How to Follow the Money

By: Frank_Holmes

Too often investors get caught up in their political allegiance or parties, focus on the negative and lose confidence in stocks. As a result, they can miss great bull markets. I believe when it comes to finding investment opportunities, it’s not about the political party, it’s about the policies, both monetary and fiscal.

This was a main theme of mine when I was speaking at the Agora Financial Investment Symposium, and throughout my presentations, I encouraged investors to follow the money. With that in mind, here are two of my favorite charts that I believe demonstrate how investors can do exactly that.

1. Global Manufacturing Activity

Manufacturing data among numerous countries has recently been moving in the right direction. For the month of July, the JP Morgan Global Manufacturing Purchasing Manager’s Index (PMI) stayed above the three-month moving average for the second month in a row. Global output continues to expand, rising to 50.8 from 50.6 in June.

To us, the PMI is not only a gauge of economic well-being for the manufacturing sector. Last month, after the PMI initially crossed the three-month reading in June, I explained that this “crossover” has historically signaled higher prices for many commodities.
Here are the details, using the SPDR S&P Metals & Mining ETF (XME) as an example. Since the beginning of 2009, history suggests that one month after the crossover, 60 percent of the time, the XME has gained an average of 7.4 percent.

Consistent with its historical pattern, in July, the XME rose 7.6 percent.

There may still be room for these stocks to grow, too, as the next two months look promising for metals and mining companies. If you look at the three-month average after the “crossover,” 80 percent of the time, the XME gained 12.6 percent.

2. Presidential Election Cycle

Last fall, I said that all the excess money in the system, compliments of the Federal Reserve’s policy decisions, helped the S&P 500 Index to climb significantly. In fact, President Barack Obama’s first-term presidential cycle beat the average of all other presidential cycles going back to 1929. You can visually see this substantial growth in the red line below.

Now, a few months into his second term, Obama’s presidential cycle remains remarkable, as stocks continue to climb a wall of worry. The yellow line shows this upward trend, an outcome of the continued easing policies in the U.S.

At U.S. Global, we believe that government policy is a precursor to change, and the change appeared to be significantly positive for the S&P 500. To me, this chart indicates that many investors who have been following the Fed’s quantitative easing trail have found a very profitable path in U.S. stocks.

Looking Forward: Positive with a Chance of Rally?
After the S&P 500 Index climbed 4.9 percent in July, our team wanted to find out if this positive trend might continue over the next month and three months. The results may surprise you.

And finally, at Agora, I had the pleasure to talk about what Agora believed to be “the no-brainer investment of all of our lifetimes.” The topic was gold and in my presentation, you can find 60+ pages of charts and trends. Download your copy of the presentation here.

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By Frank Holmes

CEO and Chief Investment Officer
U.S. Global Investors

U.S. Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.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. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. 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 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 U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.

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