons in the year’s first quarter, traders estimate.
• China, the world’s top consumer of iron ore, imported a record 74.58 million metric tons in September, up 8 percent from August and an increase of 15 percent on an annual basis. Steel production gained 7.8 percent in the first eight months, more than double the growth of 3.8 percent forecasted by analysts in a Reuters poll in July.

Weaknesses

• West Texas Intermediate crude posted a second weekly decline, finishing the week near $101 a barrel, as stronger growth in China failed to offset price losses during this week’s U.S. debt impasse.
• NYMEX natural gas closed down on the week as mild weather forecasts weigh on heating demand.

Opportunities

• Saudi Arabia, the world’s largest crude exporter, is making “massive investments” as it seeks a production buffer to guard against swings in global oil prices, while addressing a decline in output from its older fields. Saudi Arabian Oil Co., the state-owned producer known as Saudi Aramco, plans to maintain spare output capacity of more than 2 million barrels a day, according to Chief Executive Officer Khalid Al-Falih. The Dhahran-based company raised its annual capital budget tenfold to $40 billion over the last decade, and in the past two years has adjusted its daily production by more than 1.5 million barrels. “We are on track to increase the average of our conventional oil recoveries to 70 percent, which is more than double the current world average,” Al-Falih said at the World Energy Congress in Daegu, South Korea. “Resources are in fact, abundant.”
• Coal will surpass oil as the key fuel for the global economy by 2020 despite government efforts to reduce carbon emissions, according to energy consultancy firm Wood Mackenzie. Rising demand in China and India will push coal past oil as the two Asian powerhouses will need to rely on the comparatively cheaper fuel to power their economies. Coal demand in the United States, Europe and the rest of Asia will hold steady. Global coal consumption is expected to rise by 25 percent by the end of the decade to 4,500 million tons of oil equivalent, overtaking oil at 4,400 million tons, according to Wood Mackenzie (Woodmac) in a presentation at the World Energy Congress. "China’s demand for coal will almost single-handedly propel the growth of coal as the dominant global fuel," said William Durbin, president of global markets at Woodmac. "Unlike alternatives, it is plentiful and affordable." China, already the top consumer, will drive two-thirds of the growth in global coal use this decade. Half of China’s power generation capacity, to be built between 2012 and 2020, will be coal-fired, continued Woodmac.
• North America pushed Australia out of the top spot for new Asian investment in gas development, with most of the supply from existing Australian projects sold off and buyers hunting for cheaper fuel, industry executives said this week. Australia has been, for the past several years, the global hotspot for Asian gas investors, with $190 billion in liquefied natural gas (LNG) developments under way to take advantage of its proximity to top buyers such as Japan and South Korea. However, its seven current projects have been parceled out to off-takers and equity stakeholders, and no new projects are expected to move forward within the next year. That slowdown and the pull of cheap, abundant North American shale gas has turned heads towards projects just setting up for development in the U.S. and Canada that are aiming to fill Asia’s still-burgeoning LNG demand.

Threats

• Angola, Africa’s largest oil producer after Nigeria, is imposing a consumption tax on petroleum companies that will raise some costs by as much as 10 percent, according to government documents. The law, which comes into effect with its publication that may happen as early as today, requires companies to follow a tax schedule that adds 5 percent to most services and supplies, and double that for equipment rentals, a presidential decree showed. Angola set up a special tax reform branch in 2010 to work with government ministries on increasing revenue and closing loopholes in a bid to simplify taxation. The southwest African country, a member of the Organization of Petroleum Exporting Countries, pumped about 1.74 million barrels a day in September from offshore fields, according to data compiled by Bloomberg.
• Copper supply will exceed demand by 340,000 metric tons in 2013 and post similar surpluses in the next two years, according to Wood Mackenzie. Copper supply will increase by 1 million tons next year and by another 800,000 tons in 2015 as mines open and ramp up, Richard Wilson, chairman of metals at Wood Mackenzie said. Copper will bottom in 2016 at about $2.80 per pound, he added. If prices dip below that level, China’s State Reserve Bureau could buy copper to replenish stockpiles. Inventories of the metal in bonded warehouses in China are estimated at 400,000 tons to 450,000 tons, he said. They shrank by 300,000 tons this year.

October 17, 2013 The Secret Ingredient to an Indian Wedding	October 15, 2013 Being Contrarian Could Lead to Lucrative Energy Plays	October 7, 2013 The Fire Fueling Gold

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

Emerging Markets
 

Strengths

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• This week a Bloomberg special report highlighted that emerging market technology stocks are at an all-time high, exceeding the highs reached during the dot-com bubble in 2000. The chart above shows the MSCI Emerging Markets Information Technology Index climbed to a new record, surpassing the previous all-time high in March of 2000. There is additional comfort in holding these stocks today given that the index is currently valued at 2.1 times net assets, much more conservatively than its multiple of 6.6 times in March 2000, notes Bloomberg. In addition, since the dot-com crash, technology stocks have turned from speculative bets into profitable companies that benefit from growing demand for online services and smartphones.
• Polish industrial output rose 6.2 percent from a year earlier in September, accelerating from 2.2 percent the previous month, thus posting the second-fastest increase since January 2012. This could be a sign that recovery in the European Union’s economy is gathering pace. Despite a portion of the higher output being attributed to an extra working day in September, the data still shows clear signs of improvement.
• China’s third quarter GDP growth was 7.8 percent and in line with the market expectation. Industrial production was up 10.2 percent, also in line with the market expectation. Retail sales growth for the month was strong at 13.2 percent, though slightly lower than the market expectation of 13.5 percent. Fixed asset investment was up 20.2 percent for the year, slightly lower than the market expectation of 20.3 percent. This data looks particularly strong given that China is in the process of transforming the economic structure from investment driven to consumption based, and also from low-end manufacturing to high-end manufacturing and technology driven. More significantly, consumption sectors now count for 45.5 percent of the economy, which is larger than 45.3 percent for investment and manufacturing sectors, evidence of success in rebalancing.
• China’s new bank loans for September were Rmb 787 billion versus the consensus of Rmb 675 billion and Rmb 711 billion in August. Money supply (M2) growth was 14.2 percent and in line with the market expectation. Total social financing (TSF) softened to Rmb 1.4 trillion from Rmb 1.57 trillion in August, due to a drop of new non-discounted bills, with year-over-year growth of outstanding TSF at 20.4 percent. Overall it is a stable monetary policy, likely without easing but also without tightening.
• Passenger vehicle sales in China went up 25 percent in September and up17.3 percent for the year-to-date period. The auto sales momentum could continue into the fourth quarter. China heavy truck sales also saw acceleration by 59 percent in September due to improving demand in construction and transportation.
• China’s rail freight volume growth improved to 8.1 percent in September from 8.0 percent in August, and was up 3.2 percent month-over-month.
• Overseas workers remittance in the Philippines was up 6.8 percent in August.

Weaknesses

• The Russian economy will post GDP growth of nearly zero in the third quarter this year, Deputy Economic Development Minister Andrei Klepach said at a meeting of the State Duma’s budget committee. Mr. Klepach added that the 1.8 percent economic growth estimate for this year is now an optimistic one, given that an extrapolation of the current tendency is more indicative of 1.5 to 1.6 percent growth in GDP.
• Mexico’s ANTAD retail business association said on Monday that same store sales fell 6.2 percent in September from a year earlier. The association includes the retail chains Walmex and Soriana, as well as other department stores.
• Brazilian central bank’s economic activity index rose only 0.08 percent in August from July, missing the median analysts’ estimate of 0.2 percent growth in a Reuters’ survey. After modest acceleration in the second quarter, the Brazilian economy is struggling to maintain steady growth. Persistent high inflation hurt industrial competitiveness and led to a 200 basis point increase in the benchmark rate over the last five months.
• China’s September exports were down 0.3 percent due to a high base in the same period last year, as well as slowing trade growth with the United States, the European Union and South Korea. The market had expected trade growth of 5.5 percent in the month. Currency depreciation in the ASEAN countries along with Rmb appreciation affected China’s trade growth as well. Nevertheless, imports were up 7.4 percent, better than the market expectation of 7 percent, due to robust domestic demand.
• China’s September consumer price index (CPI) was 3.1 percent, higher than market expectation of 2.8 percent and 2.1 percent in August, due to food price inflation caused by hot weather and flooding in southern China. However, prices of industrial materials improved to -1.3 percent versus the market expectation of -1.4 percent and -1.6 percent a month ago, showing slower destocking.

Opportunities

• Emerging European equity markets are poised for a string of outperformance versus the emerging markets benchmark. After many years of underperformance, the forces of mean reversion could produce a period of medium-term outperformance for these stocks. According to BCA Research, the valuation ranking of emerging European equities provides these markets with an important margin of safety against negative surprises, compared with many other emerging markets. In addition, the majority of emerging European nations show improving external balances, suggesting that these economies are much less reliant on foreign savings for economic growth. This should help emerging European economies outperform in times of diminished appetite for emerging market assets.

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• Russia aims to more than double its information technology (IT) exports to $11 billion by 2020, up from this year’s IT exports which are now approaching $5 billion to a decrease in the economy’s dependence on commodity exports, notes the Telecommunications Ministry. Deputy Minister Mark Shmulevich stated that the Telecommunications Ministry will support joint projects by Russian scientific institutes and local IT companies to develop technologies such as speech and video-image recognition, robotics, cyber-security and cloud services, as seen in the strategy.

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• As shown in the chart above, the birth rate in China has gone up since 2011 due to the vast base of those who were born in the 1980s and were of child-bearing age. China’s one-child policy will soon be adjusted since many believe that the policy is creating a demographic burden as the population ages. This could be the beginning of a rising demographic cycle in China, which will bode well for child-targeted products.

Threats

• Asia’s exporters are failing to benefit from a recovery in advanced nations. As China’s exports unexpectedly fell last month, overseas shipments from Taiwan and South Korea also declined, according to Bloomberg. Asia’s export-led growth engine is showing signs of exhaustion, according to Frederic Neumann, Co-Head of Asian Economic Research at HSBC. Neumann argues that disappointing trade data may be evidence of a loss in competitiveness. As Europe emerges from its longest recession on record, and manufacturing grows in the U.S. at the strongest pace in more than two years, one could expect export-driven economies to become direct beneficiaries. However, the region’s export recovery appears to be faltering.
• HSBC Emerging Markets Research published a report this week showing consumer staples in Latin America are expensive and over-owned, following outperformance in the recent past. HSBC believes we are at a juncture when investors should be prepared to pay less for defensive sectors, especially consumer staples, as growth differentials narrow and the risk-free rate rises. Hence, the consumer staples sector is the largest underweight in its Latin American model portfolio, while the global cyclicals sector is the largest overweight.
• China has shown strong GDP growth in the third quarter, with powerful property sales as one of the drivers. Strong sales of auto, home appliance and furniture are correlated with property sales. If the government curbs price increases in the housing market, those sectors could be affected.

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.

By clicking the links above, you may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time. Note that stocks and Treasury bonds differ in investment objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, and tax features.

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

Holdings as a percentage of net assets as of 09/30/13:
Wal-Mart de Mexico SAB de CV: 0.0%
Verizon Communications Inc.: All American Equities Fund, 1.02%
Charles Schwab Corp.: 0.0%
Blackrock, Inc.: 0.0%
American Express Co.: 0.0%
Morgan Stanley: MegaTrends Fund, 1.76%
Google Inc.: All American Equity Fund, 1.70%
UnitedHealth Group Inc.: 0.0%
Teradata Corp.: 0.0%
FinEx Physically Held Gold ETF: 0.0%
Colossus Minerals Inc.: 0.0%
AT&T Inc.: All American Equities Fund, 1.18%
Proctor & Gamble Co.: 0.0%
Clorox Co.: 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 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 Producer Price Index (PPI) measures prices received by producers at the first commercial sale. The index measures goods at three stages of production: finished, intermediate and crude.
ZEW German Expectation of Economic Growth is a survey on the question of economic growth in six months.
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.
MSCI Emerging Markets Information Technology Index which is designed to reflect the performance of the shares of certain companies in global emerging markets. The shares are issued by companies in the information technology sector.
The Economic Activity Index of the BCB (IBC-Br) incorporates estimates for the monthly production of the three sectors of the economy, as well as for taxes on products, and constitutes important coincident indicator of economic activity.
M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.
The S&P 1500 Composite is a broad-based capitalization-weighted index of 1500 U.S. companies and is comprised of the S&P 400, S&P 500, and the S&P 600. The index was developed with a base value of 100 as of December 30, 1994.