Understanding the Rise of China

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

If the sweeping economic reforms planned by Chinese leaders during the Third Plenum can be our guide, it looks to be a promising decade for global investors. Details released this week confirmed President Xi Jinping’s concerted efforts to move China toward a market-based economy that mirrors the West.

The plan’s comprehensive nature and the level of clarity evidently pleased investors, as many Chinese stocks experienced a pop this week. We’re pleased U.S. Global Investors’ China Region Fund (USCOX) also participated:

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See complete fund performance here.

We believe the positive effect on the equity markets will not be short-lived or limited. A component of U.S. Global’s investment process is to closely follow government policies because they tend to be precursors to change. Xi’s policies, if successfully implemented, “will undoubtedly have profound long-term implications for the Chinese economy and society at large,” spanning economic, political, cultural, social and environmental issues, says BCA.

Some say the sweeping reforms will have an impact similar to the momentous changes following the Third Plenary Session in 1978, when Deng Xiaoping instilled the concept of free markets and ushered in a new economic era.

“Covering 15 major areas and 60 key points, the document is specific, substantial, comprehensive and actionable,” says Jefferies. The changes are so significant, it “rivals that of 1978, when Deng Xiaoping declared the opening of China,” says the research firm.

I asked Michael Ding, CFA, portfolio manager of the China Region Fund, to share his thoughts regarding these sweeping changes and the potential effects on the markets. He has fascinating insight on this subject, as Michael grew up in rural Dalian and is of the same generation as the nation’s leaders. This age group was raised in the era of severe government controls, such as food rations; still fresh in their leaders’ minds was the stagnation of the country.

Improving market inefficiencies is one significant and positive effect, says Michael. Currently, government interventions prevent companies from setting competitive prices. Releasing control should allow the market to decide what prices should be and where labor and capital should be allocated.

BCA says that three areas likely to see improvements in pricing mechanisms include money, resources and land. Changing the pricing mechanism of money influences the exchange rate and interest rates. The research firm says that “the proposed reforms involve freer cross-border capital flows, improved convertibility of the RMB and eventually a market-driven floating exchange rate system.” In addition, more liberal interest rates should allow markets to price capital based on risk and supply and demand, says BCA.

When it comes to resources, the government plans to reduce subsidies and “administrative meddling” in several sectors, including water, petroleum, natural gas, electricity, transportation and telecommunications, which should allow for more competition, according to BCA.

The reforms affecting the pricing mechanism of land will likely allow for the equal treatment of rural and urban lands. Whereas the government formerly seized rural land, people who live in rural areas in the future could “monetize the rising value of rural residential land” and ease supply shortages in major cities, says BCA.

Included in the considerable social changes are relaxing the one-child policy and reforming the hukou system. Hukou is China’s residency status system. Now, couples will be allowed to have two children if one parent is an only child. This change wasn’t a surprise to us, as it follows the rise we’ve seen in birth rates in recent years. As you can see below, the number of annual births in China has been increasing since 2011. In many cases, with rising incomes, couples can afford to pay the required fine.

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Changing the one-child policy could be the beginning of a rising demographic cycle in China, which bodes well for a wide range of companies. The country may see an increase in demand for residential housing and social housing, income protection products, and child-targeted products, such as infant formula. The change may also boost demand for larger vehicles, such as sport-utility vehicles, and Internet companies could benefit from increased users in the years ahead, according to Citi Research.

Demand on resources will be great, as each person requires a huge supply of resources throughout his or her lifetime. Consider that in the U.S., over the course of a lifetime, each person needs 72,556 gallons of petroleum, 6.63 million cubic feet of natural gas, 978 pounds of copper, and 27,416 pounds of iron ore, according to the Minerals Education Coalition. Even though China currently uses fewer resources per capita compared to developed countries, the nation is quickly catching up to developed world levels.

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The decision to reform the hukou is also equally important for resource investors. The plan will gradually allow rural migrants to become official city residents. While it may be expensive, “the Party has no choice but to provide migrant workers and their families with equal access to education, health care and other urban social services,” writes Andy Rothman from CLSA.

We’ve discussed the incredible implications for China. In a previous commentary, I wrote:

If the government reforms the hukou, it is estimated that 600 million people might move to the cities over the next 20 years. This includes 300 million migrants becoming “new urban residents” and 300 million rural residents moving to urban areas by 2030, says Citi Research. According to its data, “urbanization could bring another 150 million surplus rural laborers to the cities.”

With more workers living in cities, property sales in China’s 600 third-tier cities could significantly benefit from hukou reform, as about 100 million migrant workers currently reside in these cities.

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The Power Couple of the East

This week, Americans are reflecting on the 50th Anniversary of the assassination of John F. Kennedy. His death was devastating, as it essentially ended the Camelot reign full of potential and promise for the country’s future.

Today, Chinese President Xi Jinping and First Lady Peng Liyuan are ushering in a Camelot era for China. Similar to the Kennedys, the couple symbolizes the economic and ever-advancing strength of the country.

Xi, a princeling, is the son of Xi Zhongxun, who was among the first generation of Chinese leadership. His father’s claim to fame was in creating a special economic zone in Shenzhen, transforming the area from a small village to one of the fastest-growing cities in the world and one of the busiest container ports in China.

First Lady Peng is very familiar with the limelight, as she was once more famous than her husband, singing patriotic songs in the People’s Liberation Army. Peng is very different from previous Chinese first ladies, who were typically invisible to the rest of the world. As the rest of the world gets to know her, the first lady will likely broaden the appeal of China.

Looking ahead, Xi, together with the new leaders, appears to have the “confidence and determination to lead the nation,” according to Jefferies. We look forward to watching the new leaders put their reforms in place, and agree with Jefferies when they suggest that China could be “on the cusp of a massive multiyear bull run.”

What Investors May be Missing in Europe

With the recovery in Europe underway, there have been a record number of flows into European equities. We believe a better strategy to gain access to the European recovery is to head east. Watch the webcast now to hear Portfolio Managers John Derrick and Tim Steinle talk about ways to potentially profit.

Index Summary

• Major market indices finished higher this week.  The Dow Jones Industrial Average rose 0.65 percent. The S&P 500 Stock Index gained 0.37 percent, while the Nasdaq Composite advanced 0.14 percent. The Russell 2000 small capitalization index rose 0.78 percent this week.
• The Hang Seng Composite rose 2.91 percent; Taiwan declined 0.74 percent while the KOSPI gained 0.03 percent. The 10-year Treasury bond yield gained 4 basis points this week to 2.74 percent.

Domestic Equity Market

The S&P 500 Index erased its decline earlier in the week, rebounding strongly to another all-time high, surpassing the 1,800 level for the first time.  Positive economic data during the week offset concerns over the timing of the tapering of the Federal Reserve’s stimulus program, as weekly jobless claims fell to the lowest level since September and retail sales came in better than expected.  To date, the S&P 500 is up over 160 percent since the market bottomed in March 2009 at the nadir of the financial crisis.  

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Strengths

• The healthcare sector was the strongest sector this week and was led by biotechnology stocks.  Biogen was the top performer in the S&P 500 after its multiple sclerosis drug Tecfidera won patent approval in Europe. 
• Financials also outperformed this week and were led by equity and commodity exchange stocks, and large banks such as Bank of America, JPMorgan Chase and Citigroup.  Additionally, insurance stocks were aided by the gain in the 10-year government note this week.  Assurant was one of this week’s best performers.  
• Consumer discretionary stocks, such as Wyndham Worldwide and Starbucks, outperformed, due in part to strong retail sales numbers released this week. 

Weaknesses

• The telecommunication services and utilities sectors were among the worst-performing groups for a second week as defensive areas of the market remained out of favor.
• Real Estate Investment Trusts (REITs) was the worst-performing industry group in the S&P 500, mainly in response to a rising 10-year government yield.  Weyerhaeuser underperformed the broad index by approximately 100 basis points.
• GameStop was the worst performer in the S&P 500 this week, falling 11.8 percent. The video game retailer gave cautious guidance for the fourth quarter despite strong demand for the introduction of new game consoles.

Opportunities

• The current macro environment remains positive as economic data is robust enough to give investors confidence in an economic recovery, but not too strong as to force the Fed 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.

Threats

• 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 potential for policy error is potentially large.

The Economy and Bond Market

Treasury bond yields rose by 4 basis points this week as economic data came in better than expected, further encouraging outflows from fixed-income securities into the broader equity market.

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Strengths

• Weekly applications for unemployment benefits fell by 21,000 last week to a seasonally adjusted 323,000, the lowest level since late September. Analysts were expecting jobless claims to fall to 335,000. The less volatile four-week average fell 6,750 to 338,500 and has dropped for the third-straight week. Both figures are near prerecession levels.
• Retail sales rose 0.4 percent in October, handily beating economists’ expectations. Also, sales for September were revised upward, from a decline of 0.1 percent to an increase of 0.5 percent.
• German business confidence rose to the highest level since April 2012, supporting the view that economic growth could increase going into the new year.

Weaknesses

• Stocks reacted negatively on Wednesday after the minutes from the latest Federal Reserve meeting showed the central bank could cut back on its bond-buying program even if the job market doesn’t improve dramatically.
• The HSBC China Flash Purchasing Managers’ Index (PMI) fell to a two-month low of 50.4 in November. This missed expectations for a modest decline to 50.8, and was lower than 50.9 the previous month. The latest manufacturing report showed that export orders fell, suggesting a weaker environment.
• The National Association of Realtors says home re-sales fell 3.2 percent last month from September to an annual pace of 5.12 million. That’s down from a 5.29 million pace in August and the slowest since June.   

Opportunities

• 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 (ECB), Bank of England and the Bank of Japan. An ECB policymaker commented this week that the ECB could adopt negative interest rates or quantitative easing to lift inflation.
• There remain many moving parts to the taper decision, and it is very possible that tapering could be delayed well into 2014.

Threats

• Inflation in some corners of the globe is getting the attention of policymakers 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 selloff 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 $1,244.33, down $45.87 per ounce, or 3.56 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 7.83 percent. The U.S. Trade-Weighted Dollar Index slipped 0.19 percent for the week.

Strengths

• Pretium Resources reported that out of 8,090 dry tonnes of excavated material from the Valley of the Kings Bulk Sample Program, 4,215 ounces of gold were produced.  There are still 1,815 wet tonnes of material that remain to be processed before a final tally of the 10,000 tonne sample is completed. Pretium was expecting about 4,000 total ounces to be recovered from the sample to test the validity of its resource estimate on the high-grade ore body.  The company’s share price fell significantly when one of its two independent companies, each conducting different estimates, resigned from the project.  Pretium’s share price surged 82 percent on the results. 
• Although somewhat delayed, billionaire hedge fund manager John Paulson maintained his gold holdings unchanged in the third quarter of 2013, according to his filling on November 14.  This parallels what we have seen from other major gold funds in third-quarter filings, reflecting the fact that redemptions were very subdued, as across-the-board selling of top holdings did not repeat the mass liquidations seen in the second quarter. In addition, George Soros’ third-quarter filings revealed that he has moved back into gold stocks and has been decidedly bearish of the broader equity market recently.
• Demand for gold bars, coins and jewelry hit a record during the third quarter, according to the World Gold Council. The strong demand comes from both China and India, accounting for about 60 percent of all gold demand. Central bank gold demand also continues to move higher. Russia now holds the second-largest reserves in the world, with over 400 million ounces of gold. Finally, we are now entering a time of seasonal strength for consumer gold purchases due to the Christmas holidays in the United States and Europe, the Lunar New Year in Asia, and also Valentine’s Day in the U.S.

Weaknesses

• Organized price manipulators are still trying to panic investors into selling off their gold holdings, after the market potentially recorded the biggest part of its correction.  On November 20 the COMEX had to suspend trading of December gold futures for about 20 seconds after the contract’s price fell about $11 within a minute. This happened before normal trading hours in the U.S.  As often as this has occurred in recent weeks, it’s amazing that regulators ignore these multibillion-dollar speculative trades. Shareholders’ wealth in some of these publicly-listed firms could be quickly wiped out should the gold price rise.
• Citi Research, in its annual commodities forecast for 2014, suggests that we will have strong physical buying (much from Asia) over the next year, limiting the downside for gold prices. However, the western buyers who are getting out of the market will likely continue to do so. Citi Research specifically pointed to two reasons why these buyers are getting out of the gold market: 1) Inflation concerns and expectations have all but evaporated, and 2) The opportunity cost of holding gold as opposed to other assets is high. As a result, we are seeing funds moving out of gold and into other asset classes.

Opportunities

• Duan Shihua, a partner at Shanghai Leading Investment Management, says that gold demand will remain strong in China. There are very few places to put money in China. With the share market down and the government nudging people away from real estate, gold should remain a favored investment choice. Gold consumption should surge by 29 percent to a record 1,000 metric tonnes in 2013, based on estimates provided by 13 analysts.
• TD Securities, in its Precious Metals Outlook from November 19, outlined some positive data points summarizing third-quarter results. Earnings were generally better than expected despite the gold price posting its lowest average quarterly price since the third quarter of 2010. TD noted that 21 out of 27 producers that it covers met or exceeded consensus earnings per share estimates. Cash costs are declining faster than expected and all-in sustaining cost is declining. Finally, production growth is picking up, and on a 12-month rolling basis it is up 3 percent among the large cap producers.
• The ratio between the NYSE Arca Gold Bugs Index and the gold price dropped last month to its lowest level since January 2001, when the first of 12 straight annual gains for the precious metal was beginning. The November 20 ratio reading was 3.2 percent above the low.

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Threats

• The Ghanaian government plans to reintroduce a mining windfall tax as Ghana announced they will target economic growth of 8 percent in 2014, seeking to trim its budget deficit by 8.5 percent of gross domestic product. In 2012, a mining bill to impose a 10 percent profit tax was not considered by parliament.
• The largest U.S.-based gold ETF holdings dropped to 863.01 metric tonnes, the lowest since February 2009. Selling from the ETF has been a major headwind this year as the Federal Reserve indicated it was considering an exit strategy from its accommodative policies.  According to a Bloomberg survey, Fed policy makers will likely slow the pace of monthly asset purchases to $70 billion from $85 billion at the March meeting. 
• Goldman Sachs again reissued its negative forecast on gold, predicting at least 15 percent in losses next year for the precious metal, as well as iron ore, soybeans and copper. This gloomy report suggests a drop in the gold price to $1,050 for 2014.  Goldman believes that commodities will face increased downside risks even as economic growth in the U.S. accelerates.

Energy and Natural Resources Market

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Strengths

• October U.S. highway awards were the highest in 15 years, gaining 29.2 percent over last year after increasing 11.5 percent in September. On a trailing 12-month basis, awards were up 8.6 percent year-over-year (the strongest trailing 12-month increase since July 2010). The broad 12-month trend has now been positive for nine months in a row. Year-to-date awards are up 6.7 percent year-over-year.
• The energy merger and acquisition market sizzled this week when Devon Energy announced it would buy private company GeoSouthern Energy in a $6.3 billion deal that will accelerate the U.S. group’s shift away from gas and into more lucrative oil production.  The purchase will give Devon significant exposure to the Eagle Ford shale formation in south Texas, one of the heartlands of the U.S. oil boom of the past four years.
• World Steel data show October steel production up 6.4 percent year-over-year. World Steel data released this morning show October steel production of 134.3 million tons, up 6.4 percent from last October’s 126.1 million tons. Sequentially, the daily production rate of 4.3 million tons declined 2 percent from September’s 4.4 million tons per day figure. Once again, the year-over-year growth was primarily driven by China, which was up 10.1 percent year-over-year, but came in 0.5 percent lower on a sequential basis. World Steel production ex-China grew for the second month in a row, with October production of 2.23 million tons up 3.2 percent year-over-year.
• West Texas Intermediate crude rebounded this week from near its lowest closing level in five months as the dollar weakened against the euro following comments on inflation by European Central Bank President Mario Draghi. A weaker dollar typically makes oil more attractive for protecting against inflation. Prices also advanced after SkyNews Arabia reported that Saudi Arabia, the world’s largest crude exporter, said an Iraqi group claimed responsibility for launching a mortar attack on its territory Thursday.

Weaknesses

• The Federal Reserve Bank of St. Louis reported that values for quality farmland saw a decrease of 6 percent from the second-quarter average. Yet on an annual basis, quality-farmland values remain 9.1 percent higher than at the same point last year. While farmland values are still posting gains, many experts expect those double-digit jumps to soon end.
• Germany, the world’s second-largest holder of gold reserves, cut its bullion holdings in October for the second time in five months, data from the International Monetary Fund showed on Friday. Gold holdings by central banks are keenly watched since the group became net buyers in 2010 after two decades as net sellers. The 2008 global economic crisis triggered a wave of official sector interest in gold. Germany’s central bank sold 3.421 tonnes last month and now holds 3,387.247 tonnes of gold, according to the IMF website. Germany is the second largest owner of gold assets after the United States, which holds 8,133.748 tonnes of bullion after a small increase of 0.033 tonnes in October.
• The downturn in the mining sector over the past two years appears to be having a significant impact on the U.S.’s biggest mining equipment supplier, Caterpillar. The company has also been hit by a sluggish U.S. economy which has adversely affected its construction equipment business. The combination has led to plant closures worldwide and major workforce reductions. According to Equipment World, the most recent announcement of the planned shutdown of its Pulaski, Virginia coal hauler plant next year, with the loss of 240 jobs is just the latest in a string of closures – mostly related to mining equipment.  In the past year, the company has announced cuts to its global workforce amounting to around 10 percent, or 13,000 jobs, in order to cut costs. The company’s third-quarter profits were 44 percent down and the company’s CEO, Doug Oberhelman, noted then that the slump in demand for mining equipment accounts for 75 percent of the expected 17 percent decline in total sales from 2012.

Opportunities

• Rio Tinto said proposed economic reforms unveiled this month by China had many positive signals, underpinning continued demand for raw materials, Bloomberg reports. The Communist Party’s third plenum document “contained many positive signals, including the pledge to further open up border areas in the interior and support land reform,” said Jan du Plessis, chairman of Rio, according to notes for a speech in Sydney. “My long-term view of the Chinese economy remains positive and we expect to see continued, robust growth in demand for commodities,” the Bloomberg report stated citing Plessis.
• The Globe and Mail reported that British Columbia Premier Christy Clark is leading a trade mission to Asia that will seek to strengthen ties with energy companies and tap into a fast-growing but crowded investment market. The British Columbia delegation traveled to Beijing where liquefied natural gas will be the focus of discussions. Other stops on the trip will include Seoul and Tokyo. A study released this month by the Asia Pacific Foundation of Canada pointed out that China invested $12 billion in Canada in 2012, placing ninth-highest in a ranking of foreign direct investment. The United States topped the list of major investor countries in Canada with $326.1 billion, or 51.5 percent of the total.
• One of Texas’ oldest oil fields, in decline for decades, has become one of the hottest places in the country to drill for crude, as energy companies create clusters of wells with layers of horizontal branches. The Permian Basin—86,000 square miles centered on Midland, Texas—has been pumping oil since the 1920s, though production peaked at about 2 million barrels a day in the early 1970s. For decades, geologists have known that oil could be found in different layers of rock piled up like a stack of geologic pancakes. But now drillers are starting to tap those layers simultaneously from a single site—and are committing billions of dollars to do so. Occidental Petroleum, the largest producer in the Permian, said it plans to spend $500 million there in 2014 and has created a new "exploitation team" to identify more drilling locations.

Threats

• Mining Weekly Australia reported that junior miners and explorers are still faced with constrained capital markets, with about 41 percent of respondents holding a cash balance of less than A$2 million. This is according to a Grant Thornton report, which also stated that 46 percent of junior miners and explorers would need to raise capital within the next six months, with more than half of the respondents expected to price their next equity-raising at a significant discount to share prices.
• The Ontario government will introduce legislation to permanently ban the use of coal for electricity generation once its last coal-fired plant stops burning the fuel in 2014, Premier Kathleen Wynne said this week. The government will introduce the Ending Coal for Cleaner Air Act in the provincial legislature the week of November 28 to ensure its commitment to end coal-fired generation by December 31, 2014, is protected by law, Wynne said in a statement. Wynne appeared with former U.S. Vice President Al Gore at a public event in Toronto to mark the closure ahead of schedule of coal-burning units at Ontario Power Generation’s Lambton and Atikokan facilities

November 19, 2013 Follow the Leaders: Gold Opinions from New Orleans	November 18, 2013 Dressed to the Nines with Gold	November 13, 2013 In 20 Years, What Country Will Produce the Most Gold?

China Region Fund – USCOX  •  Emerging Europe Fund – EUROX

Emerging Markets
 

Strengths

• The announcement of reform details from the third plenary session of the Communist Party 18th conference last Friday made investors believe that Chinese stocks will be re-rated after lagging behind the global market for the last three years. The reform statement clearly provided policy direction, an implementation road map and measurement specificities, which exceeded market expectations in its swiftness and comprehensiveness. In particular, the market was encouraged by reforms including a two-child policy, the Hukou system, land rights, market price mechanism on money and resources, and state owned enterprises.
• China’s October power generation rose 10.4 percent versus 10.3 percent in September, while industrial power consumption growth came in at 9 percent versus 8 percent in September.
• Malaysia October Consumer Price Index (CPI) inflation rose to 2.8 percent year-over-year, which remains within the target inflation. This was above the consensus of 2.7 percent. 
• Singapore’s third-quarter GDP was revised to sequential expansion of 1.3 percent quarter-over-quarter and 5.8 percent year-over-year.

Weaknesses

• HSBC China Flash November PMI was 50.4 in the expansionary territory, versus market consensus of 50.8 and 50.9 for September. The production index was slightly up at 51.3, but new orders were down at 51 versus September. New export orders were down at 49.4, while raw material inventories and finished goods inventories were both down at 49 and 49.8, respectively, showing weak export and inventory de-stocking in November.
• Guangzhou city followed tier-one cities to raise down payments to 70 percent for second-home purchases. It was also reported that Premier Li Keqiang spoke about unification of property registration. Both news items added pressure on property stocks this week, but a re-rating for the sector may come sooner or later due to depressed valuations and high cash generation and sales growth.
• Association of Southeast Asian Nation (ASEAN) markets were weak this week, while fundamentals are normalizing to a slower growth rate. Thailand’s third-quarter GDP grew 2.7 percent versus the market expectation of 2.9 percent, but up 1.3 percent versus the prior quarter.

Opportunities

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• As shown in the chart above, Morgan Stanley estimates annual newborn rates to increase 8 to 11 percent in 2015 to 2020, which would create huge demand for baby food and care products. Along with immediate reforms in the Hukou system and land rights for farmers, China should see increasing demand for household products and urban construction.
• The Czech Republic’s incumbent mobile operators won frequencies that let them offer 4G services in an 8.5 billion koruna tender that did not bring new competition to market.  This is a stunning about-face for the regulator which less than six months ago prevented Spanish Telefonica from participating in the auction.
• The Czech Republic’s central bank’s goal of maintaining a weaker koruna for longer is to promote a stronger recovery in the economy and prices.

Threats

• China’s 10-year bond yield went up 100 basis points to 4.6 percent since the beginning of July, while the Shanghai interbank offered rate also increased lately, indicating the People’s Bank of China, the central bank, is in a tightening bias.
• Russian companies are at their most indebted since the 2008 financial crisis, risking credit downgrades and rising borrowing costs amid sluggish economic growth in the country, according to ING Groep NV.
• Flat-to-declining power demand in Europe weakens the case for planned capacity expansion in Central Europe, driven more by political rather than economic reasons.

Leaders and Laggards

The tables show the weekly, monthly and quarterly performance statistics of major equity and commodity market benchmarks of our family of funds.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

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

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

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

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

Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5 percent to 10 percent of your portfolio in these sectors. Investing in real estate securities involves risks including the potential loss of principal resulting from changes in property value, interest rates, taxes and changes in regulatory requirements.

Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. Each tax free fund may invest up to 20 percent of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. Bond funds are subject to interest-rate risk; their value declines as interest rates rise. The tax free funds may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.

Past performance does not guarantee future results.

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

Holdings as a percentage of net assets as of 9/30/13:

Biogen Idec, Inc.: All American Equity Fund, 1.75%; Holmes Growth Fund, 1.55%
Bank of America Corp.: All American Equity Fund, 3.01%; Holmes Growth Fund, 2.67%; MegaTrends Fund, 1.91%
JPMorgan Chase & Co.: MegaTrends Fund, 2.43%
Citigroup, Inc.: 0.0%
Assurant, Inc.: All American Equity Fund, 1.05%
Wyndham Worldwide Corp.: 0.0%
Starbucks Corp.: All American Equity Fund, 2.79%; Holmes Growth Fund, 2.98%
Weyerhaeuser Co.: Global Resources Fund, 2.04%
GameStop Corp.: 0.0%
Pretium Resources, Inc.: Global Resources Fund, 0.84%; World Precious Minerals Fund, 1.46%
Devon Energy Corp.: 0.0%
Caterpillar, Inc.: 0.0%
Rio Tinto plc: 0.0%
Occidental Petroleum Corp.: 0.0%
Spanish Telefonica: 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 Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.