U.S. Global Investors Inc. Business Update Call Transcript

| About: U.S. Global (GROW)

U.S. Global Investors Inc. (NASDAQ:GROW)

Business Update Call

January 26, 2009; 12:00 pm ET


Michael Dunn - Director of Institutional Services

Frank Holmes - Chief Executive Officer, Chief Investment Officer, Director

John Derrick - Director of Research.


Welcome to the U.S. Global Investors webcast. Global Infrastructure Gets a Domestic Boost. Please note that the slides you see on your screen are controlled by the presenters. (Operator Instructions)

Now, we would like to begin by introducing Michael Dunn, Director of Institutional Service for U.S. Global Investors. Thank you.

Michael Dunn

Good morning. Thank you everyone for joining us today. It’s seemed to have developed over the last several months, today’s topic could not be more timely nor could it feature a hotter investment buzzword, infrastructure. When we launched that infrastructure strategy to Global MegaTrends Fund about 16 months ago, we did not foresee that the subject of how research and bullishness, would soon be a key component in one of the most important and expensive government stimulus plans ever ventured, but here we are and we’re still bullish on the very broad sub-sectors that we define as infrastructure.

Certainly, growth estimates have undergone significant changes, but this seems pretty clear; we’d planed to build our way out of recession and that model is Global. Pollster Frank Luntz, recently concluded that 94% of the Americans are concerned about the condition of our infrastructure, nearly unanimous. Perhaps even more shocking, 81% of those poled actually agreed to pay 1% more in taxes to help the effort, much as riding on infrastructure.

Today we’ll discuss some of the factors that attracted us to infrastructure in the first place; update you on how they’ve changed and also speak about how they maybe affected by the ambitions of the new Obama administration.

Leading our discussion today is Frank Holmes. Frank is CEO and CIO of U.S. Global Investors. Frank acquired U.S. Global Investors in 1989. From 2000, he became Chief Investment Officer and since that time his team has earned 26 local awards and performance certificates. Frank is a former President and Chairman of the Toronto Society of Investment Dealers and was a member of the Toronto Stock Exchange's Listing Committee.

In 2006, Frank was the recipient of the Mining Journal’s Mining Fund Management award and joining us from San Antonio is the lead portfolio manager of the Global MegaTrends Fund, John Derrick. John is Director of Research for U.S. Global Investors and has been with the firm for about 10 years. Previously, he was with Fidelity Investments. He received this DBA in finance from the University of Texas at Arlington. John is a CFA Charter holder.

To get us started today, please let me introduce Frank Holmes. Frank.

Frank Holmes

Thank you, Michael and good morning ladies and gentlemen. I’m going to try to go quickly through some of the thought process; first of all, cycles. We are very much a believer that things come in cycles and this is quite often in conflict with the comprehensive pricing model and these cycles bring important over lag and one of the big factors is the [Cruzner] cycle, which talks about the 20 year emerging market cycle.

Further to that, I think it’s important that when we take a look at the presidential election cycle, that last year we had commented that 80% of time of the fourth year of the President’s term, the market is up 8%. However, 2% of the time you get the black swans where you have a mass of credit and currency prices and the market was down. So, mathematically that market decides that probability.

So, now we have our new President, a brand new country due for change and with that you have lots of commentary on what’s necessary to turn this economic around. However, dramatically in the first year of a new President’s term, markets are either down or flat. So, the odds are against President Obama, but I think there’s a stimulus package which actually started in September with money being printed and it could get traction faster than normal, which would be great for the overall stock market, in particular, everything that has to deal with infrastructure and infrastructure spending.

One thing when you look at government policies, it’s very important to look at the monitoring physical policies and to take a look at what they’re doing with interest rates. There was a high, high correlation of money supply and the demand for commodities. This cycle takes about nine months and the printing of the presses started in late September, early October. So, the traction for the commodities will not take place until December time. However, this huge printing of money in unprecedented is creating an interest in gold as an asset class.

More important for this presentation is, what is the [Inaudible] infrastructure and all the commodities that are used for and all the engineering companies and then what is the significant of this globally. So, we’d like to overlay, taking a look at these government policies and in looking at the seasonal factors that can affect stocks and commodities. So, with that, on page four you can see we have a very multi disciplinary focus; top down, bottom up, look at the strengths and weakness and opportunities and threats; have a strong position of opinions, have analysis and a call to action and this is what we believe delivers alpha.

On page five, it’s very important to see this government policy, this new focus on infrastructure and President Obama, in his inaugural speech said, “We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together.” In hearing him speak this morning regarding infrastructure spending, it was also complementary to his whole thought process and I’m very thrilled about having a strong infrastructure and rebuilding our infrastructure. It is very important to be competitive globally and the word choice of American Recovery & Reinvestment Act couldn’t be better to call all people in America together and to get a push on rebuilding this economy.

The package calls for $550 billion in new funding and $275 billion in tax cuts. I think there’s not enough money to spend on infrastructure for roads, which look as a number around $30 billion, but this will probably grow, but if it grows it’s only better for sustainable job creation and economic development, which I’m going to walkthrough in this presentation in a little more detail.

We’re hoping on page six. As this administration begins with this two year package it’s important to watch and listen and watch this debate that will take place, but it’s in motion, that’s what’s most important and we are on a plan to remove ourselves from the dependence on oil coming out of the Middle East by using gas and then with that we need gas transition lines to be rebuilt and it’s just like the internet that was rebuild and the inter state highways rebuilt. We need a greater infrastructure connectivity for power generation and for the transition of gas. All this is going to slowly evolve, I believe, in this American recovery and reinvestment bill. We have 2009 which is basically just started.

Page seven, breaks it down into more detail, where money will be spend and I think this it’s just important; what we’re doing is looking at what companies will be benefit from this, what companies have the value added proposition in the marketplace to help build out this direction of capital.

Page eight, please. As I mentioned earlier that we’d like to follow government policies and it’s so important to see what they’re doing. What we’re seeing now is this massive fiscal stimulus around the world. From China, India, Indonesia, Brazil, you can see these countries, the stimulus as percents of the GDP. China, which has huge U.S. dollars, surplus is reinvesting back in their economy and I take a look at the G7, also you’re seeing as stimulus of percentage of GDP is quite significant and this will go on. This will be a very key factor for the job creation.

So, tracking with the governments, what the governments around the world are doing, the most populated seven countries in the world and the strongest GDPs of the world, the G7 will be important in our process and we’ll regularly communicate with you, what we’re seeing and the traction that’s taking place.

Page nine, demographics is the key. Why it demographics a key both economics and politically. Politicians want to stay in power; it’s just like a business person who wants to make money and they have to turn around and find a way to stay in power and the fastest and easiest ways to create jobs and they create jobs just to have a highly educative workforce. So, emerging markets have huge population density of factors that have to be addressed and building roads create jobs, building schools creates jobs and creates something sustainable.

So, half of the global population, over $3 billion people, is estimated to live in urban areas. Projected urban population is larger than the entire world population in 1965 and to us this is a key factor with the internet, with the CNN’s and CNBC’s all over the world, communication of information, seen what America is doing, is a real key factor in these countries as these emerging countries try to emulate what we’re doing.

Page ten, please. I’d like to turn it over to John Derrick.

John Derrick

Great, thank you Frank. Actually on slide ten, this is just going to give you an idea. Frank was talking about emerging markets account for nearly three quarters of the world’s urban population and this is showing you why there’s going to be spending in those areas. As people move to the city, obviously you need a place to live; you need transportation, electricity and all those things. So you can see here, it’s estimated that $41 trillion will be invested in infrastructure over a 25 year period between 2005 and 2030.

Actually there was another study done recently they put a number of $65,000 trillion. The magnitude of what we’re witnessing here and what we’re right in the middle of is truly phenomenal. I mean if you think about the magnitude of $40 trillion or $60 trillion, it’s truly phenomenal.

You also look at this chart on slide ten there. You can see that Asia is going to be the biggest component of infrastructure spending. While, these numbers were drawn a little while ago, I think all these numbers are going to go up. As Frank alluded to in his slide, the fiscal stimulus, not only here in the U.S., but around the world is going higher and higher and higher and infrastructure is one of the key routes that counties are going to lose their economy. So, I think it’s possible that these numbers may even be higher, but within this chart, Asia is very significant in that growth.

If you turn to the next slide, slide 11; you can see that China is going to be the biggest part of Asian infrastructure spending. So, Asia is a key component, China is the dominant component of that, followed by India and you say, okay that’s great, why is that?

When you turn to the next slide, slide 12 and it shows that there are roughly 25 million to 30 million people urbanizing every year in China and India combined and this is a long cycle process. This is expected to go on for at least another decade and probably quite a bit longer than that.

What we’re seeing is, we’re seeing peasants move essentially from the rural areas of China, move to the coastal cities. You have 25 million or 30 million people per year that you have to house that, you have, like I said electricity, water, schools all those kind of just basic infrastructure, healthcare etc. to support that population growth.

So why are people moving to the cities? Because industrialization is taking place, people are gone to work in the factories, they are earning higher wages and those higher wages are attracting people to move into the city. So, this is not something that’s going to quickly reverse. Obviously, we’ve had a global downturn here recently, but it’s not going to derail this process. This is a mass migration that’s taking place that is very significant.

If you think about, trying to put this in context roughly the state of Texas has roughly 25 million people in it. So if you add everyone in the state Texas move to the East Coast every year, year-after-year, after year and to have a place for them to live and jobs, electricity and water and everything, it would be a phenomenal project here in the U.S., just think how big would the magnitude that taken place oversees.

On the next slide just tried to put some of this urbanization in context again. So, between 2005 and 2025 Chinese cities will add more than 350 million people. It’s basically greater than the entire population of the United States. There will be 200 Chinese cities with more than a million inhabitants. In Europe today, there are only about 35 cities of that size and in the U.S. there’s even less. There will be approximately say up to 50,000 new skyscrapers built, which would be the equivalent of building 10 New York’s.

There could be 170 new mass transit systems build. In Europe today, there are only about 70. In about 2025, two thirds of China citizens will live in cities. That’s roughly a billion people. This puts it in context of the need not only, we have a need here in the U.S., the Obama plan is addressing that etc., but the need in emerging markets in particular say in China, this is truly phenomenal.

If you turn to the next slide, slide 14. This is just very interesting, once again to put the scale in context. What we see here is, China added on the left chart, if China added the equivalent capacity of the U.K. power grid in each of those years 2005, 2006 and 2007, I’m sure we’ll get 2008 numbers here soon, but just to kind of put it in context that the massive infrastructure investment that’s already taking place and we’re well into the way of this infrastructure being in China and so we’re right in the middle of it, right into the sweet spot of it.

If you turn to the next slide, it’s kind of alluded to it a little bit already, but on slide 15, what we’ve seen is, we’ve seen China obviously not totally insulated from what’s going on in the rest of the world, but what is really interesting is that its estimated that net exports only contribute about 5% to 2008 GDP growth. I think a lot of people still have a kind of misconception about China that they are extremely export dependent, its changed overtime and so what we have seen is internal consumption.

Basically with this industrialization that’s taking place and this urbanization that’s taking place, basically China has developed a middle class consumer, they’ve develop a middle class economy. So you can see internal consumption was about 47% of our economy, investment either through government or external investment, like fixed asset investment and those kinds of things were 48% of GDP growth in 2008 and so you can see by this chart there are largely insolated from what’s going on in the rest of the world.

Turning to slide 16, I am going to go quickly here, basically these slides just show that we are basically seen purchasing power accelerate fairly quickly around the world over the course of -- particular over 20 year, but even more recently than that and a lot of that is due to that industrialization that’s taking place. The reason I point that out is actually on slide 17.

As incomes increase the resources intensity also increases and it make sense. Like for instance, as your income increases you go out and you buy your first air conditioner, you go out you buy your first car, maybe even your first refrigerator and all those kind of things, or maybe you buy your first apartment, you moved out on your own, you do those kind of things. Family formation and all those kind of things, but as people make more money they consume more and they consume more in this case natural resources. So anything from oil, this slides specifically looking at aluminum, copper, Iron ore, Nickel, all those kind of things particularly as you reach roughly $500,000 GDP per capita, you really see a sharp acceleration, that’s what we have in store for us.

One of the reason I point this out is that’s going to be very significant for many emerging economies around the world and so obviously we’ve seen a rapid acceleration in commodity prices and then obviously that’s come back, but I think the idea is that overtime this has delayed this somewhat but it hasn’t derailed it and so you will see as consumer start to consume again, the economy starts to recover will quickly reach that equilibrium level that we had not just six months or so are go and that will help the economies like Brazil, like Chile many places in Africa and those kind of things.

On the next slide, slide 18. This is a very interesting dynamic and you will see oil consumption, infrastructure driver question mark and so what we have seen over the course of about three decades or so is that the non-G7 seven Countries, so essentially we call it emerging markets or just broadly consuming roughly 40% of the oil 30 years ago, they consumed roughly 60% of the oil today. Whereas the G7 economies have basically switch place, so they were 60% and now they were 40%. So, what we’re seeing is more and more of the world’s global consumption of oil is coming from places outside of the U.S. and Europe.

On the next Slide on the right there, on the graphic you can see in the U.S., sorry we are still on slide 18, on the graphic on the right G7 economies consume roughly 17 to 18 barrels of oil per capital per year. In non-G7 more or less emerging market type economies, they consume roughly 3 barrels of oil per year and if you look at this and you could see the chart on the left, it showing this consumption increase in emerging economy and you can see it really wouldn’t take that much for the non-G7 economies to go from say three barrels to four barrels, not anymore close to where the G7 is, but just incremental improvement.

That would be a massive increase in the demand for oil over the long run. I still think that’s where we’re going as economies continue to develop their economy, they grow, they want to be more prosperous and one of the approaches that they doing to that is build out infrastructure through this urbanization, industrialization that’s taken place.

If I go to the next slide, slide 19; what’s really interesting here, if that scenario plays out, this is an interesting slide. If oil average $70 over the next 14 years, we will basically increase the revenue to the kind of Gulf countries, oil exporting country by roughly $6 trillion or relative to what it did say the prior 14 years. This is a significant amount of money that they will reinvest back in their economy because when oil was at $10 in 1998, there was significant under investment that took place.

So $70 oil over the next 14 years, that doesn’t seem to be too much of a stretch in my mind and so I think threw will be a significant amount of investment in infrastructure through these Gulf countries and if oil doesn’t come back, if oil doesn’t go to $70 and average is less then that over the next say 14 years, then obviously the U.S. and Europe will be in a much different situation as well and they could rebound that much quicker, to a certain extent it’s a win-win at some level.

On Slide 20; this is just a very basic graph. It just shows that, as oil prices rise, basically expenditures rise in these Gulf countries or OPEC countries. So for instant gas turbine orders, this is significant infrastructure investment. So as oil prices go up, those gas turbine orders go up pretty dramatically. In Saudi Arabia, as oil prices go up, government expenditures go up dramatically.

The Saudi government has dedicated itself also to infrastructure build out, building new cities and those types of things. So, I think as oil prices continue to climb over the long-term, we’ll see significant infrastructure investment in the Gulf countries particularly, but this also would include countries like Russia that has a significant oil wealth.

On slide 21, the next slide; this just shows basically government wealth accounts, sovereign wealth funds and those types of things around the world. Actually, China is closer, it’s almost actually $2 trillion in foreign currency reserves, but the key I wanted to point out here is, in 1997 you had an Asian financial crisis and a lot of those countries basically said, never again. I don’t want to be subject to the whims of currency speculators and they significantly improved their balance sheets if you will to protect themselves and their currencies from basically fund flows in and out of countries.

So when you look around the world, actually the strongest countries, interestingly enough are many of the emerging market countries, because they have the best balance sheets in the world and that actually, you could see that on next slide, slide 22, where emerging markets now holds roughly 70% of global foreign exchange reserves. Obviously less prone to contagions than before and unlike the U.S. and other developed nations, particularly say that U.K. or Australia or some of those countries, the emerging markets are net creditors and not net debtors. So they’re well positioned to recover as the economy continues to recover.

So, roughly 40% of emerging market debt is now rated in investment grade, versus 3% or a decade ago. So, obviously a very strong story for emerging markets and to weather that storm very well. With that I’m going to turn it back over to Frank.

Frank Holmes

Thank you, John. Well that’s on the road to recovery, first quarter update. It is important to know that it’s Happy New Year and this is the year of the Ox. So we would say [Foreign Language]; a happy and prosperous New Year. So, let’s take a look at history and see, we’ve gone through this horrific recession and market that decline; how long do they last? What is the average number of months for recessions and what we want to do is put this picture together for you, so you can see the length of what was the worse going back in August of 1921, it’s just 43 months.

Where are we in this? We’re over 13 months. So, we’re basically at the average and it appears that there’s some traction with the money supply. It’s capturing some of the interest and we’re starting to see some numbers bottom, but unemployment is a lagging indicator.

So we may witness unemployment number still rising as the economy is starting to get some traction and so hopping over in page 25, you can see that U.S. money supply did turnout. What’s important for investors’ listening is that this time last year, even though interest rates were dropping, money supply was also dropping and contracting and it wasn’t until September that the spigot was turned on.

With that, it take as I mentioned earlier about nine months before you start seeing some serious traction in commodities and in economic development, but we are seeing now and as you can see has turned out dramatically and this will create a bottom for the normal GDP numbers. So, we’re feeling more comfortable, but the bottom will be as we mentioned earlier, more of a ‘U’ shape and ending like a ‘V’ shape.

Hopping on page 26, is improving financial conditions, as the CD financial conditions index and just leading six months and Real Consumer Durables index on a year-over-year basis. We’ve seen a turn in the financials, which is positive, but it doesn’t show up in a lot of Main Street media, what’s constructive and positive about the changes taking place. So, stay tuned to this program of watching the money being increased, interest rates will stay low to stop off the deflation.

Do we think that we’re seeing the worst for the financial banks etc., I personally don’t; because of the FASB 157 mark-to-market rules and the whole process of the way boards function today is so different than it did 10 years ago and who has the power and authority and how it’s been shifted. This will still continue to have volatility in the financial sector, but overall sectors will start to see some type of stability. Until a lot of the domestic rules change, a lot of these assets are truly written-down or there’s a new way of interpreting them that these banks own, then we would get a bottom and we are hoping that that will take place in the next nine months.

Hopping on page 27, which is very important to see, is the job creation and the multiplying effect of money being spent. So, for every billion dollars in infrastructure, you basically create 35,000 jobs and if you take a look at house incomes, the American jobs, the better paid jobs, there’s taxes on that income, so you see economic activity of $6.2 billion.

So, basically for every billion dollars that the governments putting into infrastructure spending into America, you’re going to get a six-fold increase in economic development and the idea of shifting a military spending out of Iraq and taking that budget and putting into capital expenditure here will create substantially more economic activity at home and get the GDP going around. That’s thought process that’s in places and so we feel this is very exciting.

Page 28 is the breakdown of China’s composition and fiscal stimulus and I’m going to turn that over to John to make some comments regarding the comparison and how fast China has already started this program of working aggressively to turnaround their economy. John.

John Derrick

Great thank you. Actually, real quick before I dive into that, I think one of things that I would like to point out is there’s obviously a lot of negative news in the press. I think, the unemployment data that Frank alluded to, those are lagging indicators and a lot of those numbers are going to be negative and will be negative for several more months, etc.

I think what we’ve seen is, the feds been in an interest rate cutting mode for more than year, we cut them basically to zero that’s implemented kind of a quantitative easing, this mass of fiscal stimulus take effect. You’ve had mortgage rates fall to record lows, you’ve had gasoline prices have or even more than that and we’re starting to see some early signs of credit borrowing if you will in corporates, in the repo markets, in municipals, etc.

So you’re starting to see some of those kind of early indicators and the news is so bad, and the sentiment is so bad, I feel like now is the time you want to look for those kind of things that are showing kind of counter trend. Everyone knows it’s bad and you really have to be on the look out for what’s positive. As Frank kind of alluded to on the recession graphic, is that we’re already 13 months into well above the average and even if it’s a worst case scenario or the worst recession since the great depression, those only lasted 16 months.

So, with everything else that’s going on, with the global stimulus that’s taking place, its likely that we’re maybe even two thirds or three quarters of the way through this recession and many economists are still projecting at least the next six months will be in recession and there’s a lot of questions about it as we move into the third and fourth quarter, where we’ll even be able to rebound; but I think now is the time you want to start looking for those little rays of hope, because we’re starting to see some things turn.

With that, on slide 28, just going to talk about China’s fiscal stimulus, because it is very significant; roughly $586 billion $585 billion in stimulus and about 80% of that is really devoted to infrastructure. You see highways, railroads, airports, harbors, that’s about 45% of it; post-disaster, earthquake recovery and reconstruction is another 25% of it and then some role development and infrastructure development is roughly another 9% or 10%.

So, there’s a very significant investment and the Chinese Government has acted quickly, this was implemented, announced last year and so we have a Chinese Government that’s already in a very strong position from a fiscal standpoint, from currency reserves and all those kind of thing. They have not only the wherewithal, but the ability to invest aggressively and that’s what it looks like they’re doing.

With that on the next slide, slide 29; we’re starting to see early signs of recovery. Actually, the numbers in December, out of China, were actually reasonably good, relativity speaking and so we saw a slight increase and this is a manufacturing, purchasing manager’s index. So, while the increase is very modest, I’ll grant you that, the idea is that the rate of decline has stopped and it’s started to turn the other way. So it’s definitely an improvement. In an otherwise Dismal December here in the U.S., we saw the auto numbers and auto production numbers, auto sale, but we’re starting to see some stabilization already in China in December.

You turn to the next slide, slide 30. This is actually really interesting, retail sales year-over-year up 19%; this is through December, China retail sales. You could see that obviously deceleration, but on a real basis, we’re basically at or very near the highest levels we’ve been in eight years. So, what we’ve seen here is, we seen crude prices come down, we’ve seen energy prices come down. So, the nominal sales numbers come down, but on a real basis consumers are still spending, consumers feel pretty good about it, and it goes back to that development of the middleclass that I talked about a little earlier.

So, you’re seeing, I believe significant resiliency in Chinese consumer and as we saw in that earlier graphic it was roughly almost 50% of GDP growth last year. I will look at the data and I think this is a very significant development. As the world begins to recover, I think, China will be on the forefront of that.

Michael Dunn

And John just to add to that, what percentage is related to exports from China, the domestic consumption?

John Derrick

Yes, roughly 5% was export driven versus the other roughly 95% that was either investment driven or consumption driven internally.

Michael Dunn

So, the idea of taking away American jobs for their economic prosperity is pretty misleading according to the data.

John Derrick

Yes, that’s sound right.

Michael Dunn

It’s most important; it’s what they are doing. Most of their money is being spent on their own infrastructure; then building their own roads and powers plants, etc, and then making clothes that are consumed by their $1.2 billion people, that’s a key factor in their overall economic growth.

John Derrick

Right. Great, thank you. Slide 31, this is also very interesting. We’ve seen bank lending in China. Basically new bank lending broke a record in December. Very counter to what’s happening in other places around the world and this is new loans.

So, this is very significant. So the government has stepped in; the government has a lot of influence and the government is saying, “Hey, we need to lend; we need to get activity going again” and the banks are responding; a very, very positive development. So, we’re definitely seeing China buck the trend internationally and we’re all aware that China has been a significant growth driver over the last, say five or ten years.

Then it actually on the next slide, I’ll kind of wrap it up with kind of how we’re approaching it from our perspective and with our funds; the Global MegaTrends Funds. Historical when we were looking at this and we brought this fund out, a lot of the infrastructure alternatives out there were utility based, a lot of the infrastructure industries that you look at were more or less Global Utility Funds.

We’re taking a little bit broader perspective on that and not only or we’re looking at kind of the utilities if you will, whether it’s electric or water, gas etc, but we’re also looking at really the building blocks of infrastructure. We are looking at steel, iron ore, construction and engineering firms, summit, all those kind of things that basically you need to build out all these projects.

We believe that there’s going to be a significant growth aspect for those areas. I’d like to call it a fix and troubles approach. You buy that the building blocks and like in Gold Rush in1849 in California, the people there really made the money where the business is selling picks and shovels; not necessarily the local prospect are trying to find a nugget of gold.

So we think to a certain extent we’ll see a similar dynamic develop here. We feel like that’s a little bit more of a growth oriented strategy, more emphasis on emerging markets to a certain extent, but we believe that’s where the growth is and I think some of the slides that we presented today I think tell that story as well. So we’re broadly diversified.

We have that utility type exposure, but we also have more of the growth type exposure that I talked about, we also have alternative energy exposure like solar and land and those kinds of things. We had classic infrastructure investments like airports and toll roads and those kind of things and also wireless and telecommunications infrastructures is also a part of what we’re doing, which is across our utility, but maybe have a little bit more growth profile to it.

So with that I’ll turn it back over to Michael Dunn.

Michael Dunn

Thank you very much. Thank you, Frank and John. Now I’d like to take questions from our guests. If you have a question, if you look in the upper right hand corner of your screens, you can click on the questions button.

Our first question has to do of course with that the debate that’s going on in Washington and the way it is boiling down along party lines is a debate over tax cuts versus infrastructure investment among a package of additional spending. Does U.S. Global have an opinion on the better route to growth?

John Derrick

I’ll jump in on that and Frank if you have anything you want to add, definitely do jump in. I think when you look at Obam’s stimulus plan that was announced in that American Recovery and Reinvestment Bill, I think it’s a very balanced program, that’s what it is and I think that while infrastructure’s obviously an important component, if you think about it, Frank mentioned that $1 billion in infrastructure investing creates roughly 35,000 jobs and has a multiplier effect of roughly $6 billion in the economic activity.

I think if you look at how much has been invested in infrastructure, roughly $174 billion. That’s a significant amount of stimulus to the economy. I mean you could so the math in your head if you want, but its a significant investment back into America and that’s in addition to the normal amount of money that’s being spent on highways and road construction and all those other projects that are going on, so this is incremental.

So, I think you look at the tax cut and some of the other program, I think those are also an important component, because that will get the whole economy coming back, also giving some money to the state local governments to spend as they see to that and then obviously this is kind of more of a social program aspect that was to deal with unemployment and some of those kind of things.

So I think it’s a very balanced plan, I think it’s a very reasonable plan, but I think at the same time, I think it does carry enough on the infrastructure side to make a different. So I look at this plan and I’ve been very impressed so far.

Michael Dunn

Very good. Frank any follow-up to that.

Frank Holmes

That’s fine. John echoed to it perfectly, the thoughts.

Michael Dunn

Thank you. Some time ago, actually not that many months ago, there’s a lot of discussion about the importance of building out the energy infrastructure and the U.S. to combat rising prices there, but with prices coming in like they have, what are some of the possibilities for energy infrastructure in the U.S.? Will there be refining capacity that’s addresses, L&G facilities and also regarding the Obama administration, do you have an opinion about the future of domestic nuclear power generation?

John Derrick

I’ll ump in again. I think one of things that you have to consider is while we’ve had a fall in energy prices; we’ve had a fall in demand for energy and those kinds of things, because of what’s going on with the economy. You have to understand, these are long term problems and from what I’ve gathered from what President Obama has been saying is that this is going to be a priority for them. They are going to develop alternative energy sources; they are going to use domestic energy sources more than ever. They are going to really commit resources to develop that out and they are going to try to lessen their dependence on oil probably more than ever.

So I think there’s going to have to be a significant investment as far as gas turbines, wind power and even nuclear to a certain extent and then you have to have the transmission grid and all those kind of things that hook them up; the transmission kind of distribution and transmission grid, electricity transmission grid. We saw blackouts a few years ago, we’ve had all kinds of issues; it’s an old grid, it definitely needs to be upgraded.

So, I don’t think its going to derail those things. I think if anything, you’ve seen a little bit of delay and I think what it does is I think it buys us a little bit of time. I think as a country to a certain extent we were kind of shocked by what happened with energy prices and obviously we’ve seen the impact of some of that and I think what it does is it buys us a little bit of time, but I honestly don’t believe there’s going to be that much of time.

I think is as I kind of point out earlier, a lot of the story here is the emerging market growth and China is a big part of that, but also other parts of the world, Russia, Middle East, Brazil, those kind of places are all a big part of this story and they’re going to continue to consume energy and I think what it’s done is it’s given us a little breather, but we’ve got to act quickly.

Michael Dunn

Thanks, John. On a related note, do you think that the prospects for alternative energy; green energy is still strong currently in the U.S. and in particular, I suppose comments from Mr. Pickens recently, about how the emphasis for wind energy has all, but stalled?

John Derrick

Yes, I’ll follow those comments as well. They’re basically saying it’s that for right now, but I think it goes back to and I think if you’re going to lessen your dependence on foreign oil and foreign energy, I think that renewals aspect has to be a component of kind of an integrated plan, energy plan and so, once again I’m going to use the words delayed. I think things have been delayed by maybe six months or may be 12 months, I’m not sure, but I think the idea is that it’s not derailed.

Things have not been, just passed off to the side, never to come back to again. I think, what it is, is it’s been delayed a little bit, but fortunately we live here in San Antonio, right here on I10 and I’ll be honest; I watch those trucks go down I10 with those huge propeller blades and huge structures for those wind powers to go out to West Texas and so, I saw one yesterday actually as a matter of fact.

So, I know it hasn’t come to a complete stop, but obviously they’re going to be have headwinds just from a competitive standpoint or can you competitively provide electricity at competitive rates and those kinds of things; but I think in the long run, I think they’re still going to be very viable.

Frank Holmes

I think just to complement John’s thoughts is that listening to Obama speak this morning, there is a big push to have alternative source of energy, so that we can protect ourselves from the chaffers of the world and the Iran’s of the world who are manipulating energy prices and playing games with us. There is just a huge commitment to infrastructure spending for transition lines, both for power and that’s a big factor of the cost is besides putting huge wind fans in West Texas, how do you get that electricity centered around the nation.

So, we’re going to work on building on muscle tissue if you want to take a look at this, you apply that metaphor, muscle tissue, internally so that we have greater connectivity, all sources of energy, gas. We have an abundance of gas with new technology with all these sale deposits and these gas prices are below that price, but as fixed dollar as mcf, we could turnaround and become much more independent and as clean energy. So I think we are going to use that and see that this program, as the government is going to reallocate taxable money into clean jobs that are both short-term and long-term as we did in building interstate highways and as we did building the Internet hub.

Michael Dunn

A number of investors have asked about the [Inaudible] Shipping Index and where you see that today, is their a sign that perhaps there is a bottoming event?

Frank Holmes

As far as our technically indictors, they have bottomed, John?

John Derrick

Yes, no I would agree. Obviously they are in a modest uptrend right now, it appears that they bottomed, I think the Baltic is maybe a good proxy for other commodities and other even in emerging markets to a certain extent and so, we’re seeing some positive signs there. I think natural resource stocks in general energy stocks have gone through a very similar kind of bottoming process started in probably October of last year and continued to consolidate for the last several months, and are starting to turn up a little bit as expectations more or less are staring to come inline with reality. So, yes I think it is a positive sign and as Frank was alluding to, our technique indicators are saying things are back in an uptrend.

Frank Holmes

And a complement there for listeners, it’s very important to follow what the U.S. dollar is doing. Last year, in ‘08 in the first six months, the dollar was under tremendous pressure as it tested all-time lows and oil soared to 147 square, one parabolic on the upside. From July until December, we had the dollar going on up on parabolic move on the upside. Then we’ve had a modest collection and I think it is key that we’ve seen is a strong inverse relationship to commodity prices and emerging market prices to the dollar.

So when the dollar is strong, in the emerging market commodity prices are weaker, as vise versa with the dollar falling, then these commodity prices and emerging market prices are to rise. We’ve seen a collection here and it appears if the dollar was to settle down and get back to a lower level then you could have the Baltic shipping rates, that was a very sensitive to was having global and emerging market economic activities rise further and then you will see that tracks take place in the various commodities.

We have to be careful obviously because these are just price moves off the dollar. We have to make sure if there really is jobs being created, that there is economic activity and that’s what we are still focused on moderating day-in, day-out what’s the G7 countries, what’s E7 countries doing on this job creation and how they are going to resolve the banks’ not being able to facilitate loans. I think the worst is behind us, but it will be a slow process as we are watching and monitoring it.

Michael Dunn

John, a question that is fund-specific. Could you take about some of your top holdings and in addition to that, give folks a little bit of insight into the role of technology investments within the fund, which you might not find in some of those facility-oriented funds that you comment on?

John Derrick

I think that technology oriented investments are going to be more of the alternative energy type investments. So, First Solars’ that we owned, that we have had for quite some time and obviously solar energy, we believe in that technology if you will. And so, we believe that, that is going to be a good place to be in the long run. The other kind of technology areas, honestly like even the winter wine-makers and blade-makers, that’s very highly engineered, very precise product and so I think there is some technology aspects to that.

I think those that are primarily our technology plays if you will within that space currently, but I now there is also been some other investments in this new bill that has been proposed, essentially broadband infrastructure build out and some of those kind things and those things may provide opportunities going forward.

I think in the current environment, we have taken a little bit more of a broad-based approach. We continue to own several of the domestic utilities that we feel are well- positioned through either alternative energy sources like nuclear or wind et cetera like FPL, Excellon those are a couple of examples of those, but then we are trying to balance that out with some more growth characteristics something like a China Mobile or something along those lines to take advantage of our view on China, but also benefit from telecommunication infrastructure build out that has taken place in China and so hopefully that more or less answers your question.

Michael Dunn

For a moment, could you reflect on the strong dollar? Is that a risk for the portfolio or is it strength in fact?

John Derrick

I actually it’s more of a strength actually, I’m sorry a strong dollar?

Michael Dunn

Yes, strong dollar.

John Derrick

A strong dollar, I think would be a little bit more of a risk, because generally speaking it’s going to weigh in commodity prices. So, I think our longer-term view is that the dollar is likely to weaken in the long-run, obviously there is a lot of other factors taking place right now, that have given us some strength, but a strong dollar would generally be negative for commodities and for emerging markets and those kind of things, which have to a certain extent a fairly high correlation with some of the things that we’ve talked about today, so that more growth strategy does entail some of those kind of risks. So, it would be on the margin a headwind for us if the dollar remained strong.

Michael Dunn

Thank you. Could you share a comment or some insight on how the investment team regards the importance of the environmental issues with respect to China’s growth opportunities? In the past, they presented perhaps the most significant headwinds? Where is that today?

John Derrick

Well I think, particularly leading up to Olympic, I think China recognized that there is obviously a pollution issue in China and so some of the environmental impact is that the industry have. The Chinese government is pretty good about going in and shutting down some of the smaller, inefficient operators in a variety of industry. Really trying clean up their act, if you will, that kind of thing, and so I think there is awareness there and I think things are getting better. I think to a certain extent, economic growth has a cost to it and in China there is obviously going to be some environment impact and those kind of things, but at the same time, I think the ability for social progress and those kind of things probably out-weigh most of those things at least for those people that are in China.

So, I don’t have a strong opinion about what China as a government policy should be doing other than, I think generally speaking a cleaner environment is better all things equal, but it’s definitely balancing that.

Michael Dunn

Thank you. Have you noticed as a group, any change in the way the petrodollar rich nations, such as Russia, countries in the Middle East, Brazil and others have begun to allocate their capital and the last several months there has been some change dramatically?

John Derrick

Well, I think part of it is, projects have been delayed. So, revenues are not as robust as they once were.

I was in Russia in July and there was at that time a big push to increase living standards and rebuild housing, rebuild the real network and those kind of things and I still think there’s a commitment to do those kind of things, because I think most of these counties that you mentioned I think look at things in the long run and I think the key things very similar to how we see them and I think in the long run, the demand dynamics are still very favorable overall in general and for energy and commodities and those kind of the things. So, while I think things have been delayed some, I still think those projects are still more or less on the table; it just may take a little longer to get them done.

Michael Dunn

Thank you. $41 trillion, is an incalculable sum for most people, where is that money going to come from?

John Derrick

Actually, it’s going to come from what government has dedicated. I think what people have seen is they’ve seen the success of China and they’ve seen how China had put government polices in place, dedicated itself to improve the infrastructure of the country, improve social structure and those kind of thing and they reaped massive rewards from it and I think a lot of the countries have look at that model and said we can do this too. I think one of the other factors is just a significant amount of under our investment that’s taken place globally in infrastructure.

Like Frank talked about on the very first slide or first couple of slides, about the amount of money -- I’m sorry, that the urban population is now greater then the entire world population was in 1965. I mean think about all the infrastructure in the U.S. that was built before 1965, there’s a lot of infrastructure that’s 40 years old and needs to be replaced here in the U.S. and so, I think what happens is that the economies develop. I think that $41 trillion I kind of talked about a little bit on in the Gulf countries. There’s $6 trillion right now and just of all averages $70 over 14 years. I thinks it’s those kind of place.

So, China has a huge foreign currency reserve, they have this huge growth profile from an economic perspective, there’s a good chunk. You have kind of countries like that; the Gulf countries or Russia etc and then you have rededication to it in places like U.S. The U.S. has dedicated a significant amount.

A couple of years ago, the U.S. did a highway bill, $287 billion over five years and that will come back up. So, all the things that we’re seeing here is in addition to that. So that $41 trillion globally really doesn’t seem to be that much of a stretch considering in my view how dated maybe some of the infrastructure here is in the U.S. and in Europe to a certain extent and then the economic growth that just needs to take place in these others countries.

Frank Holmes

Just a complement to the thought process, I think that there is a balance between good government policies and free markets and America’s machinery is just incredible, it is in a resilient economy and it has the ability to create wealth internally and just start being able to pay for this whole program, if money is used wisely. Building infrastructure for our children’s children, that is smart, there is huge dividends being paid for that. Updating our school system and education is another great program.

The biggest risk I see is the pro-union movements and we’ve seen what takes place in [Detroit]. One of the biggest problems in Detroit region is the union has so much power and they won’t reinvent themselves, they are more for protectionism than they are about education and learning and I think that’s a key factor they could be a headwind against this whole program.

I’m still bullish as John is and we’re now getting a good balance between good government policies with the strongest economy. The intellectual capital of this country is amazing. We’re going to attack this energy issue of not being, we depended upon Middle East and troublemakers with such focus like it was with the Manhattan Project. I think as Voltaire said, “nothing can withstand your assault of continuous brainpower” and America has phenomenal depths of brainpower.

John Derrick

Actually, just a quick thing I would add to that is, while government is actually a good component of this story, but there is also a private component too. It’s a private investors investing in this sector as well. There is a lot of public-private kind of partnerships that take place in infrastructure build-out. And so, I think once we get through this credit crisis that will resume and things will continue to develop. So it’s not just the government spending, it’s a combination as Frank was kind of talking about, you have positive good government policies in place that encourages this kind of spending, then you get the private sectors to step in and also contribute a significant amount maybe even the bulk of it, before it is all said and done.

Michael Dunn

Thank you, John. Thank you, Frank. That is actually the end of our questions today and the end of the presentation, we want to thank everyone for joining us. We appreciate your comments and yours questions and as we conclude, please let me remind you that you will find replays of our webcast including our recent outlook for natural resources 2009 by visiting www.usfunds.com.

There is a lot of interesting investment commentary there and take a moment to get hooked on Frank Holmes blog, which is entitled with Frank Talk. It is located on that homepage. Please call us, if we can assist you in anyway, 1800-US-funds that’s 1800-873-8637. Once again, thank you for joining us. Take care.


This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

Question-and-Answer Session

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