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A Portrait of Two Presidents
US Global Investors
By Frank Holmes
November 9, 2012

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A Portrait of Two Presidents

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



Presidents Barak Obama and Bill Clinton

On Friday, President Obama addressed the two topics that have been on many equity investors’ minds since election night: the economy and the dreaded “fiscal cliff.” In his speech, he delivered his familiar plan to combine spending cuts with increasing revenue by raising taxes on the wealthiest Americans. That’s “how we did it in the 1990s, when Bill Clinton was president,” says the president.

Clinton’s legacy was forged under a very different global scenario. He took the reigns just after the end of the Cold War in 1991. As the Soviet Union collapsed, we saw the very beginnings of globalization, with the world opening up to capitalist markets. There were lower labor costs around the world, so companies outsourced, encouraging global growth.

With lower military costs, the U.S. was benefitting from a “peace dividend,” allowing President Clinton to reallocate the spending from military purposes to domestic reforms. He deregulated the telecommunications industry, which helped unleash the Internet.

The confluence of global events combined with policymaking that encouraged business expansion and job creation helped Bill Clinton to be able to boast “the lowest unemployment rate in modern times, the lowest inflation in 30 years, the highest home ownership in the country's history, dropping crime rates in many places, and reduced welfare rolls,” according to the White House’s biography of the former leader.

Clinton also declared that “’the era of big government is over.’ He sought legislation to upgrade education, to protect jobs of parents who must care for sick children, to restrict handgun sales, and to strengthen environmental rules,” says the White House.

Over the past four years, we have not seen the same sort of government policies from Washington. The concern from business owners lately has been an issue that I’ve expressed over several months. When questioning whether an Obama win was a negative for equities, Credit Suisse pointed out that there was apprehension around a less business-friendly environment of “big government financed by taxation, more regulation etc.,” such as the additional cost incurred because of Obamacare.

To increase government revenue, it’s proposed that the top tax rates on dividends would increase from 15 percent to 39.6 percent for those earning more than $200,000 a year. He also wants to increase the tax rate on capital gains from 15 percent to 20 percent.

If this happens, Credit Suisse estimates that these tax increases would take about 5 percent off of the fair value of the S&P 500, as “a third of the U.S. equity market is owned by individual investors who earn more than $200K a year.” Rather than reinvesting dividends and capital gains back into the stock market, these investors will be instead handing the money to the government.

Credit Suisse believes that even if a Mitt Romney administration would have been more business-friendly, there are two aspects to a reelection of Obama that equity investors might want to consider: 1) an Obama win means the Federal Reserve will continue to pursue its current policy and 2) a “fiscal cliff” compromise should be easier with an Obama victory compared to “a narrow Republican victory.”

The upcoming debate over the “fiscal cliff” is a new chance for the newly reelected president to show leadership, reach across the partisan table and work out a bipartisan solution. I believe a resolution to this important issue will be positive for markets.

As Credit Suisse says, “It is worth remembering that Clinton was able to do a deal with the Republicans in his second term (with a Republican House and Senate) after the lack of compromise in his first term led to a government shut-down.”

During our Post-Election Webcast on Monday, Keith Fitz-Gerald and I will discuss more about how the next presidential term will affect the markets and your portfolio. Join us at 2 p.m. Central Time.

John Derrick, Director of Research, contributed to this commentary.

Index Summary

  •  The major market indices were down this week. The Dow Jones Industrial Average fell 2.12 percent. The S&P 500 Stock Index dropped 2.43 percent, while the Nasdaq Composite declined 2.59 percent. The Russell 2000 small capitalization index closed the week with a loss of 2.38 percent.
  • The Hang Seng Composite fell 2.82 percent; Taiwan gained 1.15 percent, while the KOSPI declined by 0.75 percent.
  • The 10-year Treasury bond yield fell 11 basis points for the week, to 1.61 percent.

Domestic Equity Market

The S&P 500 Index was down sharply this week, falling 2.43 percent. The elections dominated the news early in the week, and then the sell off after the elections took many by surprise. The market sell off was surprising in that the most likely election outcome occurred and the status quo was maintained. It appeared that the fiscal cliff and the potential tax increases associated with them motivated investors to sell first and ask questions later.

Domestic Equity Market - U.S. Global Investors


  • Positive performers were hard to find this week, but one winner was the healthcare facilities group (hospitals) which rallied on the prospects of a repeal of “Obamacare” being unlikely.
  • The refiners also performed well this week with Tesoro rising 6 percent and Valero rising nearly 5 percent. The whole group performed well on positive operating conditions and positive corporate action dynamics.
  • Computer Sciences Corp. was the best performing stock in the S&P 500 this week, rising by 13.17 percent, as the company reported earnings and boosted its annual profit forecast.


  • The utility and telecommunication sectors were the worst performers as concerns surrounding higher taxes on dividends in 2013 weighed on the stocks.
  • The financial sector also underperformed as concerns that more regulation in the coming years would hurt returns.
  • Express Scripts was the worst performer this week in the S&P 500, falling 14 percent. The company stated that the current earnings estimates for 2013 were too aggressive and spoke very cautiously about next year on their quarterly conference call.


  • The market appeared to have an emotional, knee jerk reaction this week that could potentially reverse on any positive surrounding the fiscal cliff.


  • The market is clearly focusing on the upcoming fiscal cliff .Any delays or disappointments during the lame duck session will likely garner a negative response.

The Economy and Bond Market

Treasury bond yields moved sharply lower this week. The election outcome implies little change to the political landscape, which likely means a continuation of existing fiscal and monetary policy. The market appeared to have priced in some probability of a change but rallied post election.

It is interesting that consumer confidence continues to move higher with election uncertainty, the fast approaching “fiscal cliff” and continued noise out of Europe. It is also interesting that investor sentiment in Europe has improved for three months in a row even as it feels like Europe is on the verge of crisis again.

Confidence Continues to Rise in the Face of Many Uncertainties


  • With the election over, the country can now focus on the fiscal cliff and other pressing policy needs.
  • Consumer confidence continues to improve here in the U.S. and around the world with positive indications out of Europe and Brazil.
  • Chinese economic data for October was generally better than expected with good readings from industrial production, retail sales, fixed asset investment and consumer prices.


  • Hurricane Sandy and this week’s storm have hammered the northeast, and the negative economic impact on the economy should not be underestimated.
  • European economic data for September was weak, with German and U.K. industrial production falling sharply.
  • Spain is on the edge of an economic crisis as growth estimates continue to ratchet lower. The Spanish government will likely be forced to ask the EU for assistance soon.


  • There remains considerable speculation about the prospects for near-term government policy action in China that would support the economy or stock market.
  • Interest rates are likely to remain very low for the foreseeable future, both here in the U.S. and globally.


  • Europe remains a wildcard with the markets shifting focus on a weekly basis.
  • China also remains somewhat of a wildcard as the economy has slowed and officials appear in no hurry to take decisive action.


Gold Market

For the week, spot gold closed at $1,731.18, up $53.08 per ounce, or 3.16 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 1.87 percent. The U.S. Trade-Weighted Dollar Index gained 0.58 percent for the week.


  • Dundee Precious Metals reported strong results for the quarter ending September 30, 2012. Dundee reported adjusted earnings of $18.7 million or $0.15 per share, above consensus earnings of $0.11 per share. Third-quarter co-product cash costs were reported at $822 per ounce down from $846 per ounce in the second quarter of 2012. For the current year the company expects to achieve the higher end of the production range and lower end of the cost range, pointing to a strong fourth quarter.
  • Harmony Gold Mining, the third-largest producer of gold, said that profits in the latest quarter jumped almost fivefold as output and prices increased. Chief Executive Officer Graham Briggs plans to raise production to 1.7 million ounces in fiscal 2016 from an estimated 1.3 million ounces this fiscal year. Harmony gained 8.4 percent this week.
  • Gold imports by China from Hong Kong climbed 30 percent in September from a month earlier as central banks across the world took steps to prop up their economies, boosting demand for bullion as a haven. Mainland China bought 69,712 kilograms of gold including scrap and coins, compared to 53,508 kilograms in August. Gold is in the 12th year of a bull run as investors seek to hedge against weaker currencies and the threat of rising consumer prices.


  • In his November market commentary, Marc Faber concludes that equities could easily decline by 20 percent (or even more) from the recent highs. Investors who are heavily invested should raise some cash and hold the U.S. dollar. A strong dollar might suggest a weaker gold price, based on the negative gold-to-dollar correlation.
  • Marc Faber is accumulating gold gradually, but also he is mindful that a more meaningful correction could lie ahead.
  • On November 5, “Gold not only has broken a number of support levels, but it has also broken down from a bear flag,” analyst Karen Jones and Axel Rudolph from Commerzbank AG reported. They suggested that gold might fall to $1,631.


  • Don Cox, Global Portfolio Strategist at BMO, believes an Obama win should be good for gold. Obama runs a deficit of over a trillion a year and his only proposal for reducing the deficit going forward is to tax 1 percent of rich people, which might raise as much as $500 billion over the next decade but that won’t be enough. “So what we are going to have is more of the same” (printing money) says Don Cox. He also believes that gold stocks will outperform the underlying precious metals. Looking back at history, gold has consistently performed better in a sitting president’s second term.
  • Shandong Gold Group, Zijin Mining Group and Zhaojin Mining Industry, China’s biggest gold companies, are looking for overseas acquisitions as bullion prices rise. During a mining conference in Tianjin, Li Zhongyi, chairman of the international mining unit at Shandong Gold, said “mines worth $1 billion would fit our plan. We prefer mines which are already in production.” Chen Jinghe, chairman of Zijin Mining, said in a separate interview that “our development would be very limited if we don’t expand overseas because China is lacking gold mines.”
  • UBS believes gold buying in India will be stronger in the fourth quarter compared to the previous three months. According to Edel Tully, a London based analyst, performance is already higher by 5 percent compared with the first two months of the third quarter, and compared with the same period in the fourth quarter of 2011. She expects the seasonal trend to continue playing out for the remainder of the year.


  • Twelve of the world’s largest gold mining companies presented at RBC’s annual gold mining conference in London. The main issues for both the CEOs and investors were the perception of worldwide growth in resources nationalism, a trend towards higher tax and royalty rates, and higher rates of local participation.
  • Marc Faber of Gloom Doom and Boom newsletter fame told Bloomberg TV, “I am surprised with the re-election of Mr. Obama. The S&P is only down like 30 points. I would have thought that the market on his re-election should be down at least 50 percent… I think Obama is a disaster for business and a disaster for the Unites States. Mr. Obama doesn’t care about piling up debt.”
  • Faber concluded, if the U.S. does go into recession -- or moves into a deeper recession—this could also impact the gold price negatively, at least initially.

Energy and Natural Resources Market

Stronger Copper Mine Supply Growth Needed to Rebuild Stockpiles Near 4-Year Lows


  • Despite concerns about slow global growth and the U.S. “fiscal cliff,” the price of WTI crude oil gained nearly 1 percent this week and remains above $85 a barrel.
  • CRU Weekly’s assessment shows the U.S. benchmark steel price at $595 per ton, up 0.7 percent or $4 per ton from last week, following $19 per ton increase last week.
  • Output at the massive Escondida copper mine rose 73 percent to 253,800 metric tons in the third quarter of this year. Performance was aided by better ore grades and a lower year-over-year base. BHP, which owns about 57.5 percent of the mine, and Rio Tinto, which owns about 30 percent, have approved a $4.5 billion expansion plan.


  • Natural gas futures declined 1.7 percent to $3.49 per million btu from last week’s 52-week high as forecasts showed warmer-than-normal weather that may reduce demand for the heating fuel.
  • South African mining output fell 8.3 percent year-over-year in September, the biggest drop in five months, after strikes since August disrupted output. Output of platinum-group metals fell about 18 percent and gold production decreased 11 percent.
  • October coal production stood at 86.7 million tons, down 8.3 percent year-over-year from 94.6 million tons in October 2011. Year-to-date coal production was down 6 percent. EIA expects coal production for power generation to fall 12 percent to 825.1 million tons.


  • ISI commented that U.S. housing starts may surge in 2013 given improved house price expectations, the decline of mortgage rates, and the decline in existing houses for sale, all of which would continue the resurgence in lumber prices, construction materials and household goods so far this year.
  • Rio Tinto estimates Chinese annual steel output will hit 1 billion metric tons, a rise of about a third, within the next two decades. “The forecast is based on China growing at a slowing phase, but it’s still a pretty robust number,” Vivek Tulpule, Chief Economist at the company said. “Steel scrap plays an increasingly more important role but, it will translate into a pretty substantial growth in iron ore demand.” Steel production in China will peak toward 2030 from a 732 million ton annual run rate in October, Tulpule said.
  • China will launch a campaign to shut down small and illegal mines in a bid to improve safety and efficiency in the sector, the government said on Wednesday. The clampdown could cause a temporary fall in domestic supplies and boost its reliance on imports. Bloomberg estimates China will close 20,000 small metal and mineral mines over the next three years.
  • China’s lead market, the world’s biggest, may swing to a shortage next year as growth in sales of lead-acid batteries boosts demand, according to Beijing Antaike Information Development Co. Consumption will probably climb 8.9 percent to 4.91 million metric tons, while output may gain 5.2 percent to 4.9 million tons, analyst Hu Yongda said in an interview in Nanjing yesterday.


  • The Ministry of Commerce said China will start anti-dumping duties of 9.2 percent to 14.4 percent on imports from Japan and the EU of some high-performance stainless steel seamless tubes. The duties will remain for 5 years.


Emerging Markets


  • China’s October economic data shows the economy is indeed recovering. October’s Consumer Price Index (CPI) was up 1.7 percent versus the estimate of 1.9 percent; the Producer Price Index (PPI) dropped 2.8 percent, improving from September; industrial production was up 9.6 percent versus the estimate of 9.4 percent; fixed asset investment was up 20.7 percent versus the estimate of 20.6 percent year-to-date in October; retail sales were up 14.5 percent versus the estimate of 14.4 percent. Power generation in October went up 6.4 percent, the highest in the last seven months.
  • China’s railway investment in October doubled year-over-year to RMB 70 billion, up 8.6 percent month-over-month. CITIC Security in China expects railway investment will continue to rise in November and December on a year-over-year basis. China has also surpassed its social housing construction target of 5 million units for this year in October.
  • Bank Indonesia left policy rate unchanged at 5.75 percent. The balance of payment in the third quarter was a surplus of $834 million, improving from a deficit of $6.9 billion in the second quarter. Third quarter GDP was up 6.2 percent in line with the market expectation, showing strong private consumption growth.
  • Malaysia’s October exports were up 2.6 percent, rebounding from negative 4.5 percent in September; imports also surprised on the upside, expanding 9.6 percent in September versus 2.8 percent in August.
  • Turkish industrial production exceeded market consensus of 2.2 percent growth in September by a wide margin, posting 6.2 percent growth over last year.


  • Taiwan’s October exports were down 1.9 percent, below market expectation for a positive growth of 2 percent year-over-year and 10.4 percent growth in September.


  • The graph shows outperformance of material stocks moved in tandem with power generation. As industrial production improves, demand for materials will likely also improve. Historically, there is a positive correlation between cyclical stocks and power generation.

Recovery in China's Power Output Could Sustain Outperformance of Cyclicals

  • Fitch Ratings upgraded Turkey to investment grade; Moody’s has a positive outlook for Turkey and is likely to follow. Investment grade would lower funding costs for Turkey, helping to narrow its current account deficit further.
  • Earnings-per-share growth in Emerging Europe has been higher than other developing markets, and market-cap-weighted GDP growth plots above the regression line in a BCA study. Turkey, Central Europe, and to a lesser extent Russia, continue to benefit from rapid technological catch-up with Western Europe.

Emerging Europe's EPS and GDP Grew Faster than the World


  • Although China has turned a corner in its economic growth, a flare-up in eurozone debt issues and potential U.S. “fiscal cliff” may slow the recovery unless China adds to its stimulus.
  • With increasing wind and solar power construction encouraged by the Chinese government, thermal power capacity expansion is limited in the next few years, which threatens the revenue of power equipment manufacturers in China.
  • The LTE auction, which starts next Monday in the Czech Republic, is likely to bring a new entrant to the market, and could have implications for the incumbents.

(c) US Global Investors


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