MVP Energy MLPs: John Edwards

John Edwards John Edwards, first vice president covering energy infrastructure master limited partnerships for Morgan Keegan, is bullish for 2012 and well beyond. In this exclusive interview with The Energy Report, Edwards highlights how this sector pairs a low-volatility asset class with stable, secure distributions—a rare combination in today’s markets.

The Energy Report: A year ago, you forecast average returns of 10% with the yield spread between master limited partnerships (MLPs) and 10-year U.S. treasuries at 290 basis points. How accurate did your forecast turn out to be?

John Edwards: It turned out fairly well. The actual performance for MLPs beat our original expectations by about 390 basis points. On the last trading day of 2011, we were looking at 13.9% total return.

We targeted yields on the sector between 6% and 6.5% and it ended near 6.1% at the lower end of our targeted range.

TER: What is the current yield spread?

JE: The current yield spread is approximately 4.2%, 420 basis points.

TER: Do you believe MLPs are valued fairly right now?

JE: We think fair value in the year ahead should be in the 5.75% to 6.25% range, which is where we are. In that regard, MLPs are fairly valued.

If you look at it from the standpoint of spreads against U.S. 10-year Treasuries, you can make the case that MLPs are undervalued. Over the last decade, the average yield spread between MLPs and the U.S. 10-year has been about 324 basis points. Over the last five years, it has been 385. Obviously, that was skewed by the financial crises in 2008 and 2009. The most commonly occurring yield spread is in the range of 200–250 basis points.

We prefer to be a little conservative. With respect to valuation, MLPs have averaged a 7% yield over the last 10 years, and about 7.4% over the last five years. Inevitably, we expect there will be some spread compression, more due to a rise in the yields on the U.S. 10-years than to drops in the yields on MLPs. But overall, looking at the sector’s history, we consider 6% or so to be a very commonly occurring yield.

TER: Will total returns nearing 12.5% in 2012 lead to a flight into MLPs by retail investors? After all, virtually nothing else out there is performing at a consistent level.

JE: On a risk-adjusted basis we think MLPs offer a very compelling opportunity. For 2011 we targeted 6–6.5% yield and a distribution growth of 4–6%. We believe distribution growth ended up at the high end or a bit above. For 2012, we think the growth will be a bit stronger. We recently raised our target to about 100 basis points, or 5–7% growth. We are now thinking it will be even stronger, maybe 6–8% for 2012, in which case, we would be looking at a total return expectation somewhere between 10–22% for 2012. That would put our mid-point expectations in the 15–16% range for 2012.

TER: As of mid-December the Alerian MLP Index, which is basically the industry benchmark, was down half a percent from an all-time high set earlier in December. Did that surprise you?

JE: That did not surprise us too much. The last three months have been surprisingly strong for the sector; it has been at or very near its all-time highs. The Alerian benchmark has recently surpassed its all-time high, set in April 2011 on a price basis, and of course has set an all-time high on a total return basis.

There are not many opportunities for investors where you can find a low-volatility asset class paired with stable, secure distributions. This is a sector with tremendous visibility in terms of growth over the next 20 years. It is very difficult for us to think of other asset classes available to investors that offer what MLPs offer right now.

TER: In 2011, gas processors and MLP general partners were the best-performing MLP subsectors, with total returns at about 18% for gas processors and 17% for general partners. Do you see that trend continuing for 2012?

JE: We do. The opportunity for gas processors remains very strong. A tremendous amount of opportunity remains in shale plays where there is a lack of infrastructure. There is a lot of wet gas out there, which creates demand for the services needed to separate the gas from the liquids.

It is also important to note that fractionation capacity is also in short supply. We expect the capacity of raw liquids pipeline to be much greater than the fractionation capacity additions over the next few years. Consequently, we think companies involved in those businesses should do very well.

The one risk we are always mindful of and that is difficult to diversify away is commodity exposure in gas processing that arises from difficulties in the financial sector. Whenever there is trouble in the financial sector, it tends to create headwinds in gas processing, as natural gas liquids (NGLs) that are produced tend to tie more closely with oil, which in turn could face downside, should we see contagion from the European banking and the financial sector. NGL prices are important to natural gas processing/fractionation margins. We saw this in 2008 and 2009. But assuming the financial sector stays relatively healthy, gas processers should do very well in 2012.

TER: Conversely, it was a rough year for propane and shipping MLPs. Propane MLPs were down around 6%. Do you expect this subsector to rebound?

JE: This was a challenging year for propane MLPs. There is ongoing conservation in that subsector, and as a result, there is no organic volumetric growth at the retail level. Rising propane exports have kept wholesale propane prices relatively strong, which cuts into margins for the propane companies.

We expect the challenges for propane to continue. The subsector is ripe for consolidation. The irony is that, should there be difficulties in the financial area, propane companies would likely do well because wholesale propane prices would probably fall. But barring that scenario, we think propane companies are more likely to lag.

TER: Your recent Morgan Keegan MLP Top 10 list carries the caveat that those names are not necessarily the best fit for all accounts and are not necessarily how you would build an MLP portfolio. How would you build an MLP portfolio?

JE: In building an MLP portfolio our bias is to protect investors’ interests, to protect against downside risk. Thus, although we believe gas processors have perhaps the best upside potential, there also is more downside exposure to difficulties in the financial sector. With that in mind, we tend to overweight the larger-cap MLP names. But we would certainly want to continue to have exposure to that area.

TER: EV Energy Partners, L.P. (EVEP:NASDAQ) holds the top spot in the Morgan Keegan MLP Top Ten, largely due to its exposure to the Utica Shale. Please tell us about that play and how EV Energy is leveraging it.

JE: EV Energy Partners is an unusual MLP, in that it is in the upstream area, meaning it is involved in oil, gas and liquids production. It has a very strong position in the Utica Shale, about 158,000 acres. A number of wells have been drilled there, and it is providing a lot of data points indicative of a play with very strong potential. Some reports liken its geologic characteristics to the Eagle Ford Shale, which has been a very, very strong play.

We need more data, but based on a number of announcements from other players that have signed up for takeaway pipeline capacity out of the Utica Shale, we believe there is tremendous potential, and that it is only a matter of time before EV Energy Partners is able to realize some of that upside. That is why we think it has one of the strongest total return potentials for the coming year. We also see that at current valuation levels investors are effectively valuing the Utica acreage at just $5,000-$7,500/acre compared to recent transactions that effectively valued the acreage at $10,000-$15,000/acre, again supportive of upside potential in the value of EV Energy Partner units, in our view.

TER: It performed remarkably well over 2011. At the beginning of December, its total return for 2011 was close to 80%. Do you expect similar performance in 2012?

JE: Not quite as strong as 80%—somewhere between 27–73%. A good midpoint would be ~50% total return over the next year.

TER: That is still impressive. In January 2011, you named MarkWest Energy Partners, L.P. (MWE:NYSE.A) as one of your top picks. This year it is in your top 10. Why?

JE: MarkWest Energy had a very strong 2011, with a total return exceeding 30%. It has a very well-positioned footprint in the Marcellus Shale. It continues to have very rapid growth, providing midstream assets and services. We also believe it will be very well positioned to take advantage of emerging demand for services in the Utica Shale. We expect MarkWest will be able to invest hundreds of millions of dollars in the Utica and Marcellus Shales each year over the next several years. With that kind of visibility and potential for tremendous distribution growth, we are looking at returns averaging at least in the mid-teens for the next several years, with strong balance sheets and strong distribution coverage. Most portfolios ought to have exposure to MarkWest Energy Partners, in our view.

TER: And, you recently raised your price target to $66.

JE: Yes, as a result of its decision to buy into a joint venture with the Energy & Minerals Group for $1.8 billion (B). The two will be forming a subsequent joint venture to take advantage of the Utica Shale. We expect an announcement in January about additional plans to serve producers in the Utica Shale play.

TER: In a recent description of your investment thesis for the next few months, you included “exposure on liquids and storage” among the attributes you are looking for. Which midsize names in the liquids camp do you favor?

JE: One of the names we believe has very strong potential over the next year is Enbridge Energy Partners, L.P. (EEP/EEQ:NYSE). The partnership itself is based in Houston, but the parent is up in Calgary.

TER: What sort of distribution growth is Enbridge targeting in 2012?

JE: Enbridge’s target is in the 2–5% range, a very conservative target. We believe that given its position, recent performance and opportunities, Enbridge is more likely to be in the 5% range, giving the units some upside potential from a valuation perspective.

TER: Canadian regulators recently approved Enbridge’s Bakken pipeline project to carry oil from the Bakken into Canada, where it would connect with Enbridge’s main line in Manitoba. Is that a significant catalyst?

JE: That is just one project among many. Enbridge has $1–1.2B in projects on the drawing board over the next year. We believe all of those will contribute to Enbridge’s longer-range growth prospects.

We also like Plains All American Pipeline, L.P. (PAA:NYSE) over the next year. It has had a very strong run recently, but we think it is well positioned for the long term.

TER: Plains All American is a large-cap MLP. It made a number of acquisitions last year, including buying BP’s Canadian NGL and liquefied petroleum gas businesses. Which of Plains’ acquisitions are you most excited about?

JE: The one that you just mentioned. We think Plains was able to acquire the BP assets at a very attractive multiple and that it will be immediately accretive. Because the guidance on that contribution was very conservative, the distribution growth rate was raised recently. We anticipate it will be in the 9% range next year. Now a large part of that has been captured recently in its valuation. But, given the conservatism embedded in the guidance, we see a potential for more upside.

TER: You have an outperform rating on LINN Energy LLC (LINE:NASDAQ). Why do you believe Linn will outperform the S&P 500 in 2012?

JE: We think Linn has good distribution growth prospects. We also think it is pretty attractive valuation-wise. We are looking at somewhere in the neighborhood of 6–8% growth and distribution over the next couple of years. You combine that with its ability to make accretive acquisitions and its robust development program, and we think Linn should continue to do well with a roughly 18–20% total return prospect over the next 12 months.

TER: Do you have any parting thoughts for us today?

JE: We continue to be bullish on MLPs for the next several years at least. And we think MLPs should have a place in almost every investor’s overall portfolio.

TER: John, thank you for your time and your insights.

John D. Edwards, CFA, joined Morgan Keegan in October 2006 as a vice president, covering energy infrastructure master limited partnerships. Prior to joining Morgan Keegan, Edwards was a managing partner of Vektor Investment Group, LLC, where he consulted on energy infrastructure projects and real estate development. Edwards also worked with Deutsche Bank Securities as a vice president and senior analyst covering natural gas pipelines and as an associate analyst covering automotive suppliers. Edwards began his career in the energy industry with Edison International where he worked in regulatory finance, M&A, project finance, and business development. He received his Bachelor of Arts from Occidental College in Los Angeles, California and a Masters in Business Administration from California State University, Fullerton, and he holds the Chartered Financial Analyst designation. He is also a member of the Financial Analysts Society of Houston, Texas.

They See Netflix Rollin', They Hatin'

Sigh … here we go again.

Those of us old enough to remember the debut of the VRC also remember that In The Beginning, moviemakers tried to get a hundred bucks or so per tape. Thus was born the video rental industry, which they weren’t able to kill even by bringing the sell price down into the $20 range.

Now we’ve got streaming video — not just Netflix, but Amazon, et. al — and the boneheads still think they can find a way to force us to keep buying pieces of Kevlar at $19.99 a pop. They push the streaming license dates back further and further, they put up barriers to rental services getting the DVDs, etc.

They’ll keep doing this until it starts costing them money and market share — quite possibly when Netflix et. al say “screw you guys — we’re going into the content creation business ourselves in a big way.”

Then the polarity will reverse, and they’ll be bidding the price down to see who can get their blockbuster pictures on Netflix first, because the eyeballs tend to shift toward the newest stuff. With trailers for their upcoming releases attached, because the big screen will always put a certain number of asses in a certain number of seats and that’s still where they hope to make the nut.

I hope Netflix drives a hard bargain with them, too. “Sure, Mr. Sony guy, we’ll stream your little movie thingie, with your ads … if the price is right.”
When Netflix forked their business into separate streaming and DVD plans, we reassessed our watching habits, kept the streaming and dropped the DVD. If we absolutely, positively must have something that isn’t available on Netflix streaming yet, we hit a nearby Redbox or Blockbuster kiosk, or occasionally use iTunes. It’s quicker than waiting on the US Snail. I’m guessing Netflix drops physical media entirely in the next couple of years or so.

Buy a DVD? Only if it’s something we know we’ll watch over and over and we happen across it in the $5 bin. Otherwise, it’s just so … 2001.

Look for End of Debt Supercycle: Thoughts from the U.S. Global Investors 2012 Forecast

John Mauldin Frank Holmes What do investors need to be watching out for in 2012? More Eurozone drama? Record gold highs? A hard landing in China? The U.S. Global Investors team addressed these questions with Endgame: The End of the Debt Supercycle author John Mauldin in a Jan. 5 Outlook 2012 webinar. The Streetwise Reports editors highlight some of the expert insights.

John Mauldin: Instead of doing an annual forecast, I’m going to look out about five years, which may be five times more foolish. What I want to do rather than try and figure out where the stock market is going to be at the end of 2012 or what gold is going to do, is look at the choices we have around the world.

In most cases, political events don’t change the economic world all that much. It’ll probably annoy partisans on both sides, but if Clinton had lost to George Bush senior the first time, we would have still had a bull market. We were already in recovery. Yes, we would have had different Supreme Court Justices, but that’s not the economic world. We were set on a path. If Gore had beaten Bush 2, economically I don’t think much would have changed. We still would have had the end of a bull market and a recession in 2001. We would have had a housing bubble. Greenspan would have probably been reappointed either way. We would have had a credit crisis because we were in the process of building up debt that started in the ’50s. Europe was building its debt up. Japan was building its debt up. That is the reality.

Now the private sector is deleveraging, but sovereign debt is in a bubble. The air is coming out. My view is that the wheels are going to fall off Europe this year. I have been researching the Mayan codes and I have determined that the ancient Mayans were not astrologers; they were economists. They weren’t predicting the end of the world; they were simply predicting the end of Europe. That is a humorous way of saying this is the year Europe is going to have to make some very difficult choices. Greece gets to choose what kind of depression it wants, hard and fast or slow and long. It can’t avoid depression completely. It has borrowed too much money. The government is too big. It has come to the end of the ability to raise money at low rates. Italy and Spain are well on that path along with the rest of Europe. So, they have to make a decision, a political decision that is going to have major economic consequences.

Does Europe want to be a political union that looks more like the United States, where the individual entities have to run balanced budgets and can’t print their own money and have some kind of fiscal controls or they go back to a two-tiered Europe with multiple currencies. One way or another, this is the year that Europe is running out of road to kick the can.

Fortunately, in the U.S. we are not there yet. We have some room to make a decision. That decision is going to be made in 2012 because by 2013 we are going to have to decide how we deal with the deficits and debt. After 2014, the bond markets will start to raise rates. Total U.S. debt is continuing to grow because governments are growing debt faster than private citizens are decreasing debt. The bond markets are starting to rebel long before you would think they would for a country that’s the world reserve currency. The key is whether debt is excessive relative to income. If you can make your debt service, people will still lend you money. When they don’t think you can, they will stop. That’s when you have a crisis. It’s a debt super cycle. And, when you reach the end, you have to deal with the debt. You can pay it down. You can default on it. You can print the money, extend it out with lower rates or financial repression, which are all other ways to look at default. But, nonetheless, that debt is there.

The problem we are facing in the U.S. is that gross domestic product (GDP) is consumption plus investment plus government spending plus net exports. If we decrease government spending over time, we decrease GDP. That’s the problem that Greece is going through right now. It has to decrease government spending by 4.5%, thus shrinking the economy. But it can’t increase government spending without increasing debt or taking taxes away, which decreases consumption. Nothing the government does will make things better. The U.S. is on the same path. We can become Greece by continuing to borrow or be proactive and say we are going to get our deficits under control over a period of five or six years. The economy is still going to be slower than we would like and unemployment higher than we would like. That’s just the rules. We’re at the end game. We are at the end of the debt super cycle and that’s what happens.

Printing money doesn’t increase the GDP in actual real terms, but it makes everyone holding gold happy because the value of natural resources goes up. That is why I buy gold every month. I take those coins, I put them in a vault and I hope I never need them. I quite frankly hope gold goes back to $300/ounce (oz) because that means the economy is in wonderful shape. I’m actually afraid that gold is going to go up in value, which means we are not getting our act together.

That leads to questions about fault. Did the banks do things they shouldn’t have? Yes. Were they the cause of it? No. Was Greenspan the cause of the bubble? No. He was part of the cause. I mean, we did a lot of things as a country that weren’t good choices. Should we have allowed our banks to go to 30 and 40 to 1 leverage? No. Should we have repealed Glass-Steagall? No. The problem is that real median household income hasn’t moved for 15 years because real private GDP hasn’t changed. The only thing that has grown is government spending.

John Derrick: In 2011, the European financial crisis moved from the periphery to the core. Central bank policies were big drivers of the decline. The European Central Bank and China raised rates early in the year and again in July as fears of a China slowdown grew. That early tightening to fend off inflation had a big impact on the course of events throughout the year. The other big events were the U.S. credit downgrade in August and currency intervention, particularly in the Japanese yen.

Frank Holmes: There is a huge amount of borrowing around the world in Japanese yen because it is so inexpensive. That includes investing in commodities, resources and emerging markets. And, every time we see this huge signal move by the yen, you get this rippling effect that takes about six weeks to resolve itself with commodities being sold down. Therefore, a lot of fund managers borrowing in Japanese yen are long energy stocks, resource stocks and emerging markets, which leads to a lot of selling.

JD: The second half of last year was very volatile, but the market ended essentially flat. In fact, much of the volatility was concentrated in the last month, which made for a very difficult psychological environment, as the market has been somewhat schizophrenic with weekly rallies and selloffs.

Spikes in the yen caused market selloffs. This hit commodities especially hard. So the secret for 2012 is to use the volatility. Buy on the volatility spikes. Unfortunately, what most people do is just the opposite. Another thing to look for in 2012 is a positive fourth year of the presidential election cycle as the government tries to implement policies that will get them reelected.

Brian Hicks: There has been a lot of concern about money supply growth in the emerging markets, particularly in China, which reduced bank reserve requirements last year. A reacceleration of global money supply can be particularly constructive for commodities going forward as there has been a high correlation between money supply growth and commodities.

If you were to take all the global money and back that by gold, the price of gold could go to $10,000/oz. If you just use half of the global money supply, gold would trade at about $5,000/oz, up from approximately $1,600/oz right now. The more U.S. dollars in circulation, the higher the price of gold. This has been the main factor increasing the price of gold since 1998 and will continue to be the case in the years to come. Gold has a lot of running room to go.

Another driver for the price of gold has been federal deficits. Government spending is way above revenues. We hit a point in 2000 where spending as a percentage of GDP greatly exceeded taxes as a percentage of GDP. This could be a point of no return and could potentially drive the price of gold even higher. There has been a large bifurcation between the price of gold and gold equities, particularly in the last couple of years as risk aversion has prompted many investors to buy the bullion as opposed to gold equities. This is creating opportunity. We feel like there’s going to be a catch up in gold equities, many of which are trading at very low multiples to cash flows and earnings. Stocks such as Newmont Mining Corp. (NEM:NYSE) look like value stocks now paying high dividend yields and trading at sub 10-times price to earnings ratios. This could really present an attractive opportunity in 2012.

JD: Just a comment on all the takeovers. We were seeing 6% premiums on takeovers in ‘06. Now we are talking 60+ premiums. That’s another reflection of how undervalued the stocks are relative to commodities.

BH: That’s a great point. We have seen tremendous value creation based on mergers and acquisitions.

Shifting gears a little bit, crude oil and refined product inventories ended the year at the lowest level on record (about 685 million barrels). That’s 6% below the prior year. It’s particularly interesting when you consider some of the geopolitical factors that have arisen with Iran talking about blocking off the Strait of Hormuz. This is a primary factor behind oil price supports despite the tenuous economic environment. Many investors don’t realize that Russia is very important for non-OPEC (Organization of Petroleum Exporting Countries) supply, a key factor in containing oil price spikes. Russia is increasing production while other non-OPEC production in Mexico or in the North Sea have been declining significantly, which has helped to bolster OPEC’s market share. It has also limited the ability of oil markets to increase production out of the Middle East due to the inability to invest in those troubled areas. In fact, Russian production has been quite steady since 2006, increasing anywhere from 100 to 400,000 barrels per day (bpd), mid-single digit growth. But, forecasters predict in 2012 we will see flat production growth, which is troubling given the fact that we continue to see demand increase in other areas of the world, mainly out of China. This will be a driving factor going forward for crude oil prices.

Evan Smith: Oil supply threats include geopolitical problems at a time when oil supply and spare capacity at OPEC is rather low—a little over 2 million bpd. Nearly 40% of global supply is under autocratic rule. Iran has threatened to disrupt the supply of crude oil and products through the Strait of Hormuz where about a third of global oil supply passes. So, any disruption, even temporarily, would cause a severe spike in oil prices. We think oil prices could support $100/barrel. One of the things we like in 2012 is higher exposure to master limited partnerships partly because of their steady cash flows. They are becoming a growth business now. The capital expenditures here in the United States have grown from $3.5 billion (B) in 2005 to nearly $16B this year. This is partly because of the growth in many of the shale plays, which require increased infrastructure. We think this is an excellent investment opportunity. We also see a big opportunity for the global oil services. We can see that capital expenditures have been rising. We expect them to rise from about $500B to nearly $.5 trillion this year, an increase of 15%. So, we see tremendous opportunity for some of the oil services contractors and equipment providers. Another key driver is the impressive amount of money that has been invested in North America. Just over the last three years nearly $129B in mergers, acquisitions and joint ventures has occurred. Global companies are coming to North America to invest in these shale plays because the economics are so attractive due to improved technology. They want to learn that technology and take it home. So, we think there is continued opportunity for investors in the resource play here in North America.

Shifting gears, one of the base metals we will target is copper. It is our favorite base metal. The demand side is holding up relatively well compared to some of the other base metals. Even in China, which is the largest market for copper growth, the build out of the grid is really a key driver. That is holding up quite well. On the other side of the supply/demand equation, supply has been a problem. Through most of the boom in copper prices, mine output has lagged forecasts. Causes included weather, labor strikes and just poor grade. The bottom line is that supply has not kept up with demand. We have not solved that problem so we think 2012 should be a relatively good year for copper prices.

Another theme we like is the agricultural space. Global population continues to grow. The emerging middle class continues to consume more grains, principally through the production of more meat as people consume more protein in their diets. There has been a huge surge in the need for the production of grains, yet no more land is being created. One of the key ways we’re seeing increased yields out of croplands is through higher applications of fertilizers. That has created a fairly tight situation for potash, specifically. But, other fertilizers such as nitrogen and phosphate are also benefiting from this trend.

FH: I would just add that the world’s population has doubled from the ’70s when we had rising commodities. There’s a very different factor and China and India have a global footprint that they didn’t have.

Xian Liang: China remains the biggest driver of world demand for energy due to a rising middle class, but it is in a very early stage when it comes to discretionary spending. Take for example passenger cars. Despite a tremendous growth in auto consumption in the last decade, only 18% of Chinese households own a car. Car ownership in China is just one-tenth of U.S. levels or the same level it was in the U.S. in 1914. Air travel remains at the U.S. equivalent of the 1950s. This illustrates a great growth potential going forward. Urbanization is one of the most significant trends driving consumption. In 2011, the number of urban residents in China exceeded rural residents for the first time in Chinese history. But, China won’t stop at this 50% urbanization rate if the historical trajectory of its richer neighbor, South Korea, is any guide. We could have another 30% of growth by the year 2013. South Korea outgrew its urbanization rates in a 40-year time span. And, if China continues to urbanize, there will be about 200 million new urban households in China, which creates enormous demand for consumer staples, durable goods and housing.

China’s government policies signal the trend will continue. China raised reserve requirement ratios 12 times since January 2010. We view that as an early signal for the next easing cycle. The last time China eased reserve ratios in October 2008, that triggered a big market rally in Chinese stocks. This should bode well for stocks. We don’t think the Chinese auto boom is over. Actually, in the last couple of days, officials in China hinted that new measures may be introduced to support auto and home appliance sales.

Outside of China, we see government policies remaining very positive in southeast Asia, especially in Indonesia and Thailand. The money supply in the past two years has not deteriorated in these two countries, in fact, it is growing at a healthy 16% year over year. This is part of the reason why we remain positive on southeast Asia. Indonesia is rich in natural resources, but it doesn’t depend as much on exports. In fact two-thirds of its GDP is driven by domestic consumption, which is how it managed to escape a recession in 2008 and 2009. Favorable demographics is a factor. It is a very young country. More than 45% of the population is under 24 years old and 2 million people a year are joining the work force. Second, urbanization is creating new consumer demand. Just like China, Indonesia’s household debt is low. Total mortgage loans outstanding account for only 3% of GDP. Consumer credit is still at a very early state. I see tremendous growth potential going forward.

FH: The money supply is growing very rapidly in the entire region. I think it’s not just a China story. It’s a whole emerging market. And, I like to characterize it as the American dream trade as all these countries want the American dream. They all want a house. They want a car. They want all the lifestyle that we have.

John Derrick joined U.S. Global Investors Inc. in January 1999 as an investment analyst for the U.S. Global Investors money market and tax free funds. In March 2004, he was promoted from portfolio manager to director of research and now manages the day-to-day operations of the investment team. Prior to joining U.S. Global Investors, Derrick worked at Fidelity Investments. He has appeared on CNBC and Bloomberg TV and has also been a guest on Marketwatch Radio and NPR. Derrick has been featured in stories for BusinessWeek, The New York Times, the Associated Press and USA Today. A graduate of The University of Texas at Arlington, Derrick earned a Bachelor of Arts in finance. He sits on the board of directors for the CFA Society of San Antonio.

Brian Hicks joined U.S. Global Investors Inc. in 2004 as a co-manager of the company’s Global Resources Fund (PSPFX). He is responsible for portfolio allocation, stock selection and research coverage for the energy and basic materials sectors. Prior to joining U.S. Global Investors, Hicks was an associate oil and gas analyst for A.G. Edwards Inc. He also worked previously as an institutional equity/options trader and liaison to the foreign equity desk at Charles Schwab & Co., and at Invesco Funds Group, Inc. as an industry research and product development analyst. Hicks holds a Master of Science degree in finance, and a bachelor’s in business administration from the University of Colorado.

Frank Holmes is CEO and chief investment officer at U.S. Global Investors Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. In 2006 Mining Journal, a leading publication for the global resources industry, chose him as mining fund manager of the year. Holmes coauthored The Goldwatcher: Demystifying Gold Investing (2008). A regular contributor to investor-education websites and speaker at investment conferences, he writes articles for investment-focused publications and appears on television as a business commentator.

Xian Liang is an Asia research analyst at U.S. Global Investors Inc. and a Shanghai native.

John Mauldin is the author of New York Times Best Sellers list four times. They include Bull’s Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market, Just One Thing: Twelve of the World’s Best Investors Reveal the One Strategy You Can’t Overlook and Endgame: The End of the Debt Supercycle and How it Changes Everything. He also edits the free weekly e-letter Outside the Box. Mauldin also offers The Mauldin Circle, a free service that connects accredited investors to an exclusive network of money managers and alternative investment opportunities. He is a frequent contributor to publications including The Financial Times and The Daily Reckoning, as well as a regular guest on CNBC, Yahoo Tech Ticker and Bloomberg TV. Mauldin is the President of Millennium Wave Advisors, an investment advisory firm registered with multiple states. He is also a registered representative of Millennium Wave Securities, a FINRA-registered broker-dealer.

Evan Smith joined U.S. Global Investors Inc. in 2004 as co-portfolio manager of the Global Resources Fund (PSPFX). Previously, he was a trader with Koch Capital Markets in Houston where he executed quantitative long-short equities strategies. He was also an equities research analyst with Sanders Morris Harris in Houston where he followed energy companies in the oil and gas, coal mining and pipeline sectors. In addition, he was with the Valuation Services Group of Arthur Andersen LLP. Smith holds a Bachelor of Science degree in mechanical engineering from the University of Texas in Austin.

Economic Events on January 11, 2012

The Mortgage Bankers’ Association purchase index will be released at 7:00 AM Eastern time, providing an update on the quantity of new mortgages and refinancings closed in the last week.

At 10:30 AM Eastern time, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.

At 2:00 PM Eastern time, the Beige Book report will be released, giving us more information about economic conditions in each Federal Reserve district in advance of the next Fed meeting.