Posts by Frank Holmes - U.S. Global Investors:

Changing as Markets Change

I had the chance to listen to a prominent MIT finance professor talk about how market participants make their decisions, and I came away thinking that his big-brain ideas validate the approach that we’ve been using for years. Andrew Lo, the MIT professor, has developed what he calls the “adaptive markets hypothesis” (AMH) as a more sophisticated framework than the long-standing “efficient markets hypothesis” (EMH). I won’t go into a lot of detail, but the EMH assumes that all market participants act rationally at all times, and that all available information is immediately reflected in market prices. In Lo’s AMH, market participants are not always perfectly rational, he says – they often make bad decisions. They learn from those bad decisions and, driven by competition, the survivors constantly innovate. Those who don’t adapt don’t last. At U.S. Global, we have long viewed markets as “complex adaptive systems”—they are made up of many moving parts that are interconnected across a global network, and they learn from experiences and change accordingly. In our case, we use a matrix of top-down macro models and bottom-up micro stock selection models to determine weighting in countries, sectors and individual securities. We believe government policies are a precursor to change, and as a result, we keep tabs on the fiscal and monetary policies of the G-7 and what we call the “E-7” -- the world’s developing nations by population. We also focus on historical and socioeconomic cycles, and we apply both statistical and fundamental models to identify companies with superior growth and value metrics. We overlay these explicit knowledge models with the tacit knowledge obtained by domestic and global travel for first-hand observation of local and geopolitical conditions, as well as specific companies and projects. During his San Antonio visit, Lo contrasted “fear and greed” with “rational thinking” – the former being reactive and emotional, while the latter is measured and opportunistic. We use oscillators, like the one above showing gold and the dollar, to help us determine when fear or greed may be taking hold in a market. I’m a big believer in globalization, urbanization and major technological breakthroughs as key drivers of change in the world. These factors have an enormous impact on infrastructure creation around the world, which in turn greatly affects commodities demand. Back in the early 1970s, when gold resumed free-trading status in the U.S., China and India were both inward-looking and had very small economic footprints – now their economic engines are lifting tens of millions of people into middle-class prosperity each year. “I'd be a bum on the street with a tin cup if the markets were always efficient,” Warren Buffett once said. In other words, opportunities come to those (like us) who are able to navigate increasingly complex markets.   Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

Canada’s Gold

I was lucky enough to be at yesterday’s Olympic hockey final between Canada and the U.S., and I’ve never seen better. The 2014 Games in Sochi, Russia, have a high mark to shoot for. As a “TexCan” – grew up in Toronto, live in Texas – I was particularly proud to see both Canada and the United States turn in such outstanding performances in Vancouver. The U.S. finished first in overall medals, and Canada won the most gold medals ever at a single Winter Olympics. The Games sent a message of peace and decency around the globe. The athletes competed with sportsmanship and class, and the combination of hard work (all of them) and good fortune (some more than others) made for a glorious experience. In appreciation, NBC news anchor Brian Williams wrote a thank you note to Canada. Among other words of praise, he mentioned that he felt secure without seeing any armed guards, and that it reminded him of times past, when “we used to be a more civil society.” Read thank you note to Canada Sports can be a powerful vehicle to bring nations together, and as a global citizen, I hope the spirit of togetherness and kindness toward others is carried home from Vancouver by both visitors and athletes. By clicking on the link, you will be redirected to U.S. Global Investors does not endorse all the information supplied by this website and is not responsible for its content.

Mapping a Global Recovery

The U.S. economy grew nearly 6 percent in the fourth quarter of 2009, the Commerce Department reported Friday. This higher-than-expected number, however, was not due to more commerce, but rather to increased manufacturing to replenish depleted inventories. The U.S. isn’t alone with good economic news this week. China announced that its economy grew 8.7 percent in 2009 and Britain raised its growth forecast for 2010. Not to be outdone, India’s finance ministry is forecasting 8.75 percent growth for the coming fiscal year. Globally, the World Bank anticipates 2.7 percent growth in real GDP in 2010 and 3.2 percent growth in 2011. As it has in recent years, the emerging world should lead this growth trend. The graphic from Visual Economics supports the emerging markets growth story. The World Bank forecasts that real GDP growth in the developing world will grow 5.2 percent and 5.8 percent in 2010 and 2011, respectively. This is double the expected growth rate for the U.S. and three to four times the pace foreseen for the eurozone. Visit the Visual Economics website By clicking on the link, you will be redirected to the Visual Economics Web site. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. #10-140

Global Water in Deep Trouble?

The world may be running low on its most precious commodity—water. This map shows water scarcity projections for the world in 2025. Large chunks of Australia, Asia, Africa and North America are expected to have severe water issues. Credit Suisse estimates that, by 2020, 37 percent of the global population will face severe water stress. The problem is unrelenting demand for a finite resource. Since the 1940s, the global population has tripled to more than 6 billion people worldwide. Over the same period, global water use has quadrupled. Water infrastructure has been slow to attract money from investors. The chart below from Credit Suisse shows that private sector investment in water infrastructure in emerging markets—where it is most desperately needed—is at pretty much the same level it was 20 years ago. Over the same period, investment in telecommunications has increased roughly 1400 percent and energy 5000 percent. Even now there’s only a handful of investible companies that offer exposure to water infrastructure. Credit Suisse thinks investment growth “should pick up substantially over the next 5-10 years,” with the bulk of this investment likely going to desalination and recycling opportunities.

A New Era for Autos

New Yorkers looking to catch a glimpse of the world’s hottest car have until late April to visit the Cooper-Hewitt National Design Museum, which is displaying the $2,200 Tata Nano as an achievement in efficient design. I was fortunate enough to drive “the people’s car” on a recent trip to India (that’s me in the photo). The Nano is at the forefront of a new trend: affordable cars designed specifically for the developing world. How much has the emerging world embraced the car culture? The chart below shows the dramatic rise in vehicle sales in China, India and Brazil since the beginning of 2009. China’s vehicles sales were up 104 percent year-over-year in January and up 75 percent from two years ago, according to data from PIRA. India’s car sales grew by 50 percent year-over-year in January and were up 25 percent from a year ago. The sales pace is a bit slower in Brazil but the country just set a new record in 2009 with 3.1 million sold. The world’s automakers are scrambling to carve out shares of this promising market. Volkswagen’s Gol is already the best-selling vehicle in Brazil and this week VW debuted the Polo, which will soon go on sale in India. In January, Tata reported that 17,357 Nanos were sold from July to December. The company will soon be rolling out additional production in other areas of the country. As we’ve mentioned before, vehicle sales are a good proxy for economic activity because of the amount of energy, labor and materials it takes to produce a vehicle. They are yet another indicator of how rapidly the middle class is expanding in key emerging markets – this group’s consumption patterns stand to have a profound impact on global commodities demand going forward. None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of December 31, 2009. #10-49

March is a Good Month for Energy

We are entering a time of year that in recent decades has been good for energy prices and energy equities. Combine that with new estimates that domestic and global energy demand will rise in 2010, and we have the makings of a promising period for investors. March tends to be one of the best months of the year for both crude oil and natural gas. As you can see on the charts below, which cover roughly the past 20 years, the price of oil at the end of March is on average nearly 4 percent higher than the closing price in February. For natural gas, the increase is even more eye-catching – gas on average climbs more than 7 percent in March. The main reason for the oil price rise in March relates to the demand pull created by refiners ramping up in advance of the summer driving season. Crude price increases fall off through the early summer before picking up again in the late summer. From September to October, there is typically a big price drop that continues through year-end. For the refiners, March marks the end of a five-month stretch in which monthly crack spreads (value of refined products minus the price of the crude oil feedstock) tends to increase. If next month follows the pattern, spreads would be 4 percent wider than February. So far in 2010, however, the results have lagged the longer term trend – January saw spreads narrow by about 3.5 percent and for February to date, spreads are up about 2 percent. For natural gas, which is always extremely volatile, March is a strong month in large part due to late winter snowstorms that move across the country. When you couple that weather variable with the fact that inventory levels for natural gas have usually been drawn down substantially during the winter heating season, the result can be some dramatic spikes for gas. A cold January lifted spot natural gas prices about 6 percent higher than the December forecast, and in early February gas for April delivery was on average trading 16 percent higher than the same period in 2009. For energy equities, the typical rally period is February through May. So far, 2010 is not straying too far from that long-term trend: from a peak of 1,122 in early January, the Amex Oil Index (XOI) fell 12 percent by February 9 before heading back up 5 percent over the next six trading sessions. Of course, seasonality is not a perfect barometer because each year brings its own distinct market conditions. In 2010, the extent of global economic recovery will be a factor, as will economic growth rates in the large emerging nations. In the U.S., petroleum consumption fell by 820,000 barrels per day (4 percent) last year. Federal officials predict daily oil demand will increase about 1 percent this year, while natural gas demand is expected to increase nearly a half-percent. Gasoline prices may top $3 per gallon this spring, according to the federal outlook. In its latest monthly report, the International Energy Agency raised its forecast for global oil demand growth to about 1.6 million barrels per day this year, with all of that incremental demand coming from the emerging markets. China accounts for a quarter of the new global demand for oil. That incremental growth could be revised upward again if it looks like global GDP growth – led by the large emerging economies – will be stronger than the anticipated 4 percent. And if the supply response to additional demand is weak, higher oil prices could result. The AMEX Oil Index (XOI) is a price weighted index designed to measure the performance of the oil industry through changes in the prices of a cross section of widely-held corporations involved in the exploration, production, and development of petroleum.

Deflation Risk: Good for Gold

Massive sovereign debt loads, yawning budget deficits and high unemployment in the developed world raise the chances of deflation in 2010. If deflation were to occur, it could be good for gold. I have written about deflation in the past, but it’s such an important theme that it warrants a revisit. I see it as a key risk to the global economy — a far greater risk than inflation in the near term. Deflation is especially risky because, once under way, it’s a cycle that’s hard to break. In the U.S., for example, slow economic activity and high joblessness (currently around 10 percent) can drive down prices, which leads people to delay spending because they think prices will keep falling. This further slows economic activity, which leads to more joblessness, and around and around it goes. The competitive effects of globalization add to the deflation risk. Labor is getting ever cheaper in a worldwide jobs market, and excess global capacity continues to lower production costs. An article from the Federal Reserve Bank of San Francisco offers an excellent discussion of deflation risk based on studies of the Great Depression and the late 1990s in Japan. According to an analysis detailed in that article, there’s an 85 percent chance of deflation in the U.S. this year. Read Article* Governments are keeping capital cheap — interest rates are near zero and will be for a long time. U.S. banks have a lot of money to lend, but we don’t see that happening based on measures of money velocity. And given the enormity of government debt loads, future fiscal and monetary options are limited — not that the White House and Congress won’t be tempted to provide desperation stimulus as the 2010 midterm elections draw closer. In the face of low or no domestic growth, the U.S. and other countries can be expected to engage in a competitive spiral of currency devaluation to increase exports. This race to the bottom stands to lift gold as investors seek to store their wealth in an asset with tangible value. *By clicking the link, you will be redirected to U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. 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. #10-118

In America We Trust

A financial crisis and a polarizing debate on social and political issues may have Americans down, but they are not out. A new Gallup/USA Today poll shows that most Americans expect good things are coming — when asked how they feel about the next 20 years, nearly two-thirds of survey respondents said they were optimistic. Asked why, 35 percent answered the “strength/will of the American people.” In addition, more than six in 10 respondents said they believe today’s children will have a better life than their parents. This positive outlook on the future is consistent with the response to a question that the Gallup Poll has asked periodically for the past 50 years. Americans now rate their country’s standing as a 5 on a scale of 1 to 10, with 10 being the best. The bad news is that this result was just above the all-time low of 4.8 during the Watergate scandal. Better news — the forecast is that the U.S. will climb to 5.7 by 2015. One thing many people may have to look forward to is an improving job market. More jobs are still being lost than created, but the chart below shows that the trend is better than we’ve seen since the beginning of 2008. I’ve said many times that the government’s main focus should be on creating jobs. Once people get back to work and feel confident they can fulfill the needs of their family, economic activity will pick up. With their resilience, Americans are setting a great example for the emerging world. In India, China, Brazil and dozens of other countries, ambitious people are creating better lives for themselves and their children. These children will go on to provide new opportunities for their own children—just like what happened in the United States in decades past. The Chinese and the Indians and the Brazilians will get knocked down along the way, but their strong belief in what we call “the American Dream” will help them get up and continue to prosper. #10-115

World’s Most Powerful People

I was catching up on my reading backlog and came across a article from a while back titled “The World’s Most Powerful People.” Of course, you see a list like that and you just have to open it. The political leaders of the United States, China and Russia occupy the top three slots — hard to argue too much with that, though if the list came out today, the order might be different. Batting cleanup is Federal Reserve chief Ben Bernanke — his considerable influence over the global economic recovery effort didn’t keep him from being raked over the coals by Congress during his reappointment hearing. Next comes a run of businessmen — the co-founders of Google, Mexican multibillionaire Carlos Slim, media magnate Rupert Murdoch and then the CEO of Wal-Mart. Rounding out the top 10 are the king of Saudi Arabia and the king of Microsoft. Further down you find the pope (#11), Warren Buffett (#14), the Dalai Lama (#39), Russian president Dmitry Medvedev (#43 — 40 slots below Mr. Putin), Steve Jobs (#57) and International Olympic Committee head Jacques Rogge (#60). Not all on the list are using their power for good — North Korea’s dictator Kim Jung Il (#24), terror leader-in-hiding Osama bin Laden (#37), and Venezuela president and global agitator Hugo Chavez (#67). Who makes these lists and their order is highly subjective and thus open to debate, so let the debate begin. Find Out Who Else Made the List By clicking on the link, you will be directed to U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of 12/31/09:  Google, Wal-Mart. #10-112

Oil Demand Up, What About Supply?

The International Energy Agency (IEA) raised its 2010 world oil demand forecast to 86.5 million barrels a day—up 170,000 from its January report and 1.8 percent higher than oil demand in 2009. The upward revision comes on the heels of increased economic activity in Asia—which has led the global recovery so far. Oil industry consultant PIRA estimates that Asia has accounted for half of global economic growth over the past decade as Asia’s share of world GDP has jumped from 18 to 26 percent. Nearly half—44 percent—of the 170,000 barrels per day increase from last month came from China. While Asia has been the driving force, the effects of an economic recovery affecting energy demand are being seen across the globe. North America, Asia, Europe and the former Soviet Union (FSU) countries are all back to where demand was in 2008, when the oil price approached $150 per barrel. PIRA is forecasting world oil demand to increase by 2 percent in 2010—more than half of that growth coming from “less developed” countries. They see demand growth in all areas of the world besides Japan—which is expected to remain flat. And we’ve pointed out on many occasions that, while demand is growing, the long-term supply response has been weak. The low-hanging fruit has been harvested and now it is increasingly difficult, costly and sometimes dangerous to find and develop large new oil fields. This growing imbalance between demand and supply raises the chances of shortages that could drive prices significantly higher in coming years.