Why Growth is Deep in the Heart of Texas

By Frank Holmes

CEO and Chief Investment Officer

U.S. Global Investors

Trying to Stop a Bull Market Has Risks

TIME Magazine’s cover this week features an engaging collage of the 50 states reassembled to fit within the boundaries of Texas. With a growing number of solid-paying jobs, affordable housing, and low taxes, “the Lone Star State is America’s Future,” declares economist and writer Tyler Cowen.

As a “Texa-Can,” I think the article gives compelling insight into what I’ve personally witnessed during my 20 years living in the states, which is very different from my experience living and working in Canada, where big government and overregulation abound.

I agree with the writer when he says there are “lessons Texas has to teach.” For example, states and cities could deregulate building development “so that rents and home prices could be much lower,” says Cowen. Or occupational licensing could be “scaled back” so that it is not so onerous to start applying one’s skill in the work force.

Notably, “a little more freedom in strategically targeted areas—that is, a little more Texas—could go a long way,” writes Cowen.

Whereas excessive regulations have often diluted the efforts of entrepreneurs and resulted in fewer innovations, lower profitability and less job creation, Texas is quickly becoming the nation’s poster child of how companies, communities, and individuals flourish when allowed to operate under a more business-friendly atmosphere.

Like the saying goes, “Everything is bigger in Texas,” and that is true for many companies in the state. Did you know that 52 of the Fortune 500 companies are headquartered in Texas? The state is tied with New York in having the second-most Fortune 500 companies.

It may also surprise you to know that these businesses are diverse. Although the state is well-known for its energy companies, such as ExxonMobil, HollyFrontier, Valero Energy, and Marathon Oil, there are many other major industries in the state including technology, airlines, telecommunications, consumer discretionary, and financials. Austin has Whole Foods and Dell. Dean Foods, Dr Pepper Snapple Group, GameStop, and Southwest Airlines are located in Dallas. Sysco and Waste Management are in Houston, to name only a few.

It is more than a twist of fate that Chief Executive magazine has ranked Texas as the best state in which to do business for the ninth year in a row. The magazine bases its annual rankings on taxation and regulation, quality of workforce and living environment. After having talked to hundreds of executives from around the world, I find these metrics are a powerful recipe for success and worthy of replication.

Perhaps after successive years of solid economic growth in Texas, the U.S. is now recognizing how the state offers a balance between prudent regulation and capitalistic risk-taking?

My resources experience tells me Texas could not have had this incredible success without being able to fully capitalize on the innovative technology that has unlocked the vast supplies located in the oil and gas fields. Take a look at the vertical growth in crude oil production this year. On a daily basis, the state is pumping out more than 2.2 million barrels of crude oil each day. At this rate, if Texas were a country, it’d be the world’s 13th largest oil producer.

Texas crude oil production

click to enlarge

Since the huge oil and gas boom, the state has taken leadership in the expanding employment in the industry. There are major oil and gas basins throughout the U.S., but research shows Texas has been providing the most jobs in recent years. According to the Bureau of Labor Statistics, since 2010, the oil and gas sector added about 150,000 new positions. An incredible two-thirds were in Texas.

In 2013, oil and gas companies in the Lone Star State persist in leading this job growth too. About 2,400 jobs were added in the second quarter of this year alone.

Texas leads country in oil gas employment gains

click to enlarge

This weekend, take time to check out TIME’s new feature on Texas, including the magazine’s top 10 reasons Texas is America’s future. And while you are at it, take a look at the fund’s most recent commentary, which discusses recent performance and more about the U.S. oil and natural g as boom.

Index Summary

  • Major market indices finished higher this week. The Dow Jones Industrial Average rose 1.11 percent. The S&P 500 Stock Index gained 0.88 percent, while the Nasdaq Composite advanced 0.74 percent. The Russell 2000 small capitalization index rose 0.32 percent this week.
  • The Hang Seng Composite fell 2.69 percent; Taiwan declined 1.12 percent while the KOSPI dropped 0.88 percent.
  • The 10-year Treasury bond yield fell 7 basis points this week to 2.51 percent.

Domestic Equity Market

The S&P 500 moved to a new high this week as overall earnings were well received. The internal market rotation that began in earnest last week continued this week as utilities, telecom and staples were among the best performers and many cyclical areas lagged.

Domestic Equity Market - U.S. Global Investors

click to enlarge

Strengths

  • The industrials sector was the best performer this week as the transport names were among the sector leaders. Norfolk Southern, Boeing, Southwest Airlines, Kansas City Southern and Delta Air Lines all outperformed.
  • The utilities sector also rallied this week with broad based participation as interest rate sensitive areas outperform.
  • Corning Inc. was the best performer in the S&P 500 this week rising 15.67 percent. The company announced it is buying Samsung Electronics’ stake in their LCD panel joint venture in exchange for a 7.4 percent stake in Corning.

Weaknesses

  • The financials sector was the worst performing group this week. JP Morgan and Bank of America lagged due to government settlements and jury awards primarily related to mortgages. Several large regional banks also broadly underperformed on weaker than expected earnings.
  • The energy sector also lagged as Cameron International and FMC Technologies were the two worst performers in the S&P 500 this week on poor earnings results.
  • There were numerous companies posting double digit declines this week due to poor earnings including, Symantec, Akamai Technologies, Altera, Xerox and Juniper Networks.

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 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.

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 potential for policy error is potentially large.
  • The debt ceiling and government shutdown has passed, but the economic fallout will likely be felt over the next weeks and months as it negatively affects upcoming economic data releases.

The Economy and Bond Market

Treasury bond yields fell this week as weak economic data fueled concerns that the economy isn’t robust enough to begin tapering. While the government reopened last week, some short-term economic damage was done and confidence will likely be negatively impacted for some time longer. This all leads the market to reconsider “taper” timing, it now appears the Fed may not taper until March or even later and as can be seen in the chart below, bond yields have responded to this changing dynamic.

Germany Participating in Global Recovery with Strong Expectations for Growth

click to enlarge

Strengths

  • The bond market continued its rally that started in early September as economic expectations wane.
  • The HSBC/Markit flash manufacturing PMI for China came in higher than expected at 50.9.
  • The national average gasoline price fell to $3.31 per gallon this week vs. a high of $3.78 in February.

Weaknesses

  • The delayed September employment report showed weaker than expected job growth with nonfarm payrolls growing just 148,000.
  • Consumer confidence indicators continue to fall even as the government shutdown has ended.
  • Durable goods orders ex-transportation fell 0.1 percent in September and the August number was revised lower.

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, Bank of England and the Bank of Japan.
  • The government shutdown damage is probably done and may push QE tapering into mid-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.

Gold Market

For the week, spot gold closed at $1,350.80 up $34.55 ounce, or 1 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 7.94 percent. The U.S. Trade-Weighted Dollar Index lost 0.50 percent for the week.

Strengths

Indian gold premiums surge

click to enlarge

  • According to the most recent data from the Indian market, current premiums for physical delivery are running at around 18 percent over the spot price of gold. The chart above shows that the premium has been steadily rising over the last two years, but it has accelerated since April of this year. According to Hebba Investments, a Seeking Alpha contributor, high premiums usually signify bottlenecks in the supply chain or a general shortage in the physical market; a shortage being extremely bullish for the gold market. In addition, Asian press is starting to pick up on this story and dealers are complaining that physical gold is in short supply. This is evident by people not willing to sell their old jewelry at these prices, according to a wholesaler in Kolkata.
  • India's third-largest gold fund has reopened to investors after disallowing buy-ins three months ago. Reliance Gold Savings Fund, which manages about $300 million, originally closed to support government efforts to curb bullion demand and control a rising trade deficit. "The economic conditions are getting better and the dollar has come down…," said Sundeep Sikka, CEO of Reliance Capital Asset Management, justifying the re-launch. The rupee has appreciated 11 percent from its August lows, which could revive investment interest for physical gold and put pressure on supplies.
  • Macquarie Commodities Research reports that retail sales in China of gold and silver jewelry during September were 21.9 billion yuan, according to data released by the National Bureau of Statistics (NBS) on Friday. This was 18 percent higher year-on-year, but still shy of August’s record, reflecting a seasonally weak period. Implied Shanghai Gold Exchange volume suggests sales of about 68 tons of gold, 44 percent higher than a year ago. NBS data also suggests China’s platinum group metals’ imports picked up in September. Palladium imports rose to 1.94 tons, up 24 percent year-over-year, while platinum imports were 10.6 tons, the highest in more than three years.

Weaknesses

Unusual Gold Trades Triggering Sharp Swings in Gold Price

click to enlarge

  • Mineweb contributor Lawrence Williams reported on this month’s unusual gold trades on the futures markets, which are now occurring almost daily. The chart above, by Reuters’ Frank Tang, shows the number of contracts traded daily and the corresponding movement in the gold price. What are visible are massive trading volumes every day of over 5,000 contracts, all around the same time. On the first of October, as well as on October 10, there were massive trades of over 20,000 contracts. This amount represents well over 2 million ounces, or around $2.6 billion. It’s safe to say nobody has that amount of physical gold, apart from the big central banks, so these trades are being done by entities trading gold they do not have in a manner designed primarily to trigger stop loss orders. However, someone with enormously deep pockets does have to be there in order to support these massive trades; the risks could be huge if the market turns against them. Obviously the “big bad banks” haven’t learned anything in regards to the risk of failure due to this speculation. It’s no wonder these trades took place while the regulators were on paid vacation, drawing unemployment benefits to boot!
  • The Kyrgyz parliament has rejected a government-proposed deal with Centerra Gold on Wednesday. The deal called for setting up a joint venture in which both Centerra and the Kyrgyz government would own 50 percent of shares. Under the previous 2009 deal, the Kyrgyz government stake was set at around 33 percent. Parliament said that the government must negotiate a new deal with Centerra by December 23 to raise Kyrgyz ownership to 67 percent. In other news, Kinross Gold Corp. shorts were back on the rise heavily, up 10.5 million shares since September 30. This reverses a recent trend in Kinross shorts, which had dropped in the past couple of months.
  • Macquarie, in its U.S. Strategy research this week, stated that the most important insight coming out of the September payroll report was the continued deceleration in private sector labor demand. The reading came in at a soft 126,000 new jobs, while the three month average retreated back to pre-quantitative easing levels, and is more than 100,000 below the early 2013 levels that prompted the initial tapering signals from the Federal Reserve governors. The deceleration likely continued into October thanks to the government shutdown, making it difficult for the Federal Open Markets Committee (FOMC) to justify that there has been a substantial improvement in the labor market.

Opportunities

World Gold Supply and Demand 2013, in Tons

Supply

Partial Year

Annualized

Source

Mine Production

1,383

2,765

GFMS

Less Chinese Domestic Production

270

440

China Gold Association

Less Russian Domestic Production

112

183

WBMS

Total Mine Producing Excluding China and Russia

991

2,142

Demand

Partial Year

Annualized

Source

Hong Kong Net Exports to China

716

1,074

Hong Kong Census

Net Imports to Hong Kong

471

707

Hong Kong Census

Thailand—Net Imports

157

313

UN Comtrade Statistics

Turkey—Net Imports

124

248

UN Comtrade Statistics

India—Net Imports

551

1,102

UN Comtrade Statistics

Central Banks—Change In Reserves

216

431

IMF

Other Countries—Jewelry, Coin and Bar Demand

665

1,309

GFMS

Total Demand

2,890

5,184

Other Sources of Supply

Partial Year

Annualized

Source

Gold Recycling

672

1,344

GFMS

ETF Outflows

724

917

Bloomberg

Source: Data sources listed above, Sprott Global Resources Investments, U.S. Global Investors

  • Eric Sprott, Chairman and CEO of Sprott Asset Management, is under the opinion that the gold supply and demand statistics published regularly by the World Gold Council (WGC) are flawed, despite the fact these numbers are considered to be industry standards around the globe. Mineweb reports that Sprott has written an “open letter” to the WGC, putting forward his company’s position in the gold supply and demand equation, drawing the conclusion that global gold demand exceeds available new supply by a substantial margin. Sprott argues that global demand totals 5,184 tons for this year, leaving gold supply short a massive 3,044 tons. Only a portion of this shortfall can be met through scrap sales and sales out of gold ETFs. It is no surprise to Sprott that the imbalance between supply and demand is not reflected in prices because available statistics misrepresent reality, mostly regarding demand from Asia.
  • Gold is probably at a cyclical bottom, according to CPM Group. Bloomberg reports that CPM Group targets the gold price at $1,240 to $1,380 per ounce for the next few months. However, gold may trade in the $1,240 to $1,500 per ounce range for the “next couple of years,” before prices rise sharply in the 2016 to 2023 period, says CPM Group. Inflation expectations are likely to be vindicated by this time as the Federal Reserve will remain on an accommodative policy stance longer than previously anticipated.
  • A Canada-European Union trade agreement could have major implications for the mining sector when it comes to investor protection. Likely one of the most significant developments in the Comprehensive Economic and Trade Agreement (CETA) for miners on both sides of the Atlantic is the inclusion of an investor-state provision. The provision, in practice, ensures foreign companies a process to recoup damages in cases of expropriation or instances where political process is grossly discriminatory against a foreign company, according to Kip Keen of Mineweb. Riyaz Dattu, a lawyer specializing in international trade law with the firm Osler, Hoskin & Harcourt, believes the fact that there is an investor-state mechanism being included in this agreement is one big step further towards a global framework for investor protection.

Threats

  • Earlier this month, the Mexican Congress modified the tax reform proposal prepared by the Mexican Executive Branch, including a special mining fee of 7.5 percent of operating profits and an additional fee of 0.5 percent of gross earnings for gold, silver and platinum. In addition, Congress has proposed the elimination of accelerated depreciation for fixed assets and immediate deduction of pre-operative expenses. According to Macquarie analyst Michael Gray, the implications in the current lower-metal price environment are likely to further compress the profitability ratios of higher cash cost producers. Meanwhile, the elimination of the accelerated depreciation will limit the tax benefits upfront, which acts as a strong disincentive for exploration and mine development activities, but also sets a much higher feasibility threshold for assets, likely deterring M&A activity.
  • Mineweb contributor Dorothy Kosich recently reported that 30 to 50 percent of junior mining companies are not expected to survive based on a recent British Columbia Securities Commission (BCSC) study. The study found that some mining executives felt the market has yet to hit its lowest point, and they don’t expect conditions to significantly improve for another three to five years. Participants agreed that there will be an eventual exodus of mining companies and exploration endeavors, reaching the conclusion that 30 to 50 percent of junior miners are not expected to survive.
  • Jayant Bhandari, a former consultant to U.S. Global Investors who is knowledgeable on matters in India, wrote to us recently saying that he thinks gold will likely stay as the preferred way for Indians to save. However, with Indian currency falling about 12 percent this year, gold has become unaffordable for a portion of buyers. Going forward, the Indian rupee is likely to weaken up to 50 percent more as it is truly expensive for an economy at India's stage of development, and the fact there is little hope for the economic growth rate to increase. Bhandari’s comments coincide with recent reports by India’s finance ministry, claiming there have been significant improvements to the nation’s current account deficit. Nevertheless, this number fails to consider the growing unofficial imports of gold and the diversion of remittances escaping the tighter money flow conditions introduced recently. Therefore the projection of a lower current account deficit is a mere window-dressing exercise, highlighting that the government has not acted prudently to address economic headwinds, but instead has taken the easy way out of singling gold imports as a threat to the Indian economy. This year imports of silver into India have surged, perhaps as a substitute to buying the higher-priced gold bullion.

Energy and Natural Resources Market

Oil Production Remains Elevated in Texas Permian Basin

click to enlarge

Strengths

  • World industrial output, one of the key determinants of commodity demand, rose 2.6 percent this year, as of August 2013, according to data released on Thursday by Dutch research group CPB. This was the fastest year-over-year growth rate seen for world industrial production since July 2012. The advanced economies gained 0.5 percent, also the best performance since July 2012, while the emerging economies rose 4.7 percent, their best since November 2012.
  • Global copper market continues to be supported by global deficits. The world copper market showed a deficit of 151 thousand metric tons in July, the third straight monthly deficit, mostly due to refined copper demand in China, according to the International Copper Study Group.
  • U.S. HRC prices rise again. The CRU Weekly assessment shows the U.S. benchmark at $658 per short ton, up $5/t and 1 percent from the prior week. Also, so far this quarter, HRC is now at $651/st per ton, above the third quarter and second quarter averages of $640/st and $604/st, respectively.

Weaknesses

  • Caterpillar cut its 2013 sales and profit forecast and said revenue will be little changed next year after a slump in orders from commodity producers. Earnings will fall to about $5.50 per share on sales of $55 billion this year, the company said in a statement. In July, it forecast per-share profit of about $6.50 on sales of $56 billion to $58 billion. Revenue in 2014 will be in a range of 5 percent lower to 5 percent higher than this year because of “very low” mining- machinery orders and uncertainties over global economic growth, the company said. Caterpillar said demand from the mining industry has been difficult to forecast this year after customers decided to focus on existing projects instead of new mines.
  • Crude oil futures (NYMEX) fell under $100 per barrel for the first time since early July as rising inventories and seasonal weakness weighed on prices which fell nearly 3 percent this week.
  • The Baltic Dry Index fell 13 percent this week after setting a two-year high recently.

Opportunities

  • With the scheduled shutdown of Japan's one operating nuclear power plant last month, Japan is likely going to be running without nuclear generation until at least year end.According to Platts / BENTEK, this will likely require that an additional five or six liquid natural gas (LNG) cargoes to cover normal winter demand; however, with gas-fired generation running close to capacity this summer, it is likely that incremental generation requirements will fall to coal and petroleum products. Two new coal-fired generators were commissioned in April this year while one unit that was damaged by the tsunami was restarted in May.
  • Sinopec Group wants to sell half of its two biggest shale gas acreages in Canada to spread costs and accelerate their development, as the Chinese energy company focuses increasingly on return of investment, an executive said. A sale of an overseas asset would be a rare move for one of China’s state-owned energy companies, which have spent hundreds of billions of dollars investing in hydrocarbon resources from North America to Australia to secure China’s energy needs. “We are not only buyers, but also actively seek joint venture partners to optimize assets,” said Feng Zhiqiang, newly appointed chairman of North America operations of Sinopec International Petroleum Exploration and Production Corp., Sinopec Group’s main acquisition vehicle. “There is no such thing that a state-owned company’s job is only to obtain resources. Scale is important, profitable scale is more so,” Feng told Reuters in an interview. Sinopec Group, the parent of top Asian refiner Sinopec Corp., is looking for an equal equity partner for Montney and Duvernay, two shale gas plays totaling about 500,000 acres (2,023 sq. km) in Western Canada. They are part of Daylight Energy that Sinopec acquired in 2011 for more than $2 billion and later expanded.
  • The Australian federal government has released draft legislation that would repeal the Minerals Resource Rent Tax (MRTT), a tax long opposed by recently elected Prime Minister Tony Abbott. “The MRRT is a complex and unnecessary tax which struggled to raise the substantial revenue predicted by the former Government,’’ Treasurer Joe Hockey said today. “Further still, this failed tax imposed significant compliance costs on one of our most important industries, while damaging business confidence which is critical to future investment and jobs.’’

Threats

  • Growth in U.S. farmland prices fell to its lowest in more than three years, sapped by weaker crop prices, which are prompting farmers to cut back on machinery purchases too. A farmland price index compiled by Nebraska-based Creighton University fell to 50.9 this month, the lowest reading since January 2010. The figure, down from 54.0 in September, was only just above the 50.0 level which indicates no growth at all, with figures below that level meaning falling prices, and comes as the market enters its key autumn sales period. Prices are already falling in some major agricultural states, including Illinois, Kansas, Nebraska and North Dakota, which suffered a particularly steep decline in its farmland market. However, values are still rising – albeit at relatively slow rates - in Missouri and Iowa, the top corn and soybean producing state, where 80 acres of land sold last week for $17,600 an acre, which Hardin County Savings Bank claims is a record. The pullback in agriculture sector prosperity was also evident in an index figure for agriculture machinery which came in at 44.6, its lowest since March 2010, and indicating market shrinkage.
  • The global glut of nickel will extend into a fourth year in 2014 as new technology lowers costs for Chinese furnaces producing record amounts of a lower-grade substitute that helped drive prices into a bear market. Chinese producers will supply 456,000 metric tons of nickel pig iron (NPI) in 2014, or 49 percent more than last year. Costs at their rotary kiln electric furnaces more than halved to $11,000 a ton in five years, according to Beijing Antaike Information Development Co. That implies they’re still profitable even after prices slumped 17 percent since the start of 2013, reaching a four-year low of $13,205 in July. China expanded NPI output from 3,000 tons in 2005 to make the stainless steel needed for its construction boom after costs for pure nickel reached a record $51,800 in 2007. While slumping prices previously shut furnaces in China and curbed excess supply, the new technology means they can now compete with tr aditional refineries. The cumulative surplus since 2007 will have reached about 589,000 tons by the end of 2014, or almost four years of U.S. demand.

Emerging Markets

Strengths

  • HSBC October China flash PMI was 50.9 versus the estimate of 50.4, and improved from 50.2 in September, indicating that China industrial activities continue to expand. It is also worth noticing that sub-indices of HSBC preliminary PMI improved broadly, a sign of economic recovery.
  • From October 17 to October 23, net fund flows to emerging market equity funds was $2.5 billion. It is the sixth weekly inflow in the last seven weeks, according to JP Morgan.
  • The Philippines kept rates on hold as expected at 3.5 percent and 5.5 percent for the reverse repo and repo rates, respectively. the central bank BSP (Bangko Sentral ng Pilipinas) reaffirmed robust domestic demand outlook.
  • Taiwan September export orders rose by 2.0 percent year-over-year, versus 0.5 percent in August, though export orders fell 0.8 percent year-to-date by September end.
  • Hong Kong September exports and imports both beat expectations, despite a difficult base. The exports grew 1.5 percent, while imports grew 0.4 percent.
  • Colombia’s agency for development - Fedesarrollo reported industrial confidence in the Andean nation rose 2.2 points in September, while retail confidence rose to 16.7 from 12.0 in August. Similarly, the national statistics agency, DANE, posted official trade balance numbers for the month of August showing a better than anticipated trade surplus. Imports fell 5 percent in August to $5.0 billion while exports rose 8.9 percent from a year ago.
  • This month’s Bank of America fund manager sentiment survey shows Russia remains the market darling with 67 percent of respondents saying they currently overweight the country. Despite the lackluster performance of recent years, investors continue to highlight Russia’s cheap valuations as a reason to overweight the export-dependent economy.

Weaknesses

  • Seven day Shibor jumped to 5.9 percent versus the normal average level of around 4 percent in China due to non-action by the People’s Bank of China (PBOC), the central bank. The stock markets in China reacted negatively to the tightness of liquidity; however, the PBOC is willing to resume open market operations next week if rates in the money market rise too much, Market News International reports.
  • Malaysia September inflation jumped to 2.6 percent versus the market expectation of 2.5 percent after a fuel price hike. The data showed no evidence of inflation pressure since core inflation actually eased to 1.2 percent from 1.3 percent in August, and therefore, no rate hike was expected after the central bank said its focus was mostly on growth.
  • Thailand September exports were down 7.1 percent year-over-year, largely due to the fall of industrial exports. Imports were weak as well, falling 5.2 percent last month.
  • According to data published by the Fundacao Gertulio Vargas (FGV), Brazil’s consumer confidence decelerated from 114.2 in September to 111.1 in October. Bloomberg data suggests the number was the worst print in the year excluding July (108.33), when street protests negatively affected the reading.
  • Deutsche Bank reviewed the assumptions on its Gazprom financial model from October last year, showing key assumptions were too optimistic and did not materialize. The previous model assumed a liberalization of 15 percent of the domestic gas market in 2014, now expected to be only 4.5 percent. In addition, export price discounts of 12 percent came in at 14 percent, while Ukrainian demand volumes came in 37.5 percent lower than modeled. These headwinds were exacerbated by a lower than forecast Brent crude reference price. The silver lining appeared to be a better than expected recovery in European volumes, however, the difference between forecast and actual volumes is easily explained by a seasonal factor rather than a structural improvement in demand. As a result, the German bank lowered its price target on the stock from RUB200 to RUB132.

Opportunities

Chinas Manufacturing Activity Confirms Cyclical Recovery

  • As shown in the chart above, HSBC China Manufacturing PMI has turned to an uptrend showing expanding industrial activities. October China flash PMI was 50.9, higher than the market expectation of 50.4 and 50.2 in September. Sub-indices of the index also broadly expanded in October. China’s economy benefited from a targeted stimulus in high speed railway and other infrastructure investments, and a reform policy that revitalized the economy and competition.
  • A spokesman for Mexico’s PAN opposition party was quoted as saying Mexico has a “better than ever” chance of passing a bill this year to break a seven-decade state monopoly on oil drilling. Talks on the subject are advancing in Congress after the ruling PRI party unlocked negotiations in the political and fiscal reforms currently making their way through the legislature. President Enrique Pena Nieto is betting on an energy overhaul to attract major diversified energy companies to Mexico, saying new investments will lift economic growth on Latin America’s second largest economy.

Russia chrome users switch to yandex over google

click to enlarge

  • Russian users continue switching from Google (a default search engine in Chrome) in favor of the Russian top player, with Yandex’s share in Chrome browser trending upwards. After Yandex’s share topped 50 percent for the first time in January 2013, the company has further cemented its leading position, gaining another 4.6 percentage points year to date.

Threats

Brazils-Caixa-Economica-Federal-Appears-Stretched

click to enlarge

Brazils-Caixa-Economica-Federal-Appears-Stretched

click to enlarge

  • The Credit-to-GDP ratio in Brazil has gone from 25 percent to 57 percent in the 10 years, marking one of the fastest increases in financial penetration over the last decade, according to HSBC. The worrying increase in indebtedness of Brazilian consumers and corporations has gone largely unnoticed because interest rates have declined over that period, paring the burden of debt. However, the fact that loans have grown faster than deposits for several years has left banks largely under-funded. Case in point, Caixa Economica Federal increased its loan portfolio by 7.6 times over the last 5 years, while its loan-to-deposit ratio increased from 40 percent to 133 percent over the same period, making the lender look very stretched from both a capital and funding perspective.
  • Beijing Municipal Commission of Housing and Urban-Rural Development announced seven measures to stabilize the home prices. Other municipalities in China may follow after strong rising home prices. Many believe those measures are only creating temporary market sentiments, but will not change the price dynamics due to shrinking supply next year.
  • Czech central bank Governor Miroslav Singer says monetary policy will continue to be supportive of economic recovery. However, Singer explained that if the country found itself in a situation where zero interest rates are not enough to bolster economic growth, the committee would use the exchange rate to achieve its objectives. Singer’s proposal signals the need for a weaker exchange rate to meet the central bank’s growth forecast. A currency devaluation has been proven to bring only unsustainable short term economic growth, at the cost of potentially higher inflation and foreign investment outflows.

© US Global Investors

www.usfunds.com

© U.S. Global Investors

Read more commentaries by U.S. Global Investors