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The Good, the Bad and the Ugly in Real Time
By Frank Holmes
CEO and Chief Investment Officer

Anyone who has visited New York has probably seen The National Debt Clock, a digital readout of how much the federal government owes its creditors. The speed at which that number grows is daunting.

A more comprehensive monitor can be found online at USDebtClock.org. Not only do you get the total national debt of $12 trillion (and rising), you also get a raft of other key economic trend data for the country and its citizens based on information gathered from reputable sources that include the Census Bureau, Treasury Department, Federal Reserve and the Congressional Budget Office.

On the day before Thanksgiving, I checked this web site in the morning and then again on Friday morning, and I’d like to share a few observations about what happened during these two days.

The Fed printed up more than $10 billion in new money over that period, or more than $200 million per hour. Any wonder why gold remains an attractive asset class and our overseas trading partners are wary of the dollar?

The national debt grew by nearly the same amount, with each taxpayer’s share of that burden going up $65 to $110,781. The federal budget deficit rose by $9 billion, and total unfunded liabilities shot up almost $30 billion to $106.3 trillion, or $345,088 per citizen. We’ve commented in the past on how federal deficits have historically been positive for gold and especially gold equities.

Looking at the largest federal budget outlays: More than $5 billion went out the door for Medicare/Medicaid, $4 billion in Social Security benefits, $3.6 billion for national defense and the war efforts in Iraq and Afghanistan, and more than $2 billion in interest payments on the national debt.

One worthwhile feature of the USDebtClock.org is that it tells a fuller story by making room for good economic news.

Gross domestic product in the United States grew by nearly $200 billion, or $1,600 per worker, and about $40 billion in value was added to the total national assets during the two days.

And we also see evidence that, while the federal government continues to strap on heaps more debt, the citizenry is going in the other direction.

About $4 billion in private debt was paid down – most of that was in mortgages, reflecting the prolonged weakness in housing, but more than $1 billion in personal debt and $700 million in credit card debt went away. Personal savings climbed by more than $1 billion over the two days as Main Street continues deleveraging after years of free spending.

You can get to the U.S. Debt Clock by clicking on the image at the top of this commentary. I encourage you to pay a visit – there aren’t many places where you can get so much useful and important economic information at a single glance.

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

Index Summary

• The major market indices were mostly down this week. The Dow Jones Industrial Index fell 0.08 percent. The S&P 500 Stock Index rose 0.01 percent, while the Nasdaq Composite finished 0.35 percent lower.
• Barra Growth outperformed Barra Value as Barra Value finished 0.21 percent lower while Barra Growth advanced 0.21 percent. The Russell 2000 closed the week with a loss of 1.28 percent.
• The Hang Seng Composite finished lower by 5.21 percent, Taiwan fell 2.50 percent, and the Kospi lost 5.93 percent.
• The 10-year Treasury bond yield closed at 3.20 percent, down 14 basis points for the week.

Domestic Equity Market

For the holiday-shortened week thru 11 a.m. ET on Friday, the figure above shows the performance of each sector in the S&P 500 Index. The best-performing sector was telecom services, up 3.6 percent. Utilities and health care were also among the better-performing sectors, while financials, technology and consumer staples were the worst performers.

Within the telecom services sector, the best-performing stock was Frontier Communications Corp, up 5.6 percent. Other outperforming stocks in the sector were Verizon Communications Inc and AT&T Inc.

Strengths

• The household appliance group was the best-performing group for the week, up 4.2 percent, led by its largest member, Whirlpool Corp. This stock’s performance was likely helped by the positive news this week about both new and existing home sales.
• The healthcare equipment group outperformed, rising 3.8 percent. Its largest member, Medtronic Inc., reported earnings that beat the analyst consensus estimate, and it raised its earnings guidance for the fiscal year.
• The integrated telecom services group was among the outperformers, rising 3.7 percent for the week. Investors apparently sought out relative safe havens with high dividend yields. AT&T Inc. and Verizon Communications Corp., with yields of 6 percent and 5.9 percent respectively, were the main drivers of this group’s performance.

Weaknesses

• The healthcare facilities group was the worst performer, down 6 percent. The single member of the group, Tenet Healthcare Corp., had risen strongly since the March low, and profit-taking may have been the cause of this week’s decline.
• Four of the ten worst-performing groups were real estate investment trusts (industrial REITs, retail REITs, residential REITs, and diversified REITs). An article in an online financial publication stated that shares of REITs have jumped 70 percent from their March lows, leaving most of the good ones trading at hefty premiums to the underlying value of their property.
• The human resources & employment services group underperformed, losing 4 percent. This weakness may be related to the relatively slow pace of new job creation.

Opportunities

• There may be an opportunity for a gain in merger & acquisition transactions.
• The strength in the market since March could be an opportunity to eliminate weaker companies in portfolios and upgrade to companies with better fundamental outlooks.

Threat

• Should investors’ expectations for an improving economy not come to fruition on a reasonable time frame, it could be a threat to stock prices.

The Economy and Bond Market
Bonds rallied modestly during the holiday-shortened week. Economic data was mixed and the overall environment remained conducive to bond appreciation. Consumer confidence rebounded slightly in November, which can be seen in the chart below. Consumer confidence will be a key driver of the holiday selling season, which kicked off in earnest on Friday.

Strengths

• Consumer confidence rose, increasing hope for retailers this season.
• Home prices rose for the fourth month in a row and, combined with better-than-expected new and existing home sales, it appears the housing market has improved recently.
• Personal income and spending both rose more than expected in October and hints at reasons behind the increase in consumer confidence.

Weaknesses

• Third-quarter GDP growth was revised down from 3.5 percent to 2.8 percent, but met expectations.
• October durable goods orders fell 0.6 percent, which was well below expectations. This is on the heels of last week’s disappointing industrial production report.
• The Chinese government warned the country’s banks to be cautious regarding risky loans and potentially signaled a need to raise capital.

Opportunity

• Expectations continue to build for growth in the U.S. in the current quarter, possibly by as much as 4 to 5 percent. The global economic recovery appears to be taking hold.

Threat

• The Federal Reserve voiced concerns that, by maintaining a very accommodative monetary policy, it risks fueling speculative investments and potentially allowing another bubble to build.

Gold Market

For the week, spot gold closed at $1,177.63 per ounce, up $27.03, or 2.35 percent. Gold equities, as measured by the XAU Gold & Silver Index, lost 0.41 percent for the week. The U.S. Trade-Weighted Dollar Index fell 0.88 percent.

Strengths

• Gold reached another record high above $1,190 per ounce, boosted by a downward revision of third-quarter U.S. economic growth, expectations that the Federal Reserve will keep interest rates low for an extended period, and the possibility of India’s central bank buying the 203 metric tons of gold still for sale by the International Monetary Fund.
• Russia’s finance minister said that the Russian repository of precious metals and gemstones, also known as Gokhran, intends to sell 30 metric tons of gold to the Russian Central Bank. This follows the central bank’s decision to increase gold reserves by 15.6 metric tons, or 2.6 percent, in October as central banks scramble to diversify out of the U.S. dollar.
• The World Gold Council said total identifiable gold demand for the third quarter of 2009 reached 800.3 tons, or $24.7 billion in dollar terms, up 15 percent from the previous quarter as gold’s appeal as a store of value attracted more investors. According to the CPM Group, demand for physical gold, including bars and coins, is projected to rise 21 percent this year to 52.3 million troy ounces, the highest in history.

Weaknesses

• A recent article from the Wall Street Journal highlighted that a surge in gold demand has caused many gold storage facilities to be overloaded. HSBC has told retail clients to remove their small holdings to make room for institutional holdings. Relocating excess gold to other vaults around the country poses a threat to security and raises concerns. However, the article emphasizes the rising trend of physical bullion ownership rather than through the use of financial contracts.
• The European Central Bank said gold and gold receivables held by eurozone central banks fell 3 million euros to 238 billion euros in the week ending Nov 20 because of the sale of gold by one eurozone central bank.
• Markets slumped the last two days of the week as news emerged that Dubai World is faced with restructuring its debt. Dubai had borrowed $80 billion to finance a construction boom aimed at transforming its economy to a tourism and financial center. Finding enough tenants to carry the debt burden has been problematic, as home prices have fallen 50 percent from their 2008 peak in Dubai.

Opportunities

• Vietnam is the first Asian nation to raise borrowing costs. The benchmark rate has increased by 100 basis points to 8 percent after inflation accelerated this month. Concern about a widening budget deficit and a rise in consumer prices has prompted Vietnamese investors to buy gold. Also supportive of gold is the decision of the Vietnamese government to lift the ban on gold imports earlier this month to close the spread between domestic and international prices.
• In a bid to diversify reserves, Russia’s central bank will add Canadian dollars and other currencies to its reserves to reduce dependence on the U.S. dollar. The central bank has also said it will increase gold reserves and promote regional currencies in trade to reduce exchange rate volatility.
• The president of the Federal Reserve Bank of St. Louis said the Fed should expand quantitative easing through additional asset purchases past March 2010 if the domestic economy were to register weaker growth. Any further quantitative easing measures may have negative implications on the U.S. dollar and be a positive for gold.

Threats

• The chairman of the Senate Armed Services Committee is pushing for a new bill to tax Americans who earn more than $200,000 per year to pay for more troops to be sent to Afghanistan. The White House budget director has estimated that each additional soldier in Afghanistan could cost $1 million per year, for a total that could reach $40 billion if 40,000 more troops are added.
• CBS News reported that the U.S. Postal Service lost $3.8 billion in the most recent fiscal year, following losses totaling $7.8 billion in 2007 and 2008 combined. To date, the agency has borrowed $10.2 billion from the U.S. Treasury.
• The Federal Deposit Insurance Corporation said the deposit insurance fund had been depleted and had a negative balance of $8.2 billion at the end of the third quarter because of the rise in the number of bank failures throughout the year. F.D.I.C official expect that bank failures will cost the insurance fund $200 billion over the next five years. If losses grow worse, officials might have to impose additional special assessments on banks or draw on the Treasury’s credit lines.

Energy and Natural Resources Market

Strengths

• Natural gas futures climbed 15 percent week-over-week as data released from the Texas Railroad Commission indicated September production fell 8.2 percent from August.
• According to data released by the U.S. International Trade Commission, copper imports in September soared to 56,012 metric tons, up more than 50 percent compared with August. Although this is only one month’s data, it is encouraging in that it could imply U.S. copper demand is picking up.
• Nucor Corp. announced increases for January spot steel price by $30 per ton citing an “incremental improvement in its order book.”

Weaknesses

• According to the International Copper Study Group, world output of copper outpaced demand by 151,000 metric tons in August. Global demand dropped 1.5 percent in the first 8 months of 2009 compared with a year earlier.
• The UxC spot price for uranium fell another dollar this week and now sits at US$43.00 per pound, the fourth consecutive down week.
• Steel utilization decreased to 64.5 percent for the week ending November 21 versus 65.3 percent in the previous week. Quarter-to-date utilization has averaged 62.8 percent versus 54.2 percent in the previous quarter. Seasonal factors typically weigh on steel utilization/production in the fourth calendar quarter, as steel mills shut down to perform routine maintenance during the holiday period.

Opportunities

• Chinese soybean imports are expected to increase 25 percent in December to 4 million metric tons, according to the China National Grains & Oils Information Center.
• Teck Resources Ltd. said growing metal use in China, South Korea, India, Japan and Brazil more than makes up for weaker demand in the U.S. “We’re seeing strong growth in metal consumption that is up from the economic low point in countries such as India, Japan, Korea and of course Brazil,” Teck CEO Donald Lindsay said. “When these sources of metal demand are added to that of China, it more than makes up for what is clearly a very weak U.S. economy.”
• Chinese companies, including state-owned miners Chinalco and China Minmetals, may invest $4.4 billion over the next three years in Peru, the country’s cabinet chief Javier Velasquez said. Chinalco plans to start up the $2.2 billion Toromocho copper mine by 2012, while Minmetals and partner Jiangxi Copper Corp. will invest $1 billion in the Galeno copper and gold deposit next year, Velasquez said. Other Chinese companies have pledged to invest $1.2 billion, he said.

Threat

• The U.S. Commerce Department cut the average duties on $2.7 billion worth of Chinese pipe imports to 13.2 percent from the 21.3 percent set in September, a measure taken after both countries last week agreed to ease trade tensions. The decision, affecting imports of steel pipe used in oil wells, is the final ruling by the Commerce Department, and sends the case to the US ITC. China will probably seek mediation through the World Trade Organization, Wu Xinchun, the deputy secretary general of the CISA said.

Emerging Markets
Strengths

• Taiwan’s GDP rose 2 percent in the third quarter sequentially from the previous quarter, ahead of market expectations, as the recovery in domestic consumption more than offset a moderation in exports and a correction in investment.
• In Kazakhstan, the economy is stabilizing and is likely to experience a less painful contraction and a more rapid recovery compared with Ukraine and Russia. GDP is on track to match 2008 level on the back of stronger performance of the manufacturing, mining and agricultural sectors.



• Brazil maintained a loose fiscal policy by extending the deadline for IPI tax increases on car and construction materials sales. The IPI tax is an industrial products tax for imports. This government decision contributes to lowering import prices, thereby lowering prices for consumer goods. Additionally, it places downward pressure on the Brazilian real. The real’s appreciation has been a challenge to Brazil’s exporters.

Weaknesses

• China’s banking regulator warned domestic lenders to comply with capital adequacy requirements or face punishment such as limits on market access, overseas investments and new branches.
• Dubai’s attempt to reschedule its debt rattled investors in emerging markets. Sovereign credit default swap spreads widened, currencies weakened and equity markets in the region closed at their lows for the week.
• Mexican retail sales were down 4.6 percent in September, implying a slower economic recovery.

Opportunities

• China has made tourism a “strategic pillar industry,” as domestic travel proves one of the easiest ways to elevate consumption. In fact, online ticketing remains one of the least penetrated consumer markets in China compared with the world average, and tremendous growth potential exists for established travel website operators in China.



• Retail credit growth in Turkey is up 10 percent year to date. The momentum in consumer loans is likely to accelerate further once the Central Bank of Turkey gives a clear message that ongoing monetary easing has come to an end.
• Colombia’s central bank unexpectedly cut interest rates by 50 basis points to 3.5 percent in order to boost economic growth. The central bank believes it can ease monetary policy because the inflation rate at 2.7 percent is below the target level. Colombia’s economic recovery has been lagging, partly due to a material decrease in trading with Venezuela due to political differences.

Threats

• Near-term risks linger for those Chinese banks in need of fundraising in order to maintain rapid loan growth next year, as well as to comply with more stringent capital adequacy requirements.
• The prospects for the economies in Eastern and Central Europe to generate export-led recoveries are tempered by the fact that their currency depreciation has been relatively small compared with previous crises (see chart).



• Dubai’s attempt to delay debt repayments will probably negatively impact capital flows to emerging markets in Latin America as investors’ risk appetite for emerging market assets may wane.
  

Please consider carefully the 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 Eastern European Fund invests more than 25% 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 funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The price of gold is 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% to 10% of your portfolio in gold or gold stocks. 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% 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.

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

Holdings as a percentage of net assets as of 9/30/09:
Frontier Communications Corp.: 0.0%
Verizon Communications Inc.: 0.0%
AT&T Inc.: 0.0%
Whirlpool Corp.: 0.00%
Medtronic Inc.: 0.0%
Tenet Healthcare Corp.: 0.0%
Nucor Corp.: 0.0%
Teck Resources Ltd.: Global Resources Fund 2.00%, Global MegaTrends Fund 1.13%
Jiangxi Copper Corp.: 0.0%

*The above-mentioned indexes 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 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 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 Consumer Confidence Index (CCI) is an indicator which measures consumer confidence in the Economy.