USFunds.com • October 21, 2016

Table of ContentsIndex Summary • Domestic Equity Market • Economy and Bond Market • Gold Market

Energy and Natural Resources Market • Emerging Europe • China Region • Leaders and Laggards

Is Weak Productivity to Blame for Sluggish ConsumerSpending?By Frank HolmesCEO and Chief Investment Officer U.S. Global Investors

This week I presented at the MoneyShow in Dallas, where sentiment toward gold was a bit muted compared toother recent conferences I’ve attended. The yellow metal has certainly taken a breather following itsphenomenal first half of the year, but the drivers are still firmly in place for another rally: low to negativegovernment bond yields; economic and geopolitical uncertainty; and a lack of faith in global monetary policy.

I want to thank my friend Kim Githler for hosting the MoneyShow. Every year since she founded the event in1981, she’s captivated audiences with her intelligence, sharp wit and honesty.

One of the highlights of the event was listening to American economist Art Laffer, whose “Laffer curve” showsthat the government can actually bring in more revenue if tax rates are kept low. Art’s theory was used as thebasis for President Ronald Reagan’s free-trade, low-tax policies. Later, Art actually supported Bill Clintonbecause he was willing to streamline taxes and regulations.

The same cannot, I’m afraid, be said of his wife Hillary, who plans to raise taxes at nearly every level.

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Although bad for your pocketbook and savings, the possibility of higher taxes is expected to increase interest intax-free municipal bonds, especially among top earners. For over a year now, muni bond funds have seenpositive weekly inflows, with $147 million going in during the week ended October 17. I expect this trend tocontinue as we head closer to the election, and beyond.

The Republicans at the event, meanwhile, were almost unanimously disappointed in their candidate DonaldTrump. Many of the grievances had to do with his inability to stay on message. If he would simply stick to keyissues such as public safety, immigration and minimizing taxes and regulations, he might have a clear shot atthe presidency. Instead, he too easily walks into personal traps set by the media and the Clinton campaign.

EASE YOUR CLINTON-TAX BURDEN WITH TAX-FREE MUNIS!

Where’s the Retail Spending?Maybe you haven’t heard yet, but you got a raise in 2015 without even realizing it. At least, that’s what theCensus Bureau revealed last month. U.S. household income rose 5.2 percent, the fastest on record.

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This falls in line with other recent news that appears to show that the U.S. economy is humming once again,nearly a decade after the 2007-2008 financial crisis.

With unemployment at 5 percent, initial jobless claims fell to a four-decade low this month, while the labor-force participation rate—the share of working-age Americans who are working or actively seeking work—hasfinally begun to perk up. Also improving is the voluntary quits rate, which indicates workers now have enoughconfidence in the labor market to walk away from their current jobs and quickly find new ones.

As encouraging as this all is, I have to look at the consumer discretionary sector and wonder why we’re notseeing healthier consumption. (This is important, as spending accounts for roughly two-thirds of grossdomestic product.) If more Americans have better-paying jobs, as the data seem to indicate, and they’re feelinggood about parting with their money, why aren’t retail sales surging?

Instead, sales growth, excluding food services, has steadily been weakening. E-commerce sales growth looksstrong, but the entire industry can’t be propped up by Amazon alone.

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Confirming this is Bank of America Merrill Lynch’s latest report on debit and credit card spending, whichshowed a “substantial slowdown” in retail sales, ex-autos, in September, according to Zero Hedge.

Despite the release of the iPhone 7 in September, BofAML didn’t see “a spike in electronic store sales akin toprior releases of Apple devices. It may be a reflection of the iPhone 7 or perhaps the trend in electronic storesales ex-iPhone is sluggish.”

The bank raises a couple of good points here. Apple’s latest smartphone was met with criticism stemming fromits lack of a headphone jack, which might have dissuaded some consumers from upgrading.

And as many others have pointed out, it’s possible we’ve finally reached “iPhone fatigue.” Most everyone nowowns a satisfactory smartphone—so long as it doesn’t explode—so consumers could simply be holding out forthe next must-have gadget. Maybe they’ll find it in Facebook’s virtual reality Oculus Rift headset, but with itsprice tag still hovering above $800, it might take some time before consumers feel comfortable enough to buyit.

Automobiles and Housing Affected, TooThis goes far beyond smartphones. Big-ticket items such as automobiles and homes are also seeing sluggish, oreven negative, growth. The S&P Global Ratings recently cut its automobile sales estimate for the year to 17.5million from 17.8 million.

Facing inventory build-up, Ford Motor announced it would temporarily halt production at four of its factoriesboth here in the U.S. and Mexico, Bloomberg reports. One of these factories, in Kansas City, builds thebestselling F-150 pickup.

Meanwhile, the momentum of new housing starts and permits has also slowed, with starts falling in Septemberfor the second straight month. Despite improvement since the housing bubble, we still aren’t close to where wewere pre-recession, let alone the 1990s average.

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The Slowest Recovery Since the Great DepressionHousehold income is up, unemployment is down—and yet sales are stagnant. It’s a paradox.

A paradox, that is, until we examine another economic indicator: labor productivity.

In simple terms, productivity means labor efficiency—producing more goods and services without workinglonger hours. And when productivity rises, it increases our standards of living.

Since the end of World War II, productivity rose pretty steadily. But growth has been near-anemic for close to adecade now and is currently running lower than it’s ever been.

Consider the following chart. Each bar represents a new business cycle following a recession. Crawling along at1 percent annually, today’s productivity growth is weaker than the previous 10 cycles. In the September quarter,it actually fell 0.6 percent.

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The big question is: Why is this happening?

The answer depends on who or which economist you ask.

Possible factors that have been tossed around include the aging of the workforce, the strong dollar (whichreduces the competitiveness of U.S. companies) and a slowdown in capital spending by businesses since therecession.

One of the leading theories, presented by economist Robert J. Gordon in his recent book “The Rise and Fall ofAmerican Growth,” argues that 19th and 20th-century innovations—air conditioning, indoor plumbing, themicrowave, the automobile—were much more impactful on workers’ productivity than modern inventions suchas the internet, cloud computing and smartphone apps. (Indeed, we’d probably all agree that these things oftenwaste, instead of enhance, our time and energy.)

$740 Billion in New Compliance CostsWe can add to the list the growing mountain of regulations, a topic I’ve discussed many times before. Accordingto the American Action Forum, there’s been, on average, one costly regulation—or “hidden” tax—implementedevery day of the Obama administration. This has added about $740 billion and 194 million paperwork hours tothe burden. Although designed with good intentions, these regulations, and the compliance costs associatedwith them, often stand in the way of efficiency.

Also increasing are the number of government jobs, which aren’t exactly known to drive innovation. Althoughwe’ve seen an uptick in new manufacturing positions during the last decade, jobs have over the long-run beenon the decline.

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To get productivity back on track, and therefore consumer spending, the U.S. should strongly considerregulation reform.

Index SummaryThe major market indices finished up this week. The Dow Jones Industrial Average gained 0.04percent. The S&P 500 Stock Index rose 0.38 percent, while the Nasdaq Composite climbed 0.83percent. The Russell 2000 small capitalization index gained 0.47 percent this week.

The Hang Seng Composite gained 0.93 percent this week; while Taiwan was up 1.54 percent and theKOSPI rose 0.51 percent.

The 10-year Treasury bond yield rose 6 basis points to 1.74 percent.

Domestic Equity Market

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StrengthsMaterials was the best performing sector for the week, increasing by 1.58 percent versus an overallincrease of 0.41 percent for the S&P 500.

Netflix was the best performing stock for the week, increasing 25.65 percent. The company raced pastforecasts for subscriber growth in the third quarter.

Microsoft hit an all-time high after its earnings beat estimates. Better-than-expected earnings andrevenue ran shares of Microsoft up by more than 5 percent and to its first record-high print sinceDecember 1999.

WeaknessesTelecommunications was the worst performing sector for the week, falling by -3.80 percent versus anoverall increase of 0.41 percent for the S&P 500.

Southwestern Energy was the worst performing stock for the week, falling -10.16 percent. Thecompany’s stock dropped on concern for low pricing as it ramps up production.

Verizon tumbled after adding fewer subscribers than expected. Verizon said net additions forFIOS video totaled 36,000, but analysts estimated a gain of 59,000. At the same time, demand forhigher Internet speeds increased, reflecting the shift away from traditional cable-TV bundles andtoward more customizable streaming services.

OpportunitiesAT&T and Time Warner are reportedly talking about a merger, according to Ed Hammond, AlexSherman and Scott Moritz at Bloomberg. The talks are informal, and neither side has hired an adviser,according to the report.

Qualcomm might finally put its cash to work. The tech giant is said to be in the final stages of talks toacquire NXP for $110 to $120 a share, or about $40 billion, according to Bloomberg. Qualcomm hasabout $30 billion in cash, most of which is overseas, so acquiring a foreign company is attractive.

Tesla says cars will have self-driving hardware. The electric-car maker announced on Wednesday thatall new cars, including the Model 3, would have the ability to be fully autonomous. "The foundation hasbeen laid for fully autonomous, it's twice as safe as a human, maybe better," CEO Elon Musk saidduring a media call Wednesday evening.

Threats

eBay shares slid 10 percent in early trading on Thursday after the company announced weak guidancefor the fourth quarter. The ecommerce company said it expects adjusted earnings per share fromcontinuing operations to be in a range of $0.52 to $0.54 for the crucial holiday season. That was nearthe low end of analysts' forecast for $0.54, according to Bloomberg.

Wells Fargo is being investigated on suspicion of identity theft. California prosecutors are looking intowhether the bank’s creation of millions of fraudulent accounts constitutes identity theft, Bloombergreports.

American Express posted its lowest quarterly revenue in over five years. The credit-card giant earned$1.20 a share on revenue of $7.77 billion, which was its lowest in over five years as a result of losing itsCostco contract.

The Economy and Bond MarketStrengths

A major fallout from the housing crash is now at the lowest level since 2008. Distressed sales —foreclosures and short sales — as a percent of residential sales fell to 4 percent in September. Distressedand short sales made up about one-third to one-half of all sales in 2012.

China's GDP was in line. The Chinese economy grew at a 6.7 percent year-over-year clip in the thirdquarter, causing some economists to suggest it's a sign the Chinese economy is stabilizing as this is thethird straight quarter with 6.7 percent year-over-year growth.

Britain's jobs report looked good. Data from the Office for National Statistics showed Britain'sunemployment rate held at 4.9% while those claiming benefits for the first time rose by just 700 fromAugust to September, well shy of the 3,000 claimants that economists were expecting.

WeaknessesThe below-expected 0.1 percent month-over-month rise in U.S. core CPI failed to cement the case for aFederal Reserve rate hike in December. The annual growth rate moderated slightly to 2.2 percent from2.3 percent, while the three-month annualized rate slowed to 1.8 percent from 2.1 percent.

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Housing starts unexpectedly plunged by 9 percent at a seasonally adjusted annual rate of 1.05million. Starts of multi-family structures with five or more units fell 39 percent, and were the biggestdrag on overall construction.

Empire manufacturing unexpectedly collapsed to -6.8. That number is below economists' expectationsof an increase to 1.00, and a drop from the prior month's reading of -2.0.

OpportunitiesNext Friday's U.S. third quarter GDP will take center stage. Economists are expecting 2.5 percentgrowth versus the prior quarter’s 1.4 percent. A firm rebound in the third quarter is needed to dismissthe recent weakness as a temporary soft patch.

According to James Iselin, the managing director at Neuberger Berman, the ratio of 10-year municipalyields to Treasury yields may be on the way to surpassing 100 percent again. That would increase theattractiveness of munis of treasuries and would likely bring buyers into the market.

After a strong two years, the U.S. dollar has remained more or less flat during the last few months, withthe trade-weighted dollar index hovering near a range of 93 to 98. But now, some analysts are arguingthat the greenback could have some room to grow. According to a Morgan Stanley team led by Hans W.Redeker in a recent note, the foundation for a powerful U.S. dollar rally is in place as the outlook isstronger than it was last year.

ThreatsMedical costs are rising faster than pretty much everything else right now. The Bureau of LaborStatistics released the latest data for the Consumer Price Index measure of inflation, which rose by 0.3percent month-on-month and 1.5 percent year-on-year in September. On the month-over-month scale,headline CPI was boosted most by medical costs.

S&P cut the debt of Europe’s biggest potash producer one step to a level below investment grade. Thedowngrade means that the bonds have no investment-grade ratings that would make it eligible for theEuropean Central Bank’s asset-purchase program. Before the buying began, the ECB said it wouldn’thave to automatically sell notes downgraded to junk, but it has also said it will take steps to managerisks in its holdings. The central bank has bought 34 billion euros ($37 billion) of investment-gradecorporate bonds since starting its stimulus program in June.

Almost everyone the Federal Reserve questioned for its Beige Book had terrible things to say aboutHouston's economy, especially its construction and labor markets.

Gold MarketThis week spot gold closed at $1,266.28, up $14.85 per ounce, or 1.19 percent. Gold stocks, as measured by theNYSE Arca Gold Miners Index, ended the week slightly higher by 6.99 percent. Junior miners underperformedseniors for the week, as the S&P/TSX Venture Index climbed only 2.27 percent. The U.S. Trade-WeightedDollar Index finished the week up 0.69 percent.

Date Event Survey Actual Prior

Oct-17 Eurozone CPI Core YoY 0.8% 0.8% 0.8%

Oct-18 U.S. CPI YoY 1.5% 1.5% 1.1%

Oct-18 China Retail Sales YoY 10.7% 10.7% 10.6%

Oct-19 U.S. Housing Starts 1175k 1047k 1150k

ECB Main Refinancing Rate

Oct-20 0.000% 0.000% 0.000%

Oct-20 U.S. Initial Jobless Claims 250k 260k 247k

Oct-25 U.S. Consumer Confidence Index 101.0 -- 107.1

Oct-26 U.S. New Home Sales 600k -- 609k

Oct-27 Hong Kong Exports YoY -0.1% -- 0.8%

Oct-27 U.S. Durable Goods Orders 0.1% -- 0.1%

Oct-27 U.S. Initial Jobless Claims 255k -- 260k

Oct-28 Germany CPI YoY 0.8% -- 0.7%

Oct-28 U.S. GDP Annualized QoQ 2.5% -- 1.4%

Strengths

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The best performing precious metal for the week was gold. Gold was hammered down while Chinesemarkets were closed in the prior week, triggering a technical buy signal and possibly the best entrypoint in over year to add to positions.

After gold price discounts hit a record high of $100 an ounce in July, prices in India swung to apremium for the first time in nine months this week, reports Reuters, around $2 an ounce. TheBusiness Standard also reported this week that the sixth tranche of the sovereign gold bond scheme inIndia is set to launch on October 24, with bonds being offered at a discount to attract more customers.

It seems the relatively new Shanghai Gold Exchange (SGE) gold price benchmark has been leading theway in terms of setting the direction of the global gold price level, writes Lawrie Williams, following therecent $60 price drop of the metal during China’s Golden Week. Williams’ colleague Julian Phillipsadds that the Shanghai physical market for gold is thought to better represent physical gold prices than

COMEX paper market prices. In fact, the Dubai gold exchange has signed a contract to use the ShanghaiFixings in place of the London Fixings. In a related note from S&P Global this week, China’s centralbank added 5 metric tons to its gold reserves in September, making total gold holdings now at 1,838tons.

WeaknessesThe worst performing precious metal for the week was palladium, falling 3.66 percent. Extending aselloff sparked by weak trade data from China, palladium fell to a three-month low, reports Bloomberg.Palladium prices have fallen nearly $100 over the last three weeks.

Hedge funds are cutting bullish bets on gold at the fastest pace this week, sending the yellow metal nearfour-month lows, reports Bloomberg. Money managers cut net-long wagers by 25 percent, according toU.S. Commodity Futures Trading Commission data released last week. In the past two reports, thearticle continues, the position has fallen by around 180,000 contracts. This drop could potentially besetting up a rebound for the metal. Similarly, the increased odds of a December rate hike are sendinggold mining shares downward, following the biggest rally in a decade.

According to Bloomberg, China said its consumption of non-ferrous metals will expand through the year2020 at less than half the pace seen in the first five years of the decade. The Ministry of Industry andInformation Technology said the nation’s economy is “entering a new normal” in which demand growthfor metals will slow to a medium-low pace from a high-speed one.

OpportunitiesJames Steel, respected chief precious metals analyst with HSBC, has written a note indicating thathigher gold prices are likely to come out of the global trade slowdown, writes Zero Hedge. “Demand forgold is often stimulated by the same factors that fan protectionist and populist sentiment,” Steel said.“Abrupt declines in cross border trade, investment and immigration, the dislocation of global economicpolicies, and a beggar-thy-neighbor approach to trade, is almost tailor-made for higher gold prices.”

A survey of attendees at this year’s London Bullion Market Association in Singapore show that gold isset to rise around 7 percent by the time of the 2017 conference. General manager at Heraeus Metals inHong Kong, Dick Poon, says gold can surge to $1,400 in 2017 as the Fed holds back from furthermonetary tightening in at least the first half after an increase in December, reports Bloomberg. Portfoliomanager Terence Kooyker at Blenheim says he is bullish on gold too, and bearish on oil. Kooyker saysfaster U.S. inflation and low interest rates will support gold, adding that “gold always performs bestwhen nobody thinks you should own it.”

In a note this week, Macquarie Research initiated coverage of Rye Patch Gold with an outperformrecommendation. The group writes that Rye Patch is transforming from an explorer royalty company toa junior producer on the back of its July 2016 acquisition of the Florida Canyon mine (FCM) in Nevada.Macquarie sees FCM offering investors a key opportunity for high returns, given that the stock istrading around 70 percent discount to junior producer peers.

ThreatsEarlier this year, it was reported that California’s Public Employees’ Retirement System (Calpers), thelargest in the U.S., earned only 0.6 percent on its investments last fiscal year, reports Financial Sense. Inorder to meet its long-term goal, however, the pension needs to be returning over 12 times that amount.Calpers’ Chief Investment Officer Ted Eliopoulus writes that it is a significant policy issue and thesystem must average at least 7.5 percent a year to match its assumed rate of return or turn to taxpayersto make up the difference.

To add to the point above, author of California Dreaming: Lessons on How to Resolve America’sPublic Pension Crisis, Lawrence McQuillan writes that the total unfunded liability in California alone is$950 billion all-in when looking at state and local pension plans. Again, that is just California. This is ahuge “ticking time bomb,” he continues, noting that if you look nationally and use realistic numbers, it’saround $4 trillion when looking at all state and local government pension plans across the country. Investors should always think in terms of portfolio diversification as pension funds may not hold anygold exposure.

The world’s biggest central banks are bulking up their balance sheets, reports Bloomberg. The combinedassets of the 10 largest central banks now total $21.4 trillion, a 10-percent increase from the end of last

year. “The accelerating expansion of central banks’ balance sheets comes as debate rages over whethertheir asset purchases and continued low interest rates are creating bubbles, especially in the bondmarket,” the article continues. Almost 75 percent of the world’s central bank assets are controlled byjust four policymakers in China, the U.S., Japan and the eurozone.

Energy and Natural Resources MarketStrengths

Crude oil prices rose to a 15-month high as inventories in the U.S. decline and many members of OPECare further reducing output. This week’s inventory draw marks the tenth weekly inventory drawdown inthe last 11 weeks.

The best performing sector for the week was the BI Global Coal Producers Index. The index rose 17percent for the week as coal prices rallied on the back of recent heavy rainfalls in Australia that threatento disrupt supply from the world’s largest coking coal exporter.

CF Industries Holdings Inc., a major global fertilizing company, was the best performing stock in thebroader natural resource space for the week. The stock gained 16.3 percent after a proxy advisory firmrecommended investors vote in favor of the proposed Agrium/Potash Corp deal. The deal will helpconsolidate the fertilizer sector, which investors believe could result in greater pricing power andprofitability.

WeaknessesU.S. housing starts missed by 9 percent for the month of September. Prospective home buyers citedproblems finding affordable properties. The weaker monthly reading suggests weakness in constructionmaterials, as well as the paper and forest sector.

The worst performing sector for the week was the S&P 500 Paper and Forest Products Index. The indexdropped 2.7 percent for the week, tracking lumber prices down, and reacting to the negative housingstarts September print.

The worst performing stock for the week in the broader natural resource space was Kaiser Aluminum.The manufacturer of aerospace products dropped 10.1 percent to a 52-week low after a disappointingthird quarter earnings’ call. The company downgraded its profit guidance as it expects weaker aerospacedeliveries.

OpportunitiesGold ETF holdings surged to a three year-high. Money managers and speculators have cut net-longpositions in gold futures by record amounts over the past two weeks hurting the price of the commodity;however, physical gold investors have continued to accumulate gold as ETF holdings climb to three

year-highs, signaling a potential bullish move forward for gold.

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Halliburton, one of the largest global oil service companies, reported earnings ahead of streetexpectations. The data suggests North American activity has stabilized, a positive signal for other oilservices companies and the energy sector as a whole.

“The oil price will go higher with or without OPEC,” according to Oppenheimer’s Fadel Gheit. Despiteattention being centered on talks of production cuts among OPEC members, Gheit believes that much ofit is irrelevant as the lack of capital spending over the past years will force a rebalancing of the marketand lift oil prices.

ThreatsThe outlook for industrial and base metals in the fourth quarter of 2016 is looking weak according to aBank of America survey of market participants. With commodity prices having rallied in 2016, and thefourth quarter being the weakest seasonal quarter, prices may well weaken into year-end. Participantsdid add that they expect prices to strengthen by early 2017.

The spectacular rally in coking coal prices will end in tears according to CLSA. Coking coal prices haverallied 200 percent year-to-date, with a substantial run in the last two months. As CLSA argues, arecent change in China’s policy will bring more supply online in the coming month which poses a threatto this price level. CLSA believes there is potential for further momentum in the short-term but forecasta correction by the first quarter of 2017.

Ford delivered a blow to the auto parts industry, with negative read-through for steel and aluminumdemand. Ford is suspending production in select plants to help clear excess inventories and resize tomeet current demand.

China Region

StrengthsBoth Aggregate and New Yuan Loan Financing data came in higher than analysts’ expectations. Newyuan loans came in at 1.22 trillion for the September period, ahead of 1 trillion and up from 948.7billion in August, while Aggregate Financing came in at 1.720 trillion, up from 1.470 trillion and aheadof expectations for 1.390 trillion.

China’s third quarter GDP was in-line with analysts’ expectations for a year-over-year third quarterGDP print at a 6.7 percent growth rate, which remains right within the overall 2016 guidance from the

Chinese government for a range of 6.5-7.0 percent GDP growth.

The Jakarta Composite Index remains within close striking distance of its recent highs as the indexcontinues to consolidate its gains of recent months. The Bank of Indonesia surprised a majority ofanalysts this week with an unexpected rate cut as well as hints that additional cuts may be in order infuture.

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WeaknessesThe renminbi continues to weaken, hitting six-year lows as the on-shore yuan touched 6.7670, while theoffshore yuan fell to 6.7761.

Year-over-year industrial production in China came in at a gain of 6.1 percent, slightly weaker thanexpectations for a gain of 6.4 percent and below the previous (August) print of 6.3 percent.

Indonesian exports and imports both missed for the September period. Analysts’ expectations forexports were a year-over-year gain of 0.60 percent, but the actual print was a decline of 0.59 percent,while expectations for a gain in imports of 4.7 percent were missed by an actual print that showed adecline of 2.26 percent.

OpportunitiesMalaysia’s Prime Minister Najib Razak has pledged to control expenditures as the country grapples witha continued period of energy prices lower than in recent years. The Malaysian government is presentlyestimating a 2017 GDP growth rate of between 4 percent and 5 percent, with a narrowing fiscalshortfall. Malaysia is the region’s only net energy-exporter.

China is set to overtake the United States and take the title of the world’s largest aviation market by2024, Bloomberg reports, as the number of people flying may almost double to 927 million by 2025.

In addition to the expected aim of stemming a potential bubble, one potential upside to the recentproperty curbs in mainland China has been an uptick in Hong Kong properties and property developersas mainland buyers consider subsidies and incentives to buy in Hong Kong instead.

ThreatsPhilippine President Rodrigo Duterte spent the week visiting China after having been invited to Beijing

by Chinese President Xi Jinping. While there, Mr. Duterte announced his “separation” from the UnitedStates, noting that between his country and China, “the roots of our bonds are very deep,” alsosuggesting that, “Foreign policy now veers toward” China. Indeed, Mr. Duterte asserted, “No moreAmerican interference.” Once again, Philippine cabinet members have downplayed the president’sremarks, but the 71-year-old populist leader appears to be flagging a real pivot toward China, orperhaps simply snubbing the U.S., fishing for a better deal (or perhaps both).

While home price appreciation did slow somewhat in some of the largest Chinese cities—Beijing andShanghai new home prices dropped 3.7 and 2.5 percent, respectively, according to Bloomberg news—theaverage new home price across the 70 cities which are tracked rose the most in more than seven years inSeptember, up 1.8 percent from the August period, fueling continued caution and concerns about thepotential of a developing bubble.

The expectations for a potential U.S. interest rate hike and an accompanying rise in the U.S. dollarcould continue to exert collective pressure in certain sectors across Asia.

Emerging Europe

StrengthsHungary was the best-performing country this week, gaining 4.2 percent. The Budapest stock exchangeappreciated 23.6 percent year-to-date, the strongest performer in emerging Europe, supported bygovernment pro-growth actions. This week, Hungarian government announced it will payroll taxesearly next year.

The Russian ruble was the best-performing currency this week, gaining 94 basis points against thedollar. Major emerging Europe currencies lost against the dollar, but the ruble was supported byRussian companies selling dollars this week and buying rubles in preparation to pay 1.1 trillion rubles($17.6 billion) in taxes due before month-end.

The utility sector was the best-performing sector among eastern European markets this week.

WeaknessesRomania was the worst-performing country this week, losing 55 basis points. Banks underperformedthis week as Romanian lawmakers approved a bill allowing the conversion of Swiss-franc loans intolocal currency at below-market rates. The bill also will allow conversions at the historical rates toalready converted Swiss-franc loans.

The Hungarian forint was the worst-performing currency this week, losing 1.65 percent against thedollar. Eurostat published revised debt figures for Hungary, and debt level fell to 74.4 percent of grossdomestic product from 75.7 a year earlier. The deficit narrowed to 1.6 percent from 2.1 percent.However, Eurostat is skeptical about the quality of data reported by Hungary and is reviewingHungarian central bank operations.

The materials sector was the worst-performing sector among eastern European markets this week.

OpportunitiesJPMorgan Chase raised its recommendation to overweight Russian stocks because prices don’t reflectrecovery in oil prices, saying that the energy sector stocks are pricing in $45 per barrel oil, not $50 perbarrel where crude trades. Russian shares on the MICEX Index are trading at 6.2 times estimated 12month earnings, the lowest level among emerging markets.

The yield on Czech Republic’s two-year government notes fell to a record low of -1.05 percent, belowSwitzerland’s two-year yield. Demand for Czech bonds is driven by the country’s growing economy andinvestors’ expectation that the koruna will appreciate after the cap on the currency is lifted.

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Rosneft, Russia’s largest oil producer, announced buying India’s second biggest refinery Essar Oil Ltd.This acquisition will boost Russia’s access to the most important long-term growth market. Rosneft istargeting a market of 1.3 billion people that imports more than 80 percent of its crude requirements.The International Energy Agency forecast that India will be the world’s fastest-growing oil-consumingnation through 2040. Rosneft also sees the potential to expand in the Asia-Pacific region by supplyingfuel to Indonesia, Vietnam, the Philippines and Australia.

ThreatsOjer Telekom, the parent of Turk Telekom AS, missed September’s $290 million payment on a record$4.75 billion loan. The company received this loan three years ago and since then the lira has lost about40 percent against the dollar, making it harder to service foreign debt. If the lira depreciates moreagainst the dollar, Turkey’s heavy borrowers may find it difficult to service foreign exchange debt.

The European Central Bank (ECB) kept its quantitative easing program and interest rates unchanged,providing no support to revive the eurozone economy. Draghi has expressed confidence inflation willreturn to the ECB’s goal of just below 2 percent by early 2019 at the latest. ECB may have to redesignthe QE program to ensure the EUR80 billion monthly bond-buying program can continue, afterconcerns that eligible assets might be running low.

The European Union is considering imposing more sanction on Russia due to its action in Syria, wherenumerous reports have tied Moscow to war crimes in its efforts to reinforce Syrian President Bashar al-Assad’s regime. Talks over new sanctions split Europe as not all members of the eurozone want to moveforward with it.

Leaders and Laggards

Weekly Performance

Index CloseWeekly

Change($)Weekly

Change(%)

DJIA 18,145.71 +7.33 +0.04%

S&P 500 2,141.16 +8.18 +0.38%

S&P Energy 516.84 +2.57 +0.50%

S&P Basic Materials 295.30 +4.59 +1.58%

Nasdaq 5,257.40 +43.24 +0.83%

Russell 2000 1,218.10 +5.69 +0.47%

Hang Seng Composite Index 3,164.43 +29.24 +0.93%

Korean KOSPI Index 2,033.00 +10.34 +0.51%

S&P/TSX Global Gold Index 224.07 +18.09 +8.78%

XAU 86.87 +5.84 +7.21%

Gold Futures 1,266.70 +11.20 +0.89%

Oil Futures 51.00 +0.65 +1.29%

Natural Gas Futures 2.96 -0.32 -9.86%

10-Yr Treasury Bond 1.74 -0.06 -3.50%

Monthly Performance

Index CloseMonthly

Change($)Monthly

Change(%)

DJIA 18,308.15 -92.73 -0.50%

S&P 500 2,168.27 -2.68 -0.12%

S&P Energy 520.35 +14.90 +2.95%

S&P Basic Materials 299.87 -4.51 -1.48%

Nasdaq 5,312.00 +98.78 +1.89%

Russell 2000 1,251.65 +11.74 +0.95%

Hang Seng Composite Index 3,137.14 +36.41 +1.17%

Korean KOSPI Index 2,043.63 +8.98 +0.44%

S&P/TSX Global Gold Index 237.17 +8.69 +3.80%

XAU 94.00 +3.83 +4.25%

Gold Futures 1,320.30 +8.90 +0.68%

Oil Futures 47.97 +3.27 +7.32%

Natural Gas Futures 2.91 +0.02 +0.87%

10-Yr Treasury Bond 1.60 +0.02 +1.01%

Quarterly Performance

Index CloseQuarterly

Change($)Quarterly

Change(%)

DJIA 18,308.15 +358.78 +2.00%

S&P 500 2,168.27 +65.32 +3.11%

S&P Energy 520.35 +5.56 +1.08%

S&P Basic Materials 299.87 +9.08 +3.12%

Nasdaq 5,312.00 +449.44 +9.24%

Russell 2000 1,251.65 +94.88 +8.20%

Hang Seng Composite Index 3,137.14 +322.12 +11.44%

Korean KOSPI Index 2,043.63 +56.31 +2.83%

S&P/TSX Global Gold Index 237.17 -15.46 -6.12%

XAU 94.00 -8.50 -8.29%

Gold Futures 1,320.30 -25.70 -1.91%

Oil Futures 47.97 -1.02 -2.08%

Natural Gas Futures 2.91 -0.08 -2.51%

10-Yr Treasury Bond 1.60 +0.15 +10.52%

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The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in theirindustry.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 Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in theRussell 3000®, a widely recognized small-cap index.The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listedon Stock Exchange of Hong Kong, based on average market cap for the 12 months.The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the TaiwanStock Exchange.The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on theKorean Stock Exchanges. The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leadingcompanies involved in the mining of gold and silver. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights arecapped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subsetof the S&P 500.The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as asubset of the S&P 500.The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the1941-43 base period.The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in theindustrial sector as a subset of the S&P 500.The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumerdiscretionary sector as a subset of the S&P 500.The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in theinformation technology sector as a subset of the S&P 500.The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies inthe consumer staples sector as a subset of the S&P 500.The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset

of the S&P 500.The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as asubset of the S&P 500.The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in thetelecom sector as a subset of the S&P 500.The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly tradedcompanies involved primarily in the mining for gold and silver. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a marketbasket of goods and services purchased by individuals. The weights of components are based on consumer spendingpatterns.The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index isbased on five major indicators: new orders, inventory levels, production, supplier deliveries and the employmentenvironment.The S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index ismarket capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used toremove companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, whenincluded, will be greater than 0.05% of the index.

The relative strength index (RSI) is a momentum indicator developed by noted technical analyst Welles Wilder, thatcompares the magnitude of recent gains and losses over a specified time period to measure speed and change of pricemovements of a security. It is primarily used to attempt to identify overbought or oversold conditions in the trading of anasset.The Jakarta Stock Price Index is a modified capitalization-weighted index of all stocks listed on the regular board of theIndonesia Stock Exchange.The MICEX Index is cap-weighted composite index calculated based on prices of the 50 most liquid Russian stocks ofthe largest and dynamically developing Russian issuers presented on the Moscow Exchange. MICEX Index was launchedon September 22, 1997 at base value 100. The MICEX Index is calculated in real time and denominated by MoscowExchange in Russian rubles.BI Global Coal Producers Index is an equal-weighted basket of peers.S&P 500 Paper and Forest Products Index is a capitalization-weighted index.

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