In our latest guest market analysis piece, Frank Holmes, CEO and Chief
Investment Officer at US Global Investors talks about a shift in the markets
which could give hope to investors. Wind currents between the ocean and
atmosphere affect climates around the world; likewise, government policy shifts
and economic data have a similar ripple effect on markets. During our Outlook
2012 webcast, our listeners heard a very passionate John Mauldin assess the debt
situation in Europe, Japan and the U.S. and the need for immediate policy
change. If you listened in, you may have wondered what economics and politics
have to do with investments. Listen to a replay of the Outlook 2012 Webcast now.
That's a valid thought, as many investors hear predictions of which way the
market will go or what stocks will outperform. As I often remind my readers,
it's not about political parties, it's about the policies. And history says
that government policy shifts can have a tremendous affect on the economy and
the markets. While no one can predict the future, you can use probability in
your favor. For example, Chinese stocks have historically moved with money
supply. In the webcast, Analyst Xian Liang showed the chart below plotting the
year-over-year money supply in China against domestic B-shares (represented by
the MSCI China Index) since the end of 2000. The Chinese government is known for
acting decisively in making policy changes to steer its economy in the right
direction. In 2009, the growth in money supply was at an 11-year high of 30
percent after the government lowered the required reserve ratio (RRR) for major
banks. Adjusting the reserve requirement is important inflation-fighting tool in
China's monetary policy. The lower the reserve requirement, the more money
banks are able to lend out. Throughout 2011, due to concerns about inflation,
China had been raising the reserve requirement for banks and interest rates.
This action reduced money supply to the low we see in the chart. This December,
China shifted its stance as slow growth became a risk and inflation slowed. This
action should increase money supply, and encourage markets, going forward. China
also recently announced an earlier-than-expected windfall profit tax cut for its
oil companies. This special oil income levy raises the level at which a barrel
of oil is taxed, going from $40 to $55. This $15 difference essentially
translates to a substantial tax break for oil companies and extra money in their
coffers. Research firm Jefferies expected the tax adjustment, but thought that
it would happen at the end of 2012. With this tax cut, it appears the government
acknowledges the need for Chinese upstream oil companies to increase their cash
flow so that they can increase domestic production, says Jefferies. This tax cut
was closely followed by analysts, and was seen as a "big positive" for
China's oil companies, specifically CNOOC, PetroChina and Sinopec, says
Citigroup Global Markets. The market promptly responded positively, with each
stock rising on the news. Another economic measure that has a ripple effect on
global markets is the Purchasing Managers' Index (PMI), an indicator of
manufacturing strength. We follow this index closely, as it is considered a
leading indicator, meaning the markets react over the following three months
after the PMI data is released. As of December 31, the JP Morgan Global
Manufacturing Purchasing Managers' Index (PMI) crossed above the three-month
moving average. Going back to the inception of the index in 1998, there have
been 20 occurrences when the one-month number crosses above the three-month.
When this has happened, it's signaled higher prices for many commodities,
especially oil, copper, and to less of a degree, materials and energy. For
copper, historically, 90 percent of the time, the price was positive over the
next three months, with a median return of 10 percent over the following three
months. During the same three months, 85 percent of the time, West Texas
Intermediate oil has also gone up. Its median three-month change has been an
increase of 11 percent. Materials and energy were also positively affected, with
modest results: When the PMI crosses above the three-month average, 70 percent
of the time, the S&P 500 Materials Index rose, with a median return of about 3
percent. The S&P 500 Energy Index had a median three-month return of about 5
percent, with an 80 percent chance of the three-month change being positive. We
believe the winds are shifting to bring needed relief to global investors.
We've seen improving economic data from the U.S. lately, and this positive
news from the world's largest economy, along with an improving China—the
world's most populated country—offsets the negativity in Europe. U.S. Global
Investors, Inc. is an investment management firm specializing in gold, natural
resources, emerging markets and global infrastructure opportunities around the
world. The company, headquartered in San Antonio, Texas, manages 13 no-load
mutual funds in the U.S. Global Investors fund family, as well as funds for
international clients. For more updates on global investing from Frank and the
rest of the U.S. Global Investors team, follow us on Twitter at
www.twitter.com/USFunds or like us on Facebook at www.facebook.com/USFunds. You
can also watch exclusive videos on what our research overseas has turned up on
our YouTube channel at www.youtube.com/USFunds. All opinions expressed and data
provided are subject to change without notice. Some of these opinions may not be
appropriate to every investor. 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 MSCI China Free Index is a
capitalization weighted index that monitors the performance of stocks from the
country of China. 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 following
securities mentioned in the article were held by one or more of U.S. Global
Investors Fund as of December 31, 2011: CNOOC, PetroChina Co Ltd.
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