By most accounts, major U.S. markets have performed positively this year, generating significant wealth for many investors. The S&P 500 Index has made fresh highs pretty regularly and is currently up 12 percent, and so far the Nasdaq Composite Index has returned 14 percent.

The upside to falling oil prices is consumers are heading in to the holiday shopping season with extra money in their pockets. At a handful of stations in Oklahoma and Texas, gas prices fell below $2 today. Consumer airlines are also benefitting from the “tax break” of low fuel prices. Year-to-date, the NYSE Arca Airline Index has delivered a stellar 43 percent and the benefit is not limited to the U.S.  China Airlines is up 31.5 percent.

Airline Stocks Soar High as a Result of Declining Fuel Prices
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The most welcome news coming out of Europe is that although its central bank did not take concrete action this week, European Central Bank (ECB) president Mario Draghi offered assurances that more aggressive stimulus to help jumpstart the eurozone’s flagging economy is just around the corner. The plan is called—deep breath—Targeted Long-Term Repo Operation (TLTRO) and will allow the ECB to purchase covered bonds and asset-backed securities over the next two years. Such a plan will hopefully stimulate bank lending to non-financial corporations.

Below are some of the other programs in the ECB’s arsenal, courtesy of Visual Capitalist:  

TLTRO Compared to other ECB programs
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While Europe is seeking stimulus, Russia is staring down a recession next quarter because of international sanctions, declining oil prices and a weakening ruble. The combined costs of these setbacks are expected to reach a stunning $140 billion a year.

And we must not forget the positive U.S. jobs data, released today. Last month payrolls grew an astounding 321,000, exceeding market-watchers’ expectations, while the jobless rate holds at 5.8 percent. As many commentators have pointed out, this year has shaped up to be the strongest for job creation since President Clinton resided in the White House.

U.S. Jobs Data Continues to Improve
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Many Investors Stymied by Uncertainty
Despite all of the good news, the recent threat of market volatility, which we’ve seen plenty of in commodities and emerging markets, seems to have pushed close-to-retirement folks away from equity securities. The August and October downturns, not to mention the decline in gold and oil prices, have understandably heightened consumer fears.

Sways and Surges in the Russell 2000 Are Enough to Make Many Investors Peakish
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Fair enough. I’ve spoken with a lot of people who have shown the symptoms of seasickness from the dips and swings in the market.

A new study, in fact, highlights the growing number of green-faced investors who may be missing out on the long-term wealth creating opportunities of the market.

Allianz Life recently polled close to 800 Americans, none of them retired yet, and found that a vast majority—78 percent—said they “preferred financial products with guarantees over products with higher growth potential but the possibility of losing value.”

Also interesting, when Allianz asked them what they would do if they had extra money to invest, too many people chose inaction.

Surprisingly, over 30 percent said they would either put the cash in a savings account earning next-to-zero interest or keep waiting for the market to correct before investing. Caution is one thing, paralysis is another altogether.  As President George H. W. Bush once said: “If Columbus had waited until all the problems of his time were solved, the timbers of the Santa Maria would be rotting on the Spanish coast to this day.”

Another block of respondents, nearly 40 percent, said they preferred some balance. That is to say, they would invest in a product that provided a little growth and a little protection.

In other words, they’re perfectly willing to embark on what could be a rewarding voyage, so long as they have some Dramamine on hand—you know, the stuff that treats motion sickness.

As you shall see, a portfolio that strategically balanced both stocks and municipal bonds for the long term historically gave back healthy returns while protecting against some loss.

Balancing Act
Take a look at the chart below. What it shows are the risks and rewards of holding various instruments for one, five, 10 and 20 years.

Range of Stock, Bond and Blended Total Returns
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Based on annual returns from 1950 to 2013, the rewards were huge when securities were held for one year—but so were the risks. While stocks could have netted up to 51 percent, they could also have taken back as much as 37 percent. Bonds returned a little less, up to 43 percent, but the average loss was only 8 percent—a 29-point spread from stocks. A 50/50 portfolio, held for only a year, trailed both, returning up to 32 percent.

But a funny thing happened if you extended the holdings out. The blended portfolio began to play catchup not only on the upside but also the downside. Held for 10 years, such a portfolio outperformed bonds and was only two percentage points shy of matching stocks. It was also less risky.

Twenty years out, a 50/50 portfolio handily beat bonds and had an approximate amount of risk as stocks.

Investors who blended their portfolios might have made out with a little less than those who held only equity securities, but they also underwent a lot less stress and fewer sleepless nights—especially if they invested during the first decade of the century, when there were not one but three major financial crises.


I’ve just returned from London where I spoke at the Mines and Money Conference and I’ll share insights from that event soon. In the meantime, you can catch my interview with Bloomberg TV while I was there.


Index Summary

  • Major market indices finished mixed this week.  The Dow Jones Industrial Average rose 0.73 percent. The S&P 500 Stock Index gained 0.38 percent, while the Nasdaq Composite declined 0.23 percent. The Russell 2000 small capitalization index rose 0.78 percent this week.
  • The Hang Seng Composite fell 0.22 percent; Taiwan gained 0.21 percent and the KOSPI rose 0.29 percent.
  • The 10-year Treasury bond yield rose 14 basis points to 2.31 percent.

Domestic Equity Market

The S&P 500 Index was positive again this week, rising 0.38 percent, closing at another all-time high. The market has maintained its steady growth and recovery pace, spurred by global central bank actions and positive investor sentiment.

S&P 500 Economic Sectors
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  • The financials sector was the top sector, up 1.77 percent. The investment banks and brokers were leading the way as Morgan Stanley, Charles Schwab and Citigroup were among the best performers.
  • The health care sector was a close second, up 1.70 percent. This group was led by Biogen Idec, up 10.78 percent, which released positive trial results for an Alzheimer drug. Biotech and pharmaceutical companies generally outperformed along with managed care companies.
  • The best performing company this week was Avago Technologies, which rose 11.34 percent. The company reported better than expected earnings and revenues due to demand for the company’s radio-frequency semiconductors used in smartphones.


  • The telecommunications sector was the worst performer this week down 3.87 percent. The entire sector was pulled down by a very aggressive pricing plan from Sprint, which offered to cut in half the monthly rate of Verizon or AT&T customers.
  • Another area of weakness was consumer staples, which closed down 1 percent. Several stocks that had performed well in recent weeks gave back some of their gains, such as Wal-Mart, Monster Beverage and Coca-Cola.
  • The worst-performing company this week was Transocean, which fell 10.9 percent as the prospects for deep water offshore drilling have diminished with the recent decline in oil prices.


  • Global airlines have greatly benefited both from falling fuel costs and an increase in travel demands as a result of a growing amount of disposable income for consumers. This trend could stay strong for the next few months as oil prices historically hit a bottom in February.
  • The retail sales data will be closely watched next week, along with any commentary on holiday spending trends.
  • After OPEC’s meeting and decision to keep production at previous levels, we can see opportunity in consumer discretionary sectors, which were already expected to have one of the best holiday seasons of recent times.


  • U.S. energy producers with weak balance sheets or companies who are regionally exposed to higher production costs will be at greater risk.
  • Many industries have benefited from the increased economic activity from U.S. energy growth, such as railroads, fracking sand, pipelines and construction. New home sales and car sales in many energy producing regions have grown with the increase in wealth. This could be negatively impacted by a fall in oil and a resulting temporary loss of jobs as uneconomic wells close down.
  • With conflict in Ukraine on the rise again, and Russia overstating its available cash reserves, the instability of the Russian economy and potential for a domino effect is always present.


The Economy and Bond Market

U.S. Treasury bond yields moved sharply higher this week, primarily driven by a much better than expected employment report. Nonfarm payrolls grew 321,000 in November and September and October data was revised higher by 44,000. This very strong report puts the market on notice that the Fed may be closer to raising interest rates than many currently expect.

U.S. Labor Market on Trend to Add Most Jobs this year since 2000
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  • Employment data was very strong; along with increasing jobs, average hourly earnings rose more than expected. This is a very strong report and should bode well for the consumer this holiday season. 
  • U.S. manufacturing purchasing managers’ index (PMI) fell modestly in November but remains at an exceptionally strong level, and the new orders and backlog components saw solid increases.
  • German factory orders for October rose 2.5 percent, much better than the 0.5 percent estimate. After a period of disappointing economic results, German data has seen material improvements in the past few weeks.


  • Bonds sold off sharply this week as expectations build for a Federal Reserve response.
  • With oil prices falling, oil well permits dropped nearly 40 percent in November. While falling gasoline prices are positive for the average consumer, we are already seeing a drop in activity in the oil sector.
  • While U.S. economic data was generally strong, Chinese data has been more mixed with the HSBC China Manufacturing PMI falling to 50 in November, indicating no growth in the manufacturing sector.


  • The European Central Bank choose not to act this week but left the door wide open to  full-blown quantitative easing in the first quarter of 2015.
  • Bond yields spiked on Friday and we could see a reversal next week.
  • Municipal bonds continue to look like an attractive alternative in the broad fixed income universe.


  • After initial indications pointed toward a strong post-Thanksgiving shopping season, the weekend was disappointing to many retailers and raised question marks regarding the consumer’s willingness to spend this holiday season.
  • Moody’s downgraded Japan’s credit rating this week to A1. With Japan being the most aggressive in terms of quantitative easing, the risks are rising of unintended consequences. 
  • The geopolitical situation remains unusually fluid and could take a negative turn.

Gold Market

For the week, spot gold closed at $1,192.51 up $25.10 per ounce, or 2.15 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 1.90 percent. The U.S. Trade-Weighted Dollar Index gained 1.13 percent for the week.


  • Gold trading in China’s largest physical exchange is accelerating.  For the first ten months of 2014, the volume of contracts on the Shanghai Gold Exchange was 12,077 tonnes, compared with all of 2013 at 11,614 tonnes.
  • Klondex Mines announced a second toll milling agreement this week for its Midas Mill, where it has spare capacity. Klondex will process high grade ore, in excess of 1.5 ounces per ton from and pay the provider the value of the recovered gold less all toll milling charges.  Such deal structures are accretive to Klondex, which essentially is buying gold below the market price and processing it with a positive carry on the profit margin.
  • NGEx Resources announced its maiden resource for its 100 percent owned Filo del Sol project on the Chile-Argentina border of 280.5 million tonnes of copper.  With the associated gold content, the copper equivalent grade comes in at 0.66 percent.  Many of the older copper discoveries in South America are being depleted and are becoming more arsenic rich.  With the size of the alteration zone at Filo del Sol and with the resource drilling only testing a small part of it, NGEx expects that further drilling will grow the resource.


  • U.S. employment data released on Friday by the Bureau of Labor Statistics calculated the economy created 321,000 new jobs in November, 90,000 more than expectations and thus pushing gold below $1,200 for the close of trading this week.  Interestingly, ADP’s Employment Change report released on Wednesday came in at just 208,000 which was a miss versus the consensus estimate of 222,000.
  • It appears that after January 30, 2015, benchmark gold forward offered rates (GOFO) will stop as there may not be enough banks willing to make a public market in setting the rate for borrowing costs.  After many of the banks have been exposed for benchmark manipulation at their customer’s expense, few want to hang their hat on a number.  The GOFO rates were important in that sometimes they signaled when the physical market in gold was difficult to source supply.
  • Although the Swiss referendum on forcing the Swiss National Bank to return to sound banking versus running a hedge fund to manipulate markets based on political pressure failed to win the day, sellers tried to capitalize on the vote by sending gold down as low as $1,143 in European trading hours only to find buyers who then ran gold up to a high of $1,222, a $79 intraday swing before prices settled at $1,212.


  • China’s central bank seems to view the current price levels in gold as opportunistic.  The Peoples Bank of China circulated a draft plan to further ease import restrictions on bringing gold into China.   Qualified miners, all banks that are members of the Shanghai Gold Exchange, and even commemorative gold and silver coin makers would be eligible to import bullion.  The move would hopefully cut the premium paid to direct gold imports to China and may encourage miners and refiners to seek opportunities outside of China to secure gold.
  • Tightening the supply demand balance for new mine production, China, the world’s largest producer, is forecast by the China Gold Association, to see its current 10 percent gold production growth rate to fall by 2015 as lower prices deter new capital deployments to grow production.
  • Rio Tinto approved the development of a new ore pipe at its 60 percent owned Diavik Diamond Mine.  Although most capital investments in the precious minerals space are being deferred, Rio Tinto apparently sees further capital investments in the diamond space to remain lucrative.


  • Although gold has rallied nearly $60 dollars per ounce over the last thirty days, Societe Generale SA believes gold is still in a downward trend as long as prices don’t climb above the $1,225 to $1,240 range, according to Stephanie Aymes, head of technical analysis at the bank in London.  Ms. Aymes believes the drop in gold prices should extend to $1,085 over the next three months, marking a 50 percent retracement from the 2011 peak in gold.  Interestingly, gold had a 50 percent correction in the 1970s prior to rallying to all new highs.
  • Although India did scrap its 80/20 rule for the re-export of gold brought into the county, the country did not drop the 10 percent import duty on the gold price.  It is still unclear as to what will be the new plan for managing gold imports into India.
  • Egon von Greyerz, of Matterhorn Asset Management and one of the leading supporters of the Save our Swiss Gold Initiative, noted that although they lost the vote they did not believe they were treated fairly in the process.  The Swiss National Bank orchestrated the Swiss media almost daily to oppose the initiative in the press, proponents of the initiative were prevented from appearing in a debate on the referendum on Swiss TV, and the Yes campaign was blocked from receiving donations via PayPal.

Energy and Natural Resources Market

Oil Price impact on Fiscal Position Assuming No OPEC Policy Action
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  • Paper and forest stocks continued their recent outperformance in the natural resource complex this week on continued U.S. dollar strength and constructive fundamentals.  International Paper gained 2.32 percent on the week, reaching a new 52-week high price.
  • Strong earnings visibility and limited commodity exposure helped food-related stocks outperform natural resource producers during the week.  Archer Daniels Midland Co. made a new 52-week high this week. 
  • Regulated utilities continued to be a safe-haven for commodity and natural resource investors as the S&P Utilities Index approached its 52-week high price.


  • Chinese steel and iron ore futures dropped this week amid worries that steel demand in the world's top consumer may remain weak as construction activity slows during winter. Concerns of overproduction in global steel caused iron ore stocks to underperform for most of this week.
  • Energy stocks significantly underperformed the market following OPEC’s decision not to cut production last week.  The S&P Oil & Gas drilling companies declined by approximately 6.5 percent, as the broader market was roughly flat on the week.
  • Despite a strong rally in the Shanghai stock index this week, concerns over sluggish economic growth in China weighed on the price of copper as it remains below the key $3 dollar per pound level. 


  • Supportive data points for oil as 4,520 permits for new oil and gas wells were approved in November, down 37 percent from 7,227 in October; data this early is not always completely accurate but at least shows U.S. oil growth should slow next year and help mitigate supply glut fears.
  • Notable hedge fund closures within the commodity space may signal a trough for the struggling asset class. Such negative sentiment is typically a positive contrarian indicator.  Brevan Howard Asset Management LP, the hedge fund that oversees $37 billion, is shutting its $630 million commodity fund after losses this year.
  • The global manufacturing sector continued to grow in November, according to the manufacturing PMI data released on Monday, something which is supportive for commodity demand.


  • Counter to recent speculation, Mario Draghi said the European Central Bank will delay any program of sovereign-debt purchases (QE stimulus) until early next year, which could further threaten an already weak European economy.
  • As long as oil prices hover around the $60per barrel level, energy producers could see their debt-to-enterprise levels rise to point that could imply a 30 percent default rate for the whole segment, according to one Wall Street firm.

Emerging Markets


  • Chinese A-share and H-share indices outperformed among emerging markets again this week, surging 9.35 percent and 4.14 percent respectively, driven by financials stocks.   Lower than expected government PMI fueled speculation of imminent cuts on bank reserve ratios in addition to interest rate cuts announced two weeks ago.
  • Greek stocks also outperformed this week, rising 6.02 percent, a strong rebound from the previous week’s selloff.  Possible Troika extension of Greece’s bailout by six months to mid-2015 coupled with speculation on potential start of quantitative easing by the ECB at its January meeting sent the high beta Greek markets higher.
  • Vietnamese stocks also advanced 2.46 percent for the week, as overseas workers’ remittances to Vietnam are expected to surpass $12 billion in 2014 and, along with international bond sale, help the government narrow its budget deficit, according to the National Assembly’s financial committee.


  • Russian stocks were among the worst performers in emerging markets this week, declining 6.73 percent.  Continued depreciation of the Russian ruble, which lost another 5.34 percent for the week, and the continued decline in crude oil prices post-OPEC meeting kept investors apprehensive about Russian corporates’ ability to repay U.S. dollar denominated debt.
  • Malaysian stocks also underperformed, retreating 6.63 percent for the week.  The October trade surplus unexpectedly shrunk to 1.2 billion ringgit, the lowest level since April 2013, from 9.3 billion ringgit in September.  The only net oil exporter in Southeast Asia, Malaysia was negatively impacted from falling crude oil prices.
  • Brazilian stocks were among the laggards in emerging markets as well, down 5.61 percent this week. The ongoing slump in commodities prices, especially iron ore and crude oil, driven by weak Chinese and European demand, continued to weigh on investor sentiment towards Brazilian commodity exporters.


  • The fast and furious ascent of Chinese A share stocks since China’s official interest rate cut on November 21 may continue to lure more investor participation, based on the historically tight correlation between new brokerage account openings and the local market.  Lower account opening fees and looser margin financing requirements, thanks to government policy changes, have stimulated interest from retail investors.  Local institutional investors may be tempted to buy on dips due to year end performance pressure.  Dual-listed Chinese H share stocks in Hong Kong, trading at average 15 percent discount to A shares, should also benefit from A shares’ rise.

Market Friendly Government Policy Bullish for Chinese A Shares
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  • A new five-year low in crude oil prices after OPEC’s decision not to cut production should continue to benefit net energy importing countries within emerging markets, including China, India, Turkey, Thailand, and Taiwan by reducing corporate raw materials costs.  
  • Blowout U.S. nonfarm payroll numbers for November, coupled with lower fuel costs, should increase the probability of a better U.S. holiday shopping season which bodes well for Asian exporters of consumer goods.


  • A number of challenges could continue to weigh on investor sentiment toward South Korean equities. These include exports pressured by a stronger Korean won versus the Japanese yen, weaker corporate return on equity and negative earnings revision, as well as price-to-earnings valuation above the decade average.
  • A new five-year high in the U.S. dollar could remain a challenge from a global liquidity perspective, given the historical inverse relationship between the U.S. dollar and emerging market equities in general.
  • A new five-year low in crude oil prices after OPEC’s decision not to cut production should continue to pressure net energy exporting countries within emerging markets, including Russia, Brazil, and Middle Eastern countries among others.  

© US Global Investors

© U.S. Global Investors

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