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- 5 Reasons Why Short-Term Municipal Bonds Make Sense Now
- September 29, 2014
Last week Federal Reserve Chairwoman Janet Yellen insisted that record-low interest rates will stay as they are for a "considerable time." So what does that mean for bond investors? Many people realize that rising interest rates affect yields and prices, but what others might not know is that if you stick closely to short-term, investment-grade debt securities—the very kind our Near-Term Tax Free Fund (NEARX) invests in—the impact of such a rate hike is not as dramatic as some investors might think.
As you can see in the chart below, NEARX has been a steady grower over the years, in times of rising and falling interest rates as well as extreme market downturns. In fact, it's taken nearly a decade and a half for the S&P 500 Index to surpass NEARX using a hypothetical $100,000 investment back in June 2000.
Think of NEARX, then, as the emotionally-stable, no-drama fund.
Take a look at the latest performance of the fund here.
Although short-term bonds might not be as sexy as common stocks in fashionable brands like Apple and Tesla, they play an important role in any serious investor's portfolio. Below are five reasons why investing in municipal bonds makes sense now more than ever.
1. Short-term, investment-grade municipal bonds are less volatile in a climate of rising interest rates.
Interest rates are currently at 50-year lows, but as I wrote about previously, they can't stay near zero forever. And when rates do rise, bond prices will fall. At first glance, this inverse relationship might seem illogical, but it makes sense. If newly issued bonds carry a higher yield, the value of existing bonds with lower rates fall.
Let's imagine the Fed raised rates tomorrow. What potential implications would that have on the yield curve and bond prices? As you can see in this hypothetical example using a two-year, 10-year and 30-year Treasury, the farther out the maturity date and higher the rate hike, the more your security would be affected. Remember, these are Treasuries, not municipal bonds, but munis could be similarly affected.
As you might guess, what this indicates is that investors should take advantage of short-term bonds, which are less sensitive to rate increases than longer-term bonds that are locked into rates for greater periods of time.
I want to reassure investors that when the Fed raises rates next year, as many economists and analysts speculate, it will most likely be done incrementally over the course of several months rather than in one fell swoop. Just as deep sea divers risk getting the bends when they surface too fast, there's economic risk in allowing rates to rise too much too quickly. The Fed is well aware of this.
Below is one research firm's projection of what rates might look like at different time periods in the future. As you can see, the probability of higher rates rises gradually over time. Some readers might perceive this forecast as too dovish, but it makes the point that an unexpectedly huge rate hike that some investors fear is unlikely.
What the chart also shows is that there's still time to gain exposure to short-term securities, which are less sensitive to interest rate hikes. NEARX not only invests in such securities but is actively managed by professionals who closely monitor the bond market and interest rate environment.
John Derrick, Director of Research at U.S. Global Investors and portfolio manager of the Near-Term Tax Free Fund, stated during his recent interview with Oxford Club Radio that rising interest rates can actually work in the fund's favor: "When interest rates rise, we'll try to step in and use that volatility to our advantage. You just try to be prudent about how you position duration and maturity structure."
2. Investment-grade munis have a low default risk.
In 2013, your chances of investing in a reliable, secure municipal bond from an issuer that wouldn't default were roughly 99.9 percent. That's according to the number of bond issues in the S&P Municipal Bond Index that defaulted last year. Out of more than 21,000 bonds in the index, only 23 failed to meet their payment obligations.
In the table below, you can see there's a greater likelihood that an issuer won't default the higher its rating and the shorter its maturity. Bottom line: these securities are relatively safe.
In a July Frank Talk, John held that:
"On a tax-adjusted basis, municipal bonds have a very compelling risk-reward profile, which means the risk-adjusted returns are high. To take advantage of this, I would encourage investors to add exposure to their portfolio by investing in a product that holds high-quality, traditional municipal bonds."
John reiterated this point during his interview with Oxford Club Radio: "At the end of the day, we stick to the high-quality munis. We really don't play in the higher yield front, where there's more of a risk of a correction."
3. Municipal bonds are tax-free at the federal level.
As you might already know, munis are typically exempt from federal income taxes and often from state and local income taxation as well. This fact is especially appealing to high net worth individuals who want to minimize the tax impact on their investments.
That means more money stays in your pocket and can be reinvested.
4. Munis help diversify your portfolio.
It's prudent to have a diversified portfolio of both equity and debt securities, not to mention cash and commodities such as gold. Stocks can offer you growth and capital gains while bonds provide income and can help protect your assets during more volatile times.
Even within the bond portion of your portfolio, it's important to diversify the types of debt securities you're investing in. NEARX, for instance, holds a wide range of municipal bonds, from school districts to transportation to utilities.
"We're buying high-quality municipals, GOs [general obligations] and essential service revenue," John says.
He likes to describe NEARX as a "classic municipal bond fund."
"We operate in a very conservative manner, probably much more so than most of our peers. It's not the kind of fund where you're going to wake up one day and find that some high-yield security has blown up."
5. Municipal bonds help make America strong.
Speaking of schools, transportation, utilities and other projects, bonds help state and local governments build, repair and maintain much-needed services. This is one of the most compelling reasons to invest in short-term, investment-grade munis. Not only do they have an attractive risk-reward profile and offer tax-free income, they also ensure that municipalities have the funding to provide their citizens with essential needs like education, roads and energy and help build their communities.
Below you can see what some of the largest bond issuances are earmarked for. Without exception, the revenue that bonds generate goes toward services that make America's states, counties and cities attractive places to live.
Also, there's reason to believe that issuing bonds is the most effective way for governments to generate the funding necessary for specific undertakings. In a recent POLITICO Magazine article entitled "Are Conservative Cities Better?", columnist Ethan Epstein shows that whereas some cities and municipalities rely on and raise taxes indefinitely to fund projects and programs, others prefer instead to issue bonds because they're intended for only one sole purpose:
[B]ond issues go to specific projects, and cover only a specific amount of money. That's different from funding a social program, or simply forking over higher taxes and hoping that the extra funds go where the government says they're going.
People are OK with investing in their communities," says former Mesa, Arizona, mayor Scott Smith, adding, "People don't trust programs. They trust…tangible results."
However one feels about social programs, Mayor Smith's point is clear: bonds do precisely what they're designed to do, namely, fund projects such as hospitals and roads that benefit all citizens, young and old, rich and poor.
Take a Look at NEARX.
The Near-Term Tax Free Fund recently received the coveted five-star rating from Morningstar for the three-year performance period in the Municipal National Short-Term category, and it's been rated four stars overall for many years. The turnover of NEARX is very low, and it has performed well against its peers. Additionally, the fund seeks preservation of capital and has a floating $2 net asset value (NAV) that has demonstrated minimal fluctuation in its share price.
For those investors who wish to seek tax-free income and portfolio diversity and who want to take an active role in strengthening America's infrastructure, I encourage you to request an information packet.
Remember to sign up for our October 2 webcast, "One World Market, Many Central Banks: How Will Your Investments Be Impacted?" Participants can receive a continuing education (CE) credit. Also, be sure to download my latest whitepaper, "Managing Expectations: Anticipate Before You Participate in the Market."
Stay curious!
Please consider carefully a 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.
Morningstar ratings based on risk-adjusted return and number of funds
Category: Municipal National Short-Term Funds
Through: 08/31/2014
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. The Near-Term 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. The Near-Term Tax Free Fund may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer. Bond funds are subject to interest-rate risk; their value declines as interest rates rise.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P Municipal Bond Index is a broad, market value-weighted index that seeks to measure the performance of the U.S. municipal bond market.
Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Near-Term Tax Free Fund as a percentage of net assets as of 6/30/2014: Apple 0.00%, Tesla 0.00%.
Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund's monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.
Past performance does not guarantee future results. Diversification does not protect an investor from market risks and does not assure a profit.
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- China Defies Analysts' Predictions with an Encouraging PMI
- September 24, 2014
The forecast called for overcast skies and instead we got a little sunshine.
HSBC announced Tuesday that the preliminary purchasing managers' index (PMI) for China rose to 50.5, a modest improvement from August's 50.2. Analysts were expecting the index to decline to a neutral 50.0, based on softening factory employment, but this is a case when you're relieved others were off the mark.
Any number above 50.0 indicates expansion in the manufacturing sector; any number below, contraction. This is the fourth consecutive month that China's PMI has remained above that magic threshold, a sign that the country's manufacturing is stabilizing. The last time we saw a winning streak of this sort was between August and December of last year.
Every month, we eagerly anticipate the results of the HSBC China Manufacturing PMI because it partially informs the investment decisions we make in our China Region Fund (USCOX). Also, since China is the world's second-largest economy, its economic health greatly affects global markets and drives commodity demand.
GDP is helpful, as it measures a country's economic health, but it tells an incomplete story. Whereas GDP looks only at how things are, the PMI looks forward to how things might be—invaluable information for active money managers like us in the emerging market and resource spaces.
Hoping for Another "Cross-Over"
Although the PMI has remained above 50.0, the one-month moving average failed to cross above the three-month, as it did in May and held through July. According to our research, when the one-month crosses above the three-month, there's a higher level of probability that commodities and commodity stocks will rise. The reason for this is, simply, the more manufacturing that's taking place, the more commodities will be in demand.
The real test is the global PMI, which is due out once all of the countries' separate PMIs, China's included, are combined. If the global PMI's one-month crosses above the three-month, then there's a greater probability that commodities will perform well. But if the cross-over doesn't occur, then the opposite effect happens, as you can see in the chart below.
Right now, the U.S. is largely holding the rest of the world up like a pair of suspenders, as I wrote about earlier this month. China's 50.5 might be encouraging, but there's room for improvement.
This news follows the Chinese central bank's announcement that it will inject $80 billion into the country's five largest banks to jumpstart the economy and help Premier Li Keqiang make good on his reassurance to global CEOs that China will achieve its targeted GDP growth rate of 7.5 percent.
Please consider carefully a 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.
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 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 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 HSBC Flash China Manufacturing PMI is published a week ahead of the final HSBC China PMI every month. It analyzes 85-90 percent of the responses to the Final PMI from purchasing executives in more than 400 small, medium and large manufacturers, both state-owned and private enterprises.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Past performance does not guarantee future results.
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- Stocks Rally Following Janet Yellen's Conference and Scotland's Historic Referendum
- September 22, 2014
Interest rates can't stay zero forever, but for now it's more of the same.
The Federal Reserve's bond-buying program, enacted to spur growth, will indeed be winding down next month, as expected. But record-low interest rates will stay as they are for a "considerable time," Fed Reserve Chairwoman Janet Yellen insisted during her Wednesday press conference last week.
It was "game on" for the stock market following Yellen's speech. The Dow Jones Industrial Average closed at a new record high of 17,156, while the S&P 500 Index rose two points to close at 2,001, the Nasdaq nine points to end at 4,562.
This news gives stocks reason to rally for a "considerable time," or at least until the Fed gives us a more concrete timeframe for a rate hike.
With interest rates very likely to rise sometime next year and at an indeterminate pace, you want to be diversified with short-term bonds, as they're less volatile to rate changes. Our Near-Term Tax Free Fund (NEARX), which invests in such bonds, recently received the coveted five-star rating from Morningstar for the three-year performance period.
Last week in an interview with Marc Lichtenfield's Oxford Club Radio, U.S. Global Investors Director of Research John Derrick highlighted some of the fundamentals of NEARX:
"Our average maturity's around 2.75 years, so under three years right now… The overall fund structure is pretty conservative. [NEARX] really doesn't move around that much. It's a steady grinder."
Rolling with the Punches
Chairwoman Yellen stated that the decision to raise rates was "highly conditional" and dependent on the Federal Open Market Committee's (FOMC) assessment of the economy, which appears right now to be showing moderate or, in some sectors such as housing, faltering growth. Inflation has also fallen short of expectations.
But as always, we see opportunity.
The producer price index (PPI) numbers, released last Monday by the U.S. Bureau of Labor Statistics (BLS), reveal that demand goods such as gasoline and food dropped 0.3 percent while demand services rose 0.3 percent, resulting in an unchanged final demand of 0.0 percent.
Meanwhile, the consumer price index (CPI), which measures the cost of living, unexpectedly decreased 0.2 percent in August, the first time it's done so since April of last year. The all-items index, however, has risen at a rate of 1.7 percent over the last 12 months.
U.S. housing starts had a disappointing downturn last month, the Commerce Department reported, tumbling 14.4 percent to a seasonally-adjusted annual rate of 956,000 units. This decline is even lower than the projected -4.9 percent. Building permits fell 5.6 percent, below the -1.6 percent economists estimated.
Despite a decline in starts and permits from July, homebuilders' confidence in the market soared to 59.0, according to the National Association of Home Builders/Wells Fargo builder sentiment index. This is the highest such reading since November 2005, before the housing bubble collapsed.
We might see stronger growth in the housing market very soon, as U.S. fixed mortgage rates recently had their biggest weekly jump of the year, following the increase in 10-year Treasury yields on the heels of Yellen's press conference. This might help light a fire under hesitant homebuyers and encourage them to act. According to the Mortgage Bankers Association's (MBA) weekly survey, mortgage applications rose 7.9 percent from a week earlier.
Through the 12 months ended August 2014, the annual U.S. inflation rate is 1.7 percent, below many economists' and Fed policymakers' hopeful estimate of 2 percent.
Although lower-than-expected inflation might lead to less pain at the pump and checkout aisle, it can also sometimes lead to a sluggish economy. Debt financing becomes challenging. And as counterintuitive as it might seem, when prices are down, people tend to sit on their money and wait for even better prices to come along.
Rising prices, on the other hand, often prompt spending. For this reason, a little inflation is welcomed by some companies and their employees. Profits and wages can both increase, which stimulates borrowing and spending. The jump in mortgage rates is a perfect example.
As the U.S. Ends Quantitative Easing (QE), China and Europe Begin
With low inflation also comes the risk of dipping into deflation territory, which China is now facing. The country's own PPI declined 1.2 percent in August, continuing a 30-month downtrend, while its CPI rose only 0.2 percent from July. Its purchasing managers index (PMI) also dropped last month, as did imports and manufacturing jobs.
To counteract this slowdown, China's central bank injected $81 billion to five state-owned banks. So far the market seems to have liked the stimulus measure, as stocks in both the Hang Seng Index and Shanghai Composite Index have rallied, tracking positive stock performance on Wall Street. Only time will tell if the world's second-largest economy is in a permanent recovery mode, but we're optimistic.
Like the People's Bank of China, many central banks around the world continue or are implementing easing policies. The European Central Bank (ECB), for instance, will be buying close to $1.3 trillion in bonds to provide fresh capital to the Union's depressed banking system. All of this global stimulation activity is good for global financial markets and specifically U.S. equities. We'll be exploring this very topic in our October 2 webcast, "One World Market, Many Central Banks: How Will Your Investments Be Impacted?"
Scots Vote "Nay" in Historical Referendum
Speaking of one world market, it breathed a collective sigh of relief last Thursday when Scotland voted to stay in its long-term relationship with the United Kingdom. Once the votes were counted, stocks in London rose and the pound bounced up a quarter of a percent.
As a Canadian, I'm familiar with separatist movements. In Scotland, as it is with Quebec, there seems to be a disconnect between wanting to break up the government in order to obtain more government. At a time when there's so much uncertainty in the world, when members of the eurozone are in the doldrums, when China is trying to jumpstart its economy, when Russia is rattling its saber and ISIS is spreading as quickly as the Ebola virus, the last thing we needed was a major restructuring of one of the globe's most stable and reliable countries.
Granted, every people has the right to declare its independence for the right reasons. If that were not the case, America might today be in the same family as Scotland. University of Bath professor Chris Martin said it best when he wrote: "The desire for independence seems to be driven by romantic views of a separate Scottish identity and culture rather than by cold economic logic."
Below you can see the current gross domestic product (GDP) growth forecasts for the U.S., eurozone, U.K. and China. Had Scotland voted "yes" in the referendum, it's possible that the increased uncertainty might have stalled growth among these powers and altered economists' predictions.
Indeed, it's important to realize that the U.S., E.U. and China—the world's three greatest economic powers—all rely on one another and help drive the rest of the globe.
Even many Scots were apprehensive of the economic implications of leaving the U.K. and, by proxy, the E.U. According to the gold trading firm BullionVault, approximately 40 percent more Scots bought gold in September compared to last year, most likely as a hedge against an uncertain economic future.
Once again, who says gold isn't currency?
Keep on Keepin' On
Although the week began with speculation and uncertainty—would the Fed raise rates? would Scotland break up the U.K.?—we ended on more solid ground than some were expecting.
The bull market that we've seen this year has continued to charge forward, creating healthy intraday and closing market highs. We can relax for the moment knowing that the Fed isn't undertaking any drastic measures. And easing around the world has improved liquidity, making it easier for companies and individuals to invest in their future.
These are all good reasons to stay calm and keep seeking and investing in quality equities.
Please consider carefully a 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.
Bond funds are subject to interest-rate risk; their value declines as interest rates rise. 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. The Near-Term 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. The Near-Term Tax Free Fund may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.
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 Hang Seng Index is a capitalization-weighted index of 33 companies that represent approximately 70 percent of the total market capitalization of The Stock Exchange of Hong Kong. The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.
The Producer Price Index (PPI) measures prices received by producers at the first commercial sale. The index measures goods at three stages of production: finished, intermediate and crude. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns. The Mortgage Bankers Association Market Composite Index measures mortgage loan application volume. The NAHB Housing Market Index is derived from a monthly survey, and gauges builder perceptions of current single-family home sales and sales expectations for the next six months, as well as rating traffic of prospective buyers. Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.
Past performance does not guarantee future results.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.
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- The Sand Demand: Finding Opportunities Beyond Direct Shale Plays
- September 17, 2014
Total U.S. crude oil production averaged an estimated 8.6 million barrels per day in August, the highest monthly production since July 1986, according to the Energy Information Administration (EIA). In our Special Energy Report: An American Energy Renaissance, we highlight that just a few years ago investors were contemplating the supply constraints facing the petroleum industry, but with the disruptive technology in shale oil and gas in the U.S., we could now be looking at decades of drilling ahead.
To make the most out of this energy boom, I like to remind investors to look beyond direct shale plays to find opportunities.
One way of doing so is to become aware of the companies that provide key ingredients or supplies used in the process of hydraulic fracturing, or fracking.
One key ingredient is sand.
According to the Wall Street Journal, due to the enormous increase in the demand for sand, PacWest Consulting Partners expects frackers to use nearly 95 billion pounds of sand this year, up 30 percent since 2013. This projection, made by the energy-consulting firm just one year ago, is a 50-percent increase to its original estimate.
Since many energy companies have adopted the process of fracking in their oil field operations, they have come to rely on sand as an integral component to this procedure.
In fracking, sand can be used as a "proppant." Once the shale rock formations are injected with water and chemicals, it is the proppant (normally treated sand) that keeps the newly formed cracks open after they are made in the rock. This allows the natural gas or crude oil to be extracted more easily.
A recent article from Shale Plays Media highlights that just a year ago oil field fracking operations used around 2,500 tons of sand, whereas today the new fracking techniques call for as much as 8,000 tons of sand to be pumped into a well. (That's 75 to 100 railcars of sand per well!) The article goes on to explain that this "frac sand" is normally high-purity quartz that can withstand between 6,000 and 14,000 pounds of pressure per square inch.
Who is supplying the sand?
Knowing the incredible value of sand to the oil drilling industry makes it easier for us to identify meaningful opportunities for our funds. For example, we want to know who is supplying the sand and who is moving the sand to and from the drill sites – these are the companies to pay attention to.
One company we have identified as a sand success story is Emerge Energy Services. This company deals directly with the production and supply of sand to drill sites. Since debuting in May 2013, the company has seen its share price go from $17 to $122.50 at the end of August.
Sand production companies like Emerge have shifted focus from solely supplying sand for roofing, construction, glassware and golf course projects, over to the enormous demand needed for oil and gas drilling across the United States. The outlook for the energy sector remains strong as we look towards 2015, with the demand for sand showing no signs of a slowdown.
Who is shipping the sand?
Besides sand production companies, railroads throughout North America are another beneficiary of the booming energy industry, and not only because of oil shipments. The rail industry is now busier than ever hauling frac sand across the numerous shale plays.
Union Pacific Corp. is an example of one rail company that has seen a 26-percent increase in hauled railcar loads of sand since 2013. According to the company website, the rail line covers 23 states in the Western two-thirds of the U.S.
There is more than one way to make the most out of the energy renaissance we are living through; Emerge Energy and Union Pacific are two companies we have invested in. Witnessing the adoption of the fracking process fuel demand for frac sand is just one example. I encourage investors to stay curious, ask questions and dig deeper to find all the opportunities that may be right under your nose.
To stay informed not only on the domestic market but the global market as a whole, I invite you to register for our webcast happening on October 2. This will be one event you won't want to miss! We are also offering continuing education credit for those in attendance of the webcast.
Click here to register today: One World Market, Many Central Banks: How Will Your Investments Be Impacted
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.
Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of 06/30/14: Emerge Energy Services, Union Pacific Corp.
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- Managing Expectations: Anticipate Before You Participate in the Market
- September 16, 2014
Although the world looks messy and chaotic, if you translate it into the world of numbers and shapes, patterns emerge and you start to understand why things are the way they are.
~ Marcus du Sautoy, Professor of Mathematics at the University of Oxford
Here at U.S. Global Investors, we strive to serve our clients to the best of our abilities by detecting and accounting for trends and patterns not just in the market but also the world at large. That includes everything from changes in monetary and fiscal policy, both domestic and foreign; the weather; lifecycles of mines; and advances in technology. We would be remiss indeed to exclude developments in any of these fields when making decisions about how to manage the funds our clients have entrusted us to grow.
In the following whitepaper, we'll fold back the layers of the "messy and chaotic" and try to understand what makes the market tick.
The Importance of Cycles in the Investment Management Process
Elon Musk, CEO of Tesla Motors, told the Guardian in July 2013: "The lessons of history would suggest that civilizations move in cycles. You can track that back quite far—the Babylonians, the Sumerians, followed by the Egyptians, the Romans, China. We're obviously in a very upward cycle right now and hopefully that remains the case."
Similarly, financial markets are influenced by relatively predictable cycles, a lesson we at U.S. Global Investors rely on to help us manage expectations and be effective stewards of your money. This is a theme I've frequently written about and discussed during presentations, one of which, "Anticipate Before You Participate," is a classic that I often use to remind investors of these timeless principles.
Precedent plays a big role in our decision-making process just as it does in our day-to-day lives. I don't know about you, but I know not to wait until the rains have flooded the streets ankle-deep before I buy an umbrella.
A keen awareness of the ebbs and flows of historical and socioeconomic conditions, on both the macro and micro scales, allows our investment management strategy to be more proactive than reactive. Although reacting to sudden and unexpected developments is often necessary—Russia's involvement in Ukraine is a good example—our team tries to mitigate their impact on our funds by leveraging our knowledge of the complex interplay and overlap of important cycles, from the short-term to very long-term.
Weather – A Cycle in One Season
Just as the moon's gravitational pull changes the ocean tides, so too does the weather influence the behavior of the market.
Case in point: a strong link exists between El Niño, the weather pattern, and global asset prices. Steady rains are good for Brazilian coffee output, for example, but bad for the Chilean metals industry—the reason being, when the rain is heaviest, access to mountainous mining regions is blocked.
Here in the U.S., an unusually brutal winter at the beginning of 2014 put a damper on consumer spending. Sales were pummeled as many consumers, especially those in the Northeast, were disinclined to go shopping after shoveling bucketsful of snow off their front lawns. Consequently, the ISM Manufacturing Index in January closed at a weak 51.3, below economists' expectations of 56.0. Car sales were way down.
On the bright side, stock trading tends to be more spirited on sunny days than cloudy days. In a thought-provoking paper titled "Reassessment of the Weather Effect: Stock Prices and Wall Street Weather," University of California-Berkeley student Mitra Akhatari finds a significant correlation between sunshine in New York City and a bump in stock prices: "If it is the case that people tend to evaluate future prospects more optimistically when they are in a good mood than when they are in a bad mood," she writes, "then sunnier days are associated with investors being more willing to take on risky investments."
The reverse also seems to be the case, according to Akhatari. On overcast days, investors' less-than-peachy mood invariably leads to uninspired trading.
Or even calamity, as was the rare case on the morning of October 29, 1929—infamously known as Black Tuesday—when autumn clouds blotted out the sun's warmth and light.
This doesn't mean that every time the sky turns gray, the market suffers. Some people are better than others at separating their emotions from their investment decisions.
In any case, let's all take a moment to appreciate the fact that the U.S.'s main stock exchange is not located in Seattle, which averages more than 200 cloudy days per year.
Gold Seasonal Trends – One Year Cycle
Gold is a classic example of a commodity that rotates through seasonal cycles year after year. I've written at length on the ways in which gold behaves in response to international festivals and holidays such as the Chinese New Year, Diwali and Ramadan. You can look back five, 15 and 30 years to spot the patterns the precious metal dependably follows, reaching annual highs starting in August and September as gold jewelry demand spikes.
Another cyclical indicator—or theory, I should say—we use to track the performance of gold is mean reversion. Mean reversion, which I'll talk about in full detail later, is the idea that a commodity will eventually revert back to its historic value, whether it's currently sailing in the stratosphere or crawling through the weeds.
What goes up must come down, as they say, and we saw this play out last year when gold plunged 28 percent after an exhilarating years-long bull run. Although many traders let go of their bullion and gold stocks, we strongly suspected, based on historical data, that the metal would soon rebound, which it did.
Presidential Election Cycles – Four to Eight Years
At U.S. Global we like to say that government policy is a precursor to change, and no person in the nation has more control over policy than the president. The decisions he makes and actions he takes have far-reaching consequences in markets both domestic and international, more so than perhaps even he can anticipate.
President Barack Obama began his first term by injecting $700 billion into the economy. It's still debatable how successful this legislation was. We've also seen several rounds of quantitative easing (QE) to loosen money and facilitate loan-taking.
Largely as a result of these policies, the S&P 500 Index during both of Obama's terms has performed above the average four-year presidential cycle. Early in June, the Dow Jones Industrial Average hit a record high of 17,000.
Just over the horizon are midterm elections, a time when the market historically becomes bullish. According to the most recent Stock Trader's Almanac:
"An impressive 2.7% has been the average gain during the eight trading days surrounding midterm election days since 1934. This is equivalent to roughly 52 Dow points per day at present levels. There was only one losing period in 1994 when the Republicans took control of both the House and the Senate for the first time in 40 years."
Lifecycle of a Mine – Multiple Years
Not only is it important for us to understand the seasonality of the commodity itself, it's equally important to be aware of the stages a mine must proceed through before it becomes operational. As I write in The Goldwatcher: Demystifying Gold Investing:
"We strongly believe in using cycles to better manage risks and expectations, and we see this as a way for others to manage their emotions when it comes to investing. Knowing where a company is on the mine lifecycle can be a tremendous asset to an investor in gold equities who seeks to minimize risk and optimize performance. It's one more tool the investor can use to try to manage volatility and his own market expectations."
Take a look at the graphic below. Years can and do divide the time when a mine is discovered and when production begins. It's imperative to know which stage of its lifecycle the mine is in to make a better-informed decision on whether to invest, withdraw or wait.
When a mine is first discovered, excitement raises the price of the stock. This is when investment is most speculative since only one in 2,000 companies finds at least a 1 million-ounce deposit. Once reality sets in and miners are faced with the notion that the metal or mineral—assuming there is any—probably won't be exhumed for some time, prices tumble. Years later, after production finally begins, stocks see another uptick. This is when the equity is at its lowest risk factor.
To manage risk and expectations, it's critical for us to know where we are in the cycle of the mine. Because we prefer to confirm this in person, we often visit projects in locations such as Colombia, Panama, Canada, West Africa and elsewhere.
Oscillators, Standard Deviation and Mean Reversion
Again, at U.S. Global Investors, we actively monitor both short- and long-term cycles, from the annual seasonality of gold to four-year presidential elections, in order to manage expectations based on historical patterns.
Among other important cycles and patterns that we use are oscillators, which are diagnostic tools that help us measure a security's upward and downward price volatility. Think of an oscillator as a thermometer; with it, we can accurately take a security's "temperature." The knowledge extrapolated from this reading is materially useful in managing expectations, appreciating the dimensionality of a security's short-term volatility and identifying when to accumulate or trade a stock.
To understand how oscillators work, though, you'll first need to be familiar with standard deviation and mean reversion.
Standard Deviation
Standard deviation, also known by its Greek letter sigma, is a probability tool that gauges a security's volatility. Specifically, it measures the typical fluctuation of a security around its mean or average return over a period of time ranging from one day to 12 months or more.
In the following bell-shaped curve, the center line represents a security's average return over a given period of time—one day, 20 days, 60 days, 12 months or what have you. To the left and right of the line, the darkest blue sections indicate one standard deviation, or sigma, either above or below the mean; the next lightest, two sigma above or below; and so on.
No matter the security, returns can be expected to trade within one sigma of their mean 68 percent of the time. Ninety-five percent of the time they will fluctuate within two sigma, and nearly all of the time they will trade within three.
So why should investors care about this? Generally speaking, the higher the sigma, the higher a security's volatility; the probability that it will fall back toward the mean also rises. A speculative tech stock, for example, has a greater tendency to have a higher sigma than a blue chip stock. This tells you that the tech stock's returns will fluctuate more erratically than the blue chip stock's.
But sigma is not as black and white as this comparison might suggest. Rather, it more closely resembles multiple shades of color that help investors manage their emotional reactions to the market's swings and focus instead on the power of using statistics. It's easy to get pulled into market fears or "irrational exuberance"—to use former Federal Reserve Chairman Alan Greenspan's phrase—and this probability model helps us be more objective.
To illustrate how these statistics operate in the real world, let's look at the S&P 500 Index. Over the last ten years, it's had a rolling 12-month standard deviation of 17 percent. This means that if you were to chart its returns over the course of 12 months, you could expect them to stay within ±17 percent from the mean about 70 percent of the time. That's one sigma. You could also reasonably expect returns to rise or fall within ±34 percent, or two sigma, 95 percent of the time.
Knowing this, it probably wouldn't be a huge cause for celebration if the S&P 500 rose, say, 8 percent during a 12-month period, since this figure falls within the "normal" one-sigma range. Conversely, a loss of 8 percent wouldn't be a total disaster. A one-sigma move is a non-event from a historical perspective.
To put this in perspective, the S&P 500 moved up about 30 percent in 2013, its best year since 1997. This is close to a significant two-sigma move from its 12-month average. In 2008, the worst year since 1937, the same index lost 38 percent, exceeding two standard deviations.
While the S&P 500's 12-month standard deviation is 17 percent, its one-day standard deviation is only 1 percent. (The one-day will always be lower than the 12-month.) If we chart the index's one-day percentage changes in 2008 and 2013 side-by-side, you'll see just how much more volatile the former year was compared to the latter. The index in 2013 made "normal" one- and two-sigma moves, whereas in 2008, especially in the second half of the year, we saw nearly unprecedented one-day sigma moves.
The most important thing to keep in mind is that, just as we all have different fingerprints, every commodity, every stock, every fund and every index has its own DNA of volatility. The S&P 500 might have an annual standard deviation of 17 percent, but over the same 12-month period, the MSCI Emerging Markets Index has a much more volatile 29 percent. Investors must strive to remain objective in the face of emotional factors that move markets and adjust their expectations of how these two indices behave compared to one another.
Using Weather Statistics to Explain Standard Deviation
As an analogy, consider the extreme temperature fluctuations in Minneapolis-St. Paul, Minnesota. Minneapolis has an average annual temperature of 45 degrees, which sounds pleasant enough. You might think that in such a climate, all you need to get by is a warm jacket. But the picture changes dramatically when you learn that the Twin Cities' 12-month standard deviation is ±22 degrees. Statistically, this means that for a little over two thirds of the year—68 percent of the time—you can expect the temperature to swing between 23 and 67 degrees. Suddenly that jacket is looking pretty paltry. At two standard deviations, there's a strong probability that the temperature will fall anywhere between a bone-chilling 1 degree—which might very well occur, since the average low in January is 2.8 degrees—and 89 degrees. That's a huge, yawning gap that Minneapolitans must contend with throughout the year.
Compare this to San Antonio, Texas, home of U.S. Global Investors. Here the average temperature is a balmy 70 degrees, with a less-volatile standard deviation of ±13 degrees. Even at two sigma—which, again, occurs 95 percent of the time—the temperature in the Alamo City statistically falls anywhere between 42 and 94 degrees, close to the average high in July.
If we're looking just at temperature fluctuations, Minneapolis resembles the Emerging Markets Index whereas San Antonio behaves more like the S&P 500. Your expectations of "normal," therefore, will need to be different depending on which of these two cities you reside in or indices you follow.
Mean Reversion
This leads us to mean reversion. Mean reversion is the theory that, although prices might trend up for many years (as in a bull market), or fall for many years (as in a bear market), they tend to move back toward their historic averages eventually. Such elasticity is the basis for knowing when a security is under- or overvalued and when to buy low and sell high. We have just experienced a bull market with the S&P 500 and a bear market with gold stocks. Within these trends, though, is great internal volatility that we can monitor using oscillators. Even in a bull or bear market, we can measure the 20- and 60-day volatility of any kind of security.
Again let's use Minneapolis as an illustration. We've already established its wide-ranging temperature fluctuations throughout the year, from highs reaching the 80s to lows flirting with zero. This being so, it would be unreasonable to expect the weather to remain freezing indefinitely, as is the case in Game of Throne's aptly-named Land of Always Winter. Eventually it reverts back to its 12-month mean of 45 degrees.
The same goes in the world of investing. Mean reversion applies to everything, in both a micro and macro setting. In an April 2012 Frank Talk, I showed that entire countries have their own means, which they eventually revert back to. After charting Chinese stock performance over a 10-year timespan, a pattern emerged:
"Chinese stocks landed in the top half [of emerging markets] four out of 10 years—2002, 2003, 2006 and 2007. In 2003, China climbed an astounding 163 percent; in 2007, it was the top emerging market again, returning nearly 60 percent. Since then, the country has fallen to the bottom half... If you apply the principle of mean reversion, history appears to favor China landing in the top half during this Year of the Dragon."
Indeed, by the end of 2012, Chinese stocks jumped nearly 40 percent from the previous year, placing the country in the top half of emerging markets—just as predicted using the theory of mean reversion.
Look at the two oscillator charts below. They show the up-and-down movements in the price of gold stocks (top chart) and bullion (bottom chart) over the past 10 years. One row above or below the mean, indicated by the black horizontal line, equals one sigma; two rows above or below equals two sigma; and so on. As you can see, mining stocks have recently reverted to their mean for the first time in about three years, while spot gold is gradually working its way back.
Again, every security has a different sigma for a specific period of time, and as such your expectations should reflect these differences. Gold bullion currently has a one-day standard deviation of ±1 percent and a 12-month standard deviation of ±18.8 percent. So if gold's return falls within a range of ±1 on any given day or ±18.8 percent for a 12-month period, it's behaving normally, as this is only one sigma. Anything over 18.8 percent for a 12-month period would be heading toward two sigma, which is when a buy or sell action is advised.
Now compare spot gold to the NYSE Arca Gold BUGS Index, which has a 12-month standard deviation of 35.5 percent—nearly double that of bullion. Plus or minus 35.5 percent might sound incredibly scary and volatile, but for gold stocks, a fluctuation of this sort is "normal," occurring 68 percent of the time.
It's all about managing your expectations and emotions.
Look at the following oscillator that charts the S&P 500 and gold bullion's 60-day percent change over the past five years. Like the EKG tracings of a healthy patient, the lines bottom and peak, bottom and peak—but revert back to their mean with regular frequency.
Oscillators are vital to identifying the optimal time to buy or sell. When prices exceed two sigma above the mean, it might be a good time to sell because the statistical data suggest the commodity is overvalued and, therefore, prices are due to drop toward their mean. When prices exceed two sigma below the mean, it indicates the commodity is undervalued. Buying the laggards at this time could enable you to participate in a potential rally.
No statistical tools are accurate 100 percent of the time, but investors can take ownership in how they use probability tools such as oscillators to manage the emotions of the market. It's when an asset moves more than one sigma that the power of mean reversion raises your chances to capture opportunity. This is part of what makes investing so exciting.
Strap yourself in and enjoy the ride.
Picking Mining Stocks in a Bear Market
This section is devoted to fundamental resource stock evaluation. I'll discuss some of the statistical tools we use to pick quality stocks during a treacherous bear market, such as what we've seen in gold stocks the last three years.
Let it be known, however, that, though our approach might vary slightly depending on the condition of the market, we fervently seek to pick the best stocks for the best price and execution.
How I Learned to Respect the Bear
The traditional definition of a bear market is when broad stock market indices fall more than 20 percent from a previous high—which sounds like a catastrophe, but is in fact "normal" market behavior. According to self-professed "investing nut" Ryan Barnes, a contributor for Investopedia, "bear markets… are a natural way to regulate the occasional imbalances that sprout up between corporate earnings, consumer demand and combined legislative and regulatory changes in the marketplace."
Think of bear markets, then, as the gradual transition from warm summers into frozen winters. Trees lose their leaves, snow and ice blanket the ground, many animals—the bear the most notable—hibernate for the season. All life seems to take a breather. But just as you can always count on spring to emerge and, with it, new life, you as an investor can count on the market to rebound with fresh vigor.
As you might have known, the tail end of "winter"—or "trough," as it's known— is when you want to take part in the inevitable recovery. If the market never had a winter season, if it were perpetually trapped in an endless summer, investors would be hard-pressed to find an ideal entry point.
"I'd be a bum on the street with a tin cup if the markets were always efficient," billionaire investor Warren Buffet once wrote.
It's easy to determine when winter becomes spring. But what about the end of a bear market? How do you know when it's bottomed and the optimal buying time has been reached?
CLSA consultant Russell Napier, in his 2009 book Anatomy of the Bear, describes the determinants of the end of a bear market:
"The bottom is preceded by a period in which the market declines on low volumes and rises on high volumes. The end of a bear market is characterized by a final slump of prices on low trading volumes. Confirmation that the bear trend is over will be rising volumes at the new higher levels after the first rebound in equity prices."
Look at the chart below. You'll see that, in three decades, the Philadelphia Gold & Silver Index (XAU) has never had a losing streak for more than three years.
Historical precedent suggests that gold stocks were due for a jump in 2014, and just as expected, the XAU has returned close to 20 percent year-to-date (YTD) after an abysmal 2013, the "final slump of prices on low trading volumes."
The following line graph illustrates just how dramatically gold and silver stock performance has rebounded. As you might remember from our discussion in the previous section, what we see here is an example of mean reversion, which occurs when the price of a security reverts back to its historic average.
These data exemplify the notion that you should remain patient during downturns, avoid getting discouraged and allow the security—in this case, precious metal stocks—to revert back to its long-term mean. When it does, you'll find that the wind is suddenly at your back instead of in your face.
Spencer Johnson, author of the 2009 book Peaks and Valleys: Making Good And Bad Times Work For You—At Work And In Life, writes, "You cannot always control external events, but you can control your personal peaks and valleys by what you believe and what you do."
Likewise, we might not have any control over how the market behaves, but we can control how we respond to it: with grace, intelligence and levelheadedness.
Value Drivers for Superior Performance
One of the tools we use to navigate around volatility, regulate emotion and focus on facts and fundamentals is an invaluable model we call the portfolio manager's cube. It helps us separate the weak from the strong, evaluate a company's attractiveness and pick the best GARP-y stocks. "GARP" stands for "growth at a reasonable price," which is an investment strategy that aims to identify companies with superior growth and value metrics.
The cube allows us to sift, sort and prioritize. It draws attention to the intersections among a resource company's production, cash flow and reserves (rows) and relative value, momentum and event drivers (columns). Using this model, we compare stocks on a relative basis in production per share to find attractive opportunities and overpriced risks. We also identify events that could increase reserves and/or production per share over the next 12 months.
More than anything else, the cube affords us the framework for conducting relative valuation of a stock. Relative valuation is a method that compares a security's value to that of others to determine its financial worth.
For example, we evaluate mining stocks in the same way you or I might compare cars using multiple metrics before making a purchase. On this topic, I urge you to check out one of my favorite websites, Dennis Boyko's GoldMinerPulse, for a look at the type of fundamental analyses and relative evaluations that go into comparing and contrasting mining stocks.
The following is an example of how we might use the cube. Suppose a young mining company has just discovered a gold deposit. This event might excite potential investors and compel them to enter when the stock is undervalued, expecting it to skyrocket. But it's important to conduct a cross-sectional analysis of this discovery in terms of production, cash flow and reserves. How much gold does the company expect to produce in relation to others? The average concentration of gold in the earth's crust is 0.005 parts per million, making a substantial yield very rare.
Other questions might include: Does the company have ample cash flow to finance the costly yet necessary infrastructure, equipment, geological analyses and manpower to extract the metal, not to mention pay dividends? Has it kept up with its cash reserves to remain solvent during development of the mine and subsequent excavation? Many years, after all, typically go by before ounce one is plucked from the ground.
Besides using models such as the portfolio manager's cube to determine a mining company's or asset's relative value, we also rely on "boots on the ground" experience. Members of our investment team and I routinely visit domestic and global projects to gain tacit knowledge and ensure that operations are running smoothly and management is knowledgeable and has a firm handle on things.
To see photos of what these visits look like, check out our slideshow, On a Quest for Copper.
The Five Ms
A mine's lifecycle is the perfect segue into what I call the five Ms to picking the best mines. Most of what follows can be found in the 2008 book I co-wrote with London-based financial writer John Katz, The Goldwatcher: Demystifying Gold Investment.
One of the five Ms is Mine Lifecycle, which I previously covered. The other four Ms are Market Cap, Management, Money and Minerals, detailed below.
Market Cap
Market cap is simply the number of shares outstanding multiplied by the stock price. The gold sector is broken down into three sectors by market cap: seniors (market caps >$10 billion), intermediates (between $2 and $10 billion) and juniors ($2 billion).
If a gold company has 10 million shares outstanding at $1 per share, the company is valued at $10 million. The question any investor should ask is, "Is this company really worth $10 million?" If the market pays $25 per ounce of gold in the ground, the company should be valued at $25 million (one million ounces in reserves X $25 an ounce). If the company's market cap is only $10 million, it may look undervalued. Accordingly, if the company's market cap is $50 million, it may appear to be overvalued.
For larger gold companies, an investor can measure a company's market cap against its production level, reserve assets, geographic location and/or other metrics to establish relative valuation. For junior mining companies—an area of focus for our World Precious Minerals Fund (UNWPX)—we look for balance sheets with ample cash for exploration and development of prospective reserves, but we resist paying more than two times cash per share.
Essentially, management of mining companies must have both explicit and tacit knowledge to be successful. Explicit knowledge is academic. How many PhDs or masters in geology/engineering does company management have?
Tacit knowledge is more personal in nature and much more difficult to obtain. It is acquired over time through first-hand observation, experience and practice. How many years have they worked in the industry? Has management ever successfully completed a project with similar geopolitical or environmental constraints?
Success in the mining sector, especially the juniors, relies on the ability to raise capital and communicate with investors. Often the heads of junior companies are geologists or engineers who have no relationships in the brokerage business. This lack of relationships impedes their ability to generate market support. Historically, companies with the highest number of retail shareholders have the highest price-to-book ratios and carry higher valuations than peers.
Some of the most successful company builders in the gold-mining industry are what I call the "financial engineers"—people who have the relationships and understand the capital markets and who know how to hire the best geological and engineering teams. We tend to have more confidence investing in them.
Mining is an expensive business. Often, companies burn through substantial amounts of capital before generating their first dollar in cash flow. A gold exploration company has to deliver reserves per share to have a chance at another round of financing. It has to convince the capital markets that it is an attractive investment on a per-share basis.
We call this the "burn rate"—how long will the company's current cash levels last before it has to return for additional financing. If a junior exploration company has $15 million in cash reserves and is spending $3 million a month, it has five months to deliver enough reserves per share to convince capital markets it is worth the risk.
This calculation can be done quickly. Exploration reserves are generally valued at one-third the reserve values of a producing mine—if producing reserves are valued at $150 an ounce, exploration reserves would be $50 per ounce.
The gold-equities market is generally efficient at judging reserves per share, so if the exploration company doesn't come up with the results necessary to get an evaluation—find gold for less than $50 an ounce—investors quickly lose confidence. There is an old rule when it comes to exploration companies: don't pay more than two times cash per share if there are no proven assets in the ground.
Compared to the rest of the mining sector, gold companies have the highest industry valuations based on price to earnings, price to cash flow, price to enterprise value and price to reserves per share.
Companies operating mines that produce gold as well as industrial metals tend to have lower valuation multiples. For example, the current price-to-earnings ratio for Freeport-McMoRan Copper and Gold, is eight times forward earnings. Investors can use the low relative valuations of copper/gold producers to increase their margin of safety in anticipation of an upward move in gold prices.
I must stress once again that these relative valuation techniques apply whether we're in a bull or bear market. In Peaks and Valleys, Spencer writes, "Have you ever noticed that your life is filled with ups and downs? It is never all ups or downs."
Neither is the market. As active money managers, we have learned to adapt to an ever-changing climate—from "summer" to "winter"—to select what we believe are the best, most reasonably-priced mining stocks for our investors.
Anticipate Before You Participate: Patterns in Trading
The primary unit of time measurement for high-speed traders might be the microsecond, but for normal retail traders, it's vital to know the best months, days and even half-hours of the day to make market transactions. Humphrey B. Neill, author of the 1931 classic Tape Reading and Market Tactics: The Three Steps to Successful Stock Trading, said it best: "Never mind telling me what stocks to buy; tell me when to buy them."
Consider Black Friday, the most active shopping day of the year. Let's say a top-of-the-line 60" 1080p plasma HDTV normally goes for around $950 but on Black Friday is discounted to $500. That's a 44-percent savings. If you had a desire to own this TV and were somehow guaranteed a way to bypass the rabid mobs, you'd be a fool to spend $950 on it the day before or after.
Likewise, you'd be at a disadvantage to buy or sell a security without first conducting some level of research to determine the optimal time, statistically speaking, to make a transaction. At the very least, you should know when not to make a transaction.
Fortunately, much of this research has already been conducted. My friend Jeffrey Hirsch, following in the footsteps of his late father Yale Hirsch, has for years edited the invaluable Stock Trader's Almanac, which is updated annually. The book is notable for finding reliable patterns in market trends and behavior, on both the micro and macro scale. It also gave birth to such well-known investing adages as "Sell in May and Go Away" and the "January Barometer."
Thirty-five years ago when I was just getting started in the securities business, I asked Yale how he managed to arrive at his findings. He told me that his background in music composition enabled him to "hear" melodies, if you will, in four-year presidential cycles, seasonal cycles, weekly cycles and more. This interdisciplinary approach of combining music and finance should inspire all investors to leverage their own unique skills, talents and backgrounds to seek patterns in the market that others might overlook.
If you don't already own a copy of the Stock Trader's Almanac, I urge you to make a special trip to the bookstore. You can also visit the book's website and sign up for a free seven-day trial. The site provides a wealth of helpful and fascinating information for investors to peruse.
The Best Statistical Times to Trade
Previously I discussed market patterns in four-year presidential cycles and seasonal cycles. But now let's look at months and work our way down to half-hours of the trading day.
October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.
~Mark Twain
"Sell in May and Go Away" is more than a clever expression. The Stock Trader's Almanac has over six decades' worth of data to support this strategy. Based on the S&P 500's monthly closing prices, the worst-performing months of the year fall between May and October. Mark Twain's witty remark about October, made close to 100 years ago, still holds somewhat true today.
The Dow Jones Industrial Average has been up four of the past five Septembers, but the ninth month has still been the worst-performing since 1950 for all of the major indices and exchanges, including the Dow, S&P 500, NASDAQ and Russell 1000 Index.
What this shows is that, in August, September and October, it's time to "nibble" on stocks, as prices are dropping. In March, April and May, it's time to trim.
As I said, the Dow has been improving slightly in September over the last few years. Its 20-year return has risen to -0.51 percent from its 50-year return of -0.77 percent return.
Theoretically, investing from November 1 through April 30 and then switching to fixed-income products for the rest of the year seems to be a safe and effective strategy. If you backtest this to 1950 with an initial $10,000 investment, you would have gained an estimated 6,740 percent. Investing the same $10,000 from May through October would have cost you $1,024. What a difference six months makes.
I must stress, however, that this chart, and those that precede and follow it, shows only probability. Like a basketball bouncing down a rocky mountainside, nothing is certain, and actual behavior varies. Macro events such as presidential elections, midterm elections and changes in fiscal and monetary policy have a dramatic effect on the outcome of the market.
For further data, check out the Almanac's best and worst S&P 500 entry and exit dates, separated into the five best months (November through April, excluding February) and seven worst months (May through October, including February).
Many events can affect the market from a weekly standpoint, including holiday and triple-witching weeks, which occur when stock options, stock index options and stock index futures all expire on the same day. Four such days occur on the third Friday of March, June, September and December—the end months of each quarter.
You might think that the market would become chaotic during triple-witching weeks, but in fact volume and activity has often been positive. As of this writing, the Dow has been up 17 of the last 23 witching-weeks that fall in March.
Below you can see what the Almanac says are the best and worst weeks in general for the Dow, ranging from 2008 to 2012.
Best and Worst Weeks for the Dow Jones Industrial Average
2008 through 2014
Best 20 Weeks Worst 20 Weeks Week Ending % Change Week Ending % Change 10/31/2008 11.29% 10/10/2008 -18.15% 11/30/2011 7.25% 9/23/2011 -6.41% 11/28/2008 9.73% 08/05/2011 -5.75% 07/17/2009 7.33% 05/07/2010 -5.71% 03/13/2009 9.01% 01/24/2014 -3.52% 10/14/2011 4.88% 11/25/2011 -4.78% 04/18/2008 4.25% 02/08/2008 -4.40% 09/16/2011 4.70% 07/29/2011 -4.24% 07/09/2010 5.28% 10/03/2008 -4.84% 03/27/2009 6.84% 05/23/2008 -3.91% 06/30/2011 4.02% 01/18/2008 -4.02% 08/26/2011 4.32% 06/27/2008 -4.19% 12/20/2013 2.96% 02/20/2009 -6.17% 09/13/2013 3.04% 10/24/2008 -5.35% 01/31/2008 3.63% 06/20/2008 -3.78% 06/08/2012 3.59% 01/04/2008 -3.50% 09/03/2010 4.33% 08/19/2011 -4.01% 12/23/2011 3.60% 05/18/2012 -3.52% 10/28/2011 3.58% 11/21/2008 -5.31% 11/23/2012 3.35% 11/14/2008 -4.99% Source: Stock Traders Almanac 2014, U.S. Global Investors
What's interesting here is that, even though September is historically the worst month to trade in, it had three of the best weeks and only one of the worst weeks. Conversely, December, one of the best months to trade in, had only two of the best weeks. No week in December fell in the "worst" category, however.
Which day is the best to buy? Which day is the best to sell? That depends on whether we're talking about days of the week, days of the month, days preceding or following holidays—there are innumerable contexts and implications to consider, all of which have already been carefully studied and scrutinized by Yale and Jeffrey Hirsch.
According to Hirsch, the best day to trade was once the last trading day of the month, followed by the first four trading days of the next month. Front-runners who noticed this trend, however, took advantage of it, leading to a shift in 1982. Since then, the strongest days tend to fall on the ninth, tenth and eleventh trading days of the month.
To the right, you can see what Hirsch's research says are the days of the week when the greatest likelihood that performance will rise in the Dow will occur. Between 2008 and 2014, Mondays have been the weakest, climbing less than 50 percent of the time—the only trading day to fall more than it rises, in fact.
As a special case study, let's focus just on the three days before and after a holiday, specifically Labor Day. Historically, how does the market react to this particular day?
The following chart tracks the historical 33-year performance of four major indices three trading days before and after Labor Day. As you can see, investors tend to be bullish on the Friday preceding the weekend (-1) and bearish starting Tuesday, the first trading day of the week (+1). The NASDAQ does slightly better than the other three both before and after the holiday, leading into the rest of September.
There's plenty more research on the best days on which to trade—and which to avoid—in The Stock Trader's Almanac.
Hours and Half-Hours
Canada is the largest natural resource market in the world. The TSX Venture Exchange, with a market capitalization of over $37 billion, represents approximately 2,250 small-cap companies, many of them in the mining and metals space.
What you see above is the intraday market performance of the TSX Venture. I chose it as an illustration because mining, metals and gas are some of our specialties here at U.S. Global Investors. It's imperative that our portfolio management team is cognizant of these exchange-specific intraday trends to buy and sell stock for the best possible price and execution.
With the TSX Venture, it's generally smarter to sell rather than buy in the morning. Over the last two and a half years, this is when prices tend to be high. There's heavy volatility as the market is reacting to what might have happened since the previous trading day's closing bell. Unless you really know what you're doing in this particular market, if you buy in the morning, you can often expect to see your shares sink as the day unfolds.
The "safest" time to buy would be in the late afternoon. The market has cooled somewhat and traders are gauging where things might be headed. The challenge during this time, however, is that volume has dipped and, as a result, bid-ask spreads have widened.
A similar pattern emerges, a little like the shape of a waterslide, if you chart the intraday performance of the Market Vector Junior Gold Miners ETF, which gives investors exposure to small and intermediate gold and silver companies. Prices are highest in the morning, decrease throughout the afternoon and then get a final boost starting around 3:00. Making a trade at 9:30, then, will have a vastly different outcome than making one at 1:30.
Now compare the TSX Venture and Market Vectors Junior Gold Miners ETF (GDXJ), both of are considered volatile, to the NASDAQ 100 ETF—or "the Qs"—which tracks the 100 largest and most active non-financial and international companies listed on the greater NASDAQ. In other words, blue chip stocks.
Over the same timeframe as the previous indices, the pattern here has almost reversed. Relative lows in the morning. Modest improvement throughout the trading day. You could, in this market, reasonably buy in the morning and sell in the afternoon.
Again, these charts are imperfect and show only probability. Trading activity can fluctuate widely, especially prior to and after earnings and economic announcements. And there will always be the unforeseen event—a workers' strike, a CEO's termination or resignation, civil unrest—that shakes up the market.
You don't have to be as obsessed and intuitive with statistics and patterns as Yale or his son Jeffrey Hirsch, but it pays to "Anticipate Before You Participate." Research must be conducted on the market you're planning to trade in before you enter.
The New Challenges of Price Discovery
Investing in the Age of High-Frequency Trading, Falling Volumes and Widening Bid-Ask Spreads
As investment managers, one of our most important fiduciary responsibilities is buying and selling stocks for the best possible price and execution. We do this by using the statistical strategies I've previously covered, from monitoring short- and long-term cycles; implementing probability models such as standard deviation, mean reversion and oscillators; and identifying the relative valuation of stock with the portfolio manager's cube.
If only it were that simple.
In the past few years, price discovery—or the act of finding the "right" price for a security—has become much more challenging because of falling stock volume and widening bid-ask spreads. These challenges are directly attributable to the infiltration of high-frequency traders into the market, not to mention the expansion of dark pools and non-exchange trading.
Simply put, when stock volume is high and transactions increase, the bid-ask spread narrows. Brokers and dealers accordingly price shares to move, and investors have a pretty good estimation of what they're going to spend on a security.
But when there are fewer transactions and volume is down, the bid-ask spread widens. Price discovery, then, becomes difficult because stock valuation has a broader range in which to move. I previously discussed this using the intraday performances of the TSX Venture and GDXJ as examples: in the afternoon, after volume and activity tend to decrease, spreads widen.
Think of this in terms of real estate. If volume is up and homes are selling rapidly in Neighborhood A, both buyers and sellers have a good idea of what a fair price is, based on the dollar amount of square footage of nearby homes sold within a certain timeframe. Price discovery, therefore, is reasonable.
But if homes in Neighborhood B languish on the market for lengthy periods of time, relative price comparisons begin to dissolve. Who knows what the homes should go for? Closing deals becomes tough because, in such a scenario, a buyer's bid might come in way under what the seller is willing to accept. As a result, the price of homes, even those in adjacent lots, can fluctuate wildly.
Volume Drops, Volatility Rises—But Opportunity Remains
To see these concepts in action, look at the chart below. The TSX Venture, which lists about 500 Canadian micro-cap venture companies, has seen a drop in volume of more than 60 percent since mid-2011. This has widened the bid-ask spreads of individual equities in the index—not the index itself—complicating price discovery.
Despite the challenge, we try to take advantage of the volatility that other investors might flee from. Decisions to buy or sell a company are first fundamentally driven, and then trading is based on statistical analysis of fund flows, volatility over different time periods and relative performance to the gold indices we strive to beat. For the Gold and Precious Metals Fund (USERX), it's the FTSE Gold Mines Index; for the World Precious Minerals Fund (UNWPX), the NYSE Arca Gold Miners Index.
Our style resembles that of the Navy SEALS, in that we prefer to be nimble, surgical and tactical. During the bear market that ran from mid-2011 until February 2014, we nibbled rather than munched on inexpensive companies that were lagging in relative performance over one day, one month and one quarter. And when these companies showed a surge in price and volume, we often trimmed our holdings rather than sold outright. This incremental "nibbling" strategy is a little like investment reconnaissance, enabling us to test our conviction in a company before taking a weightier position.
Another disruptive factor to price discovery has been the proliferation of exchange-traded funds (ETFs). Accounting for more than 30 percent of trading volume in the markets, some ETFs are influencing the markets they track and impacting their underlying holdings. A study by Goldman Sachs confirmed that ETF trades influence stock prices. The study looked at which individual stocks move more with the dynamics of the ETF than on their own fundamentals and found that those stocks most affected by ETF activity are in the Russell 2000, probably because of their lower levels of liquidity, lower volume and cheap prices.
We've witnessed this same phenomenon with some junior gold stocks in the GDXJ. A gold stock can have a significant price move based not on changes to its fundamentals or a corporate event but rather shifts in sentiment toward gold that is compounded by fund flows. The inclusion or exclusion of a stock in the underlying index can result in a flurry of disruptive trading unrelated to changes in the company's fundamentals.
Just as one man's trash is another man's treasure, one man's fear of volatility is another man's opportunity. Part of successful active management is not getting discouraged, learning to adapt to a changing climate and coming to terms with the market's often erratic behavior.
But the erratic behavior has only ramped up in recent years.
HFT: Trading at the Speed of Greed
As I said earlier, price discovery has become much more difficult in recent years because of growing high-frequency trading (HFT), dark pools and non-exchange trading—all of which have changed, perhaps irreversibly so, the formation of capital in the investment industry.
HFT is a controversial practice whereby automated computers using sophisticated algorithms transact orders at lightning-fast speeds. In a process called latency arbitrage, high-speed traders are able to gain access to crucial order information and other market data milliseconds before "normal" or "slow" traders. They manage to do this through a number of means, including setting up their computers as close as possible to stock exchanges and using best-of-the-best fiber optic cables.
After acquiring the information, such traders can get in front of other buyers' purchases and, almost instantaneously, turn around and scalp the shares within less than a blink of an eye. Often gains are less than a penny per share, but because they trade so frequently and rapidly, it's easy to make fast money.
This new form of legalized front-running became the talk of Wall Street after the March 2014 publication of financial writer Michael Lewis's critical book on the matter, Flash Boys: A Wall Street Revolt. In one passage, Lewis deftly recounts the infamous Flash Crash that occurred at 2:34 on May 6, 2010:
"[F]or no obvious reason, the market fell six hundred points in a few minutes. A few minutes later, like a drunk trying to pretend he hadn't just knocked over the fishbowl and killed the pet goldfish, it bounced right back up to where it was before. If you weren't watching closely you could have missed the entire event… Shares of Procter & Gamble, for instance, traded as low as a penny and as high as $100,000. Twenty thousand different trades happened at stock prices more than 60 percent removed from the prices of those stocks just moments before."
A spread of $99,999.99. If that doesn't give a trader pause, I'm not sure what will.
The chart below shows just how dramatically HFT has heightened intraday volatility in the SPDR S&P 500 ETF, the largest and most popular of its kind in the U.S. Up until 2007, daily price changes had a relatively steady heartbeat. But in 2007, when HFT as we know it today emerged, the average intraday volatility more than doubled. In August 2011, the peak volatility climbed to one that was 10 times higher than in 2006.
Lewis's book has created a much-needed awareness of what HFT has brought to the market: disruption, unsettlement and a loss of trust and transparency. Like thieves in the night, high-speed traders can swoop in to a market that you created and take advantage of it.
Michael Matousek, head trader at U.S. Global Investors, has experienced this unpredictability firsthand. On numerous occasions he has put in a buy order, based on up-to-the-second liquidity information, but received only a fractional amount.
As for liquidity, Michael says that HFT might increase it, "but when an order is 'sniffed,' [high-frequency traders] cancel. So the perceived liquidity is gone within fractions of a second."
Not only does the liquidity disappear, but because transactions often come with a flat fee, costs increase when orders are only partially filled.
Fellow U.S. Global trader Mike Ellingsen notes how HFT has also affected depth of market, or the measure of the liquidity of open and, I should add, transparent buy and sell orders.
"True depth in the equities market has become hard to gauge," he says. "Trust is key in this entire conversation."
This trust, however, has been tarnished in a system dominated by HFT, which currently accounts for approximately 70 percent of all market activity in the U.S.
Trading in the Dark
So what do you do if you're a large institutional trader who has a million shares to move but doesn't want to be preyed upon by high-speed front-runners? The solution for many is to use not a conventional exchange, where market information is publically shared, but a private exchange. In such exchanges, known as "dark pools," transactions are conducted secretly and anonymously. There is no trading floor, no orders visible to the public and no transparency.
Dark pools aren't anything new; they've been around since at least the 1980s, mostly to reduce market impact and lower transaction costs. But an increasing number of large investors are using these exclusive pipelines to (allegedly) hide and protect their transactions from high-speed traders. In recent years, non-exchange trading has surged, accounting for close to half of all stock trades today.
The problem, as you might guess, is that stock volume in the U.S. is being usurped from the trading floors and drying up faster than the Aral Sea. Again, when volume drops, bid-ask spreads widen, which complicates price discovery.
According to TabbFORUM, whose Equities LiquidityMatrix™ consolidates monthly exchange data, industry volume dropped 1 percent in July. That doesn't sound like much, but when you're dealing with more than 5.5 billion shares in the U.S. market alone, a decrease of 1 percent is huge. And every month seems to tell the same story.
In the last decade and a half, the greatest loss of volume occurred in 2012. The S&P lost 27 percent; the Dow, 28 percent; the NASDAQ, 20 percent; and the Russell 2000, 22 percent. Since 2000, a whopping 70 percent of NASDAQ volume has evaporated.
Two years years ago, a headline for a Bloomberg BusinessWeek article asked: "Where Has All the Stock Trading Gone?"
The answer: dark pools.
Fair Games Call for Fair Rules and Referees
Lewis's book has convinced many in the securities industry that the rulebook has not just been amended but also put through the shredder. Regulators have also taken notice. Back in April 2014, U.S. Attorney General Eric Holder announced that the Justice Department is looking into the legality of HFT. His department is joined by the Federal Bureau of Investigation (FBI), the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).
We welcome the regulators to explore ways to manage these issues better and create both a fairer playing field and more transparent trading arena.
It's not just the high-speed traders themselves that need refereeing. The "real black hats," as New York Times financial columnist Andrew Ross Sorkin points out, are the big stock exchanges.
"These exchanges don't just passively allow certain investors to connect to their systems," Sorkin writes. "They have created systems and pricing tiers specifically for high-speed trading. They are charging higher rates for faster speeds and more data for select clients. The more you pay, the faster you trade."
The U.S. has a lot of catching up to do to level the playing field and soften the deleterious effects of predatory trading. Some of the SEC's proposals—registration of all high-frequency traders, an increase in market transparency, among others—are still months and perhaps even years away.
Canada, on the other hand, already has many such regulations in place. Germany's High Frequency Trading Act, which became effective in May 2013, mandates that all high-frequency traders apply for a Federal Financial Supervisory Authority license and imposes fees on traders who make "excessive use" of HFT. In Italy, a 0.02 percent tax is levied against all HFT transactions.
However you feel about HFT, you cannot deny that it has greatly affected the investment industry and changed how easily price discovery is conducted and capital is formed. Despite the added challenge, our investment team at U.S. Global Investors continues to believe in and use the time-honored strategies that have served us well in the past.
Be Nimble, Yet Nibble
So what do we do as active managers? We use statistical models to try and sniff out both value at a reasonable price and accumulate at attractive relative prices, even when there are so many new factors to consider. We remain confident as we adapt to changes in the landscape, taking a nimble approach while nibbling on opportunities we find.
Curious investors recognize that we navigate all of the complexity and intensity of constantly changing landscapes by using patterns in trading, from standard deviation moves to daily patterns to broader, seasonal patterns.
We are confident in our use of these analytical tools to manage expectations, enthusiastic in our approach and optimistic about the future.
Happy investing!
Please consider carefully a 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.
Past performance does not guarantee future results.
Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are 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 these sectors.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. The HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years. The Philadelphia Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver. The Russell 1000 Index is a U.S. equity index measuring the performance of the 1,000 largest companies in the Russell 3000 Index. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index is market capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to remove companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, will be greater than 0.05% of the index. The Market Vectors Junior Gold Miners Index is a market-capitalization-weighted index. It covers the largest and most liquid companies that derive at least 50 percent from gold or silver mining or have properties to do so. The NASDAQ-100 Index includes 100 of the largest domestic and international non-financial securities listed on the Nasdaq Stock Market based on market capitalization. The FTSE Gold Mines Index Series encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year, and that derive 75% or more of their revenue from mined gold. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of trading on December 20, 2002.
Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the funds mentioned as a percentage of net assets as of 6/30/2014: Market Vectors Junior Gold Miners ETF (0.55% in Gold and Precious Metals Fund, 0.55% in World Precious Minerals Fund); SPDR S&P 500 ETF (0.00%); Proctor & Gamble (0.00%); Goldman Sachs Group, Inc. (0.00%); E*TRADE Financial Corporation (0.00%); Virtu Financial (0.00%); Tesla Motors, Inc. (0.00%); Nasdaq-100 ETF (0.00%); Freeport-McMoRan Copper & Gold, Inc. (0.00%); Silver Wheaton Corp. (1.18% in Gold and Precious Metals Fund, 0.39% in World Precious Minerals Fund).
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.
Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.
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Home > Post > Post 16 > Post 16 News Release > 2013 News Releases > News Release
News Release
TFC Corey King
Public Affairs Officer
Kentucky State Police
Post 16, Henderson
(270) 826-3312
Click here to e-mail TFC Corey King
Two People from Utica Arrested on Meth Charges
Date of News Release: 09/15/2013
(Henderson, Ky.) -- On Saturday, September 14th at approx 1130 PM, troopers from the Kentucky State Police responded to Highway 1207 in Utica regarding a tip received about a possible meth lab at this location. Upon arrival, troopers made contact with James S. Goode and Kristin Goode of Utica. Both subjects then consented to a search of the residence. After searching, troopers located numerous items both in and around the residence which were indicative of the manufacturing of methamphetamine. James and Kristin Goode were arrested without incident and transported to Daviess County Detention Center. Both subjects were charged with manufacturing methamphetamine, possession of marijuana and possession of drug paraphernalia. The investigation is currently being led by Trooper Levi Scott of the Kentucky State Police.

subset: commoncrawl


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SAN DIEGO (CBS 8) - Friday was graduation day for 10 dogs from the Canine Companions for Independence organization.
For the past nine months, the pups were trained in commands designed to make everyday life easier for people with disabilities. On Friday, the dogs' trainers turned over their leashes to their new companions.
Volunteer puppy raisers also turned in the puppies they've been fostering so the dogs can start their training.
"We also have about 45 puppies that are turning in today, so they will begin their six months of professional training," Becky Miller said.
Canine Companions for Independence holds four graduations a year. This is the first of 2013.


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Crab Cakes
Tired of the same old seafood recipes during Lent? Try these crab cakes, you won't be sorry you did.
1/3 cup dry bread crumbs
1/4 green bell pepper, seeded and finely diced
1/4 red bell pepper, seeded and finely diced
2 green onions, thinly sliced
2 Tbsp. chopped parsley
1 egg white
2 Tbsp. mayonnaise
1/2 tsp. hot pepper sauce
1 Tbsp. fresh lemon juice
1/2 tsp. Worcestershire sauce
2 tsp. Dijon mustard
1/4 tsp. Old BayTM seasoning
1/4 tsp. dry mustard
1/4 tsp. onion powder
1/4 tsp. garlic powder
3 (6 oz.) cans crabmeat, drained and flaked
1/2 cup dry bread crumbs
canola oil for frying
In a bowl, toss together the 1/3 cup bread crumbs, green bell pepper, red bell pepper, green onions, and parsley.
Mix in egg white, mayonnaise, hot pepper sauce, lemon juice, Worcestershire sauce and Dijon mustard. Season with Old Bay seasoning, dry mustard, onion powder and garlic powder. Fold crabmeat into the mixture. Form into 6 large cakes. Coat in the remaining 1/2 cup bread crumbs.
Heat oil in a large, heavy skillet. Fry the cakes 5 minutes on each side, or until evenly brown. Drain on paper towels.