Have Winds Shifted to Pro­vide Relief to Investors?

By Frank Holmes, CEO and Chief Invest­ment Offi­cer, U.S. Global 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 yes­ter­day, 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.

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.

What’s the prob­a­bil­ity of the U.S. mar­ket head­ing higher in the year of a pres­i­den­tial elec­tion? Reg­is­ter today for our web­cast next Tues­day to hear from Jef­frey Hirsch of the Stock Trader’s Almanac, the annual resource that count­less money man­agers, traders and investors have come to rely on. We’ll dis­cuss Jeffrey’s nearly 50 years of mar­ket research, along with the many other his­tor­i­cal indi­ca­tors such as the Jan­u­ary Barom­e­ter and the Santa Claus Rally. Sign up now.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

Comments

Comments are closed.