A Melman Minute By: Leonard Melman   NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of the developing international financial crisis and its relationship to gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday. The working title of the book will be 'Just a Melman Minute!"   December 21, 2009   As we enter not only the last few days of the current year, but also the last gasps of the twenty-first century's first decade, it seems worthwhile to step back and look at some of the longer-term trends which have affected our markets and which we believe will exert ever-growing influence into the future. One of the most interesting is that for financial asset returns, this century's first decade has been the worst performing in almost two centuries.  Three hammer blows in succession resulted in enormous set-backs and these included the dot-com debacle; the market plunge following 9/11; and the recent financial meltdown which sent averages plunging in late 2008 and early 2009.  As a result of these factors, the Dow Jones Industrial Average basically stood still for the decade (see chart), the first time major securities markets in America failed to post an identifiable decade gain since the 1820's when such records first began. As financial writer Tom Laurincella points out in a recent article, "...Since the end of 1999; stocks traded on the New York Stock Exchange have lost an average of 0.5% a year...Companies also pared dividends, cutting into investor returns..." However, as it relates to precious metals, he was also able to point out that, "...Gold was the best-performing asset, up 15% a year this decade after losing 3% each year during the 1990's.  Given that the 1990's were great for general stock averages and gold performed poorly during those years and the 2000's were negative for general stocks but gold performed excellently, we regard such figures as confirmation of the general contra-cyclicality of gold in relation to financial assets. Several analysts have posed the question "what went wrong during the past decade?" and that is the subject on which we wish to focus, because if the trends which developed during the 2000's are not corrected, then we believe that the outlook for the 2010's is questionable at best and truly dangerous at worst.  In our opinion, two powerful - and continuing - forces have begun to exert themselves on world markets.  The first is the relative decline of America among the industrialized nations of the world and the second, and we believe even more threatening in the long run, is the Western World's abandonment of free markets and the onward rush into government domination and regulation of those markets. Anyone who doubts the widespread acceptance of socialist dogma apparently wasn't paying attention to the goings-on in Copenhagen last week.  From all the extensive reading we have done regarding that event, we cannot recall a single major address warning of the potential dangers of massive environmental over-regulation nor did we learn of a single address cautioning the audiences of the dangers inherent in abandoning capitalist free markets in favor of those dominated by government bureaucracies. In fact, the opposite held sway and one particular incident, a lengthy address by Venezuelan strong-man Hugo Chavez, stands out.  As reported by the Fox News Network, "...assembled world leaders cheered on the socialist strongman during a rousing attack on all things capitalist at the Copenhagen climate conference..."  The Fox article then tells us he went on, "...urging his audience to 'fight against capitalism', the 'silent and terrible ghost' that was haunting the elegant conference chambers in the Danish capital..."  According to the Toronto Star (in our opinion noted for its support of socialist causes) Chavez, "...called capitalism 'the road to hell' responsible for poverty, murder, AIDS - and even unfair climate agreements..." What amazes - and truly concerns us deeply - was the fact that anyone making such statements wasn't laughed and jeered right out of the auditorium.  Instead, he was wildly cheered by not hundreds, but thousands of delegates.  We can see this trend clearly visible in the recent spate of enormously-complex laws now progressing through - or already enacted - by the American Congress and, as we look forward, we wonder whether American industry can continue to function efficiently and at low cost while at the same time obeying all the numerous laws under which they will be burdened.  We have our doubts, and in those doubts we also believe that government expenditures will rise above expectations, government revenues (particularly personal and corporate income taxes) will fall below expectations and, as a result, US government deficits and debt will remain at threateningly high levels - or even accelerate through the coming decade. Perhaps the most visible single piece of evidence will come from action in the interest rate marketplace, particularly those rates related to long-term bonds, for if those rates rise sharply over a prolonged period of time, the ability of the American government to honorably pay principle and interest on their indebtedness could grow increasingly compromised in the coming decade - something that has never happened previously in American history. One of our favorite charting textbooks is William Jiler's "How Charts Can Help You in the Stock Market" and in that book, he addresses the subject of "Head and Shoulders Bottoms."  As can be seen on the TYX chart, a long-term H&S bottom appears to have formed during the past two years with a Left Shoulder having developed in late 2007 through mid-2008 between 4.1 and 4.7%; a distinct "Head" at about 2.5% near year-end 2008; and a "Right Shoulder" during the last half of 2009 between about 3.9 and 4.6% (disregarding the sudden and short-lived move to 5% in spring 2009). What we find of particular interest is Jiler's comments regarding "measuring", or predicting the extent of the move should the TYX Index break to the upside of this formation.  He wrote, "...a common rule of thumb applied to "Head and Shoulders" formations is that, once the pattern has been completed, the stock in its reversal swing will move at least as far again as the distance from the top (or bottom) of the Head to the neckline."  In the present case, the bottom of the "Head" is near 2.5% and the neckline comes in near 4.6%.  Therefore, according to Jiler's formula, we could anticipate a move in long term rates of about 2.1%, or up to about 6.7%, and we would suggest that a move of that magnitude, particularly if it develops quickly, could abort any anticipated economic recovery.    We are not alone in our concern regarding rates.  First, Scott Patterson writing in the Wall Street Journal discussed the improving economic numbers, but then noted, "...If all these figures continue to progress, there will be the odd combination of solid growth with record low interest rates - a situation unlikely to last for long."  Morgan Stanley and RBS Securities both expect sharp growth for rates next year, with MS forecasting that the 10-year bond rate, currently at 3.5%, will rise to 5.5% by year-end 2010. We plan to expand our look forward in Wednesday's Melman Minute. Financial markets this morning are in a festive mood in both Canada and the USA.  As of 9:00 AM PST, both Canada's TSX Index and the Dow Industrials are ahead by over 100 points.  Precious metals, however, have reversed early rallies and are now headed lower with gold off by about $10 to just above $1,100 and silver has now retreated to just above the $17.00 mark.  Base metals have held on to early gains but mining shares are in retreat with both major mining share indexes off by about 1.5 to 2 percent.  Crude oil is slightly higher, as is the U.S. Dollar Index. - - - - - All quotes US$ unless otherwise indicated. Next Melman Minute scheduled for Wednesday, December 23.  Of course, there will be no MM planned for either Christmas Day, December 25 or New Year's Day.        ◄  Previous Minute                                                                                                        Next Minute  ►
		DISCLAIMER The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed.  Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only. Any investment decisions should be made only following consultation with registered investment professionals.