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. Since the work has been expanded to include potential solutions to the growing list of seemingly insoluble dilemmas, the working title of the book has been revised to 'REVERSING THE WAY IN!"   February 1, 2010 Despite some substantial commentary from those who disagree, we have found that stock market movements, particularly major ones, have been quite accurate in predicting the direction and magnitude of underlying economic activity.  One need only look to the market collapse of late 1929 as a precursor to the economic collapse of 1930-39 or even the staggeringly swift and powerful market fall of mid-2008 as a precursor to the severe worldwide economic contraction of late 2008 and well into 2009.  Therefore, we think it worthwhile to take a renewed look at recent market activity. As long term readers know, we have been skeptical regarding the underlying basis for the Dow rally from 6,500 in March of last year to the recent peak near 10,700.  In fact, in our Melman Minute of May 6, 2009 we recalled the pattern of market action from November, 1929 into the early summer of 1930, a period which saw the Dow Industrials recover approximately 60% of their September-November 1929 losses.  This recovery was then followed by renewed and powerful selling which drove the Industrials to horrendous new lower levels - and in our MM of May 6 we indicated that the rally which began in March 2009 could meet a similar fate.  Here is a portion of what we wrote at that time: "...Therefore, our expectation is that the financial markets may indeed continue the recent rallies, but we believe this is not the beginning of a protracted bull market but rather an important correction within an ongoing bear.  We also believe that just as the initial optimism generated by Hoover's initial moves to fight the onrushing Depression eventually faded, so too will the optimism generated by the Obama Administration's massive interventions likewise fade as economic reality bites hard in the future." We continue to hold to that view and one of our favorite market indicators is now giving off signals that the underlying strength of the recent rally may indeed be ebbing.  In addition to the weakening appearance of the Dow Industrials chart itself (see above), we also note a sudden and quite dramatic turn in "last hour trading activity" for the Dow Industrials stocks. Historically, last-hour trading has been a significant indicator of future market activity.  The theory suggests that active traders who believe the market is in a major bullish trend will tend to insure they are fully invested at the end of each trading day in order to participate in the expected continuing rally.  This suggestion implies that those who sold some positions during the trading day will "re-load" prior to the market's close.  Conversely, those who anticipate the market is in a declining mode will often acquire a security for short-term trading purposes during a market day, but will tend to unload during the last hour in order to avoid the next anticipated downturn.  With that in mind, please consider the following figures. In the seven trading sessions beginning January 11, 2010, five of the seven sessions enjoyed last-hour advances and the net last hour gain for those days was +73 Dow points.  However, a sharp turnaround began on January 20, 2010 and for the next seven sessions beginning that day, six showed negative last hour results and the cumulative last hour losses for that period was -237 points!  Clearly, there has been at least a short-term change in market sentiment over that period. As we noted in our last Melman Minute, another indicator has come under close attention in recent days, namely the "January Effect" which states that the results of January trading will indicate the results for the year as a whole.  Well, the figures are in and they do not make happy reading for optimists as important markets around the world fell sharply for the month.  Major markets in Canada and the USA were off by about 3-5 percent and in many others around the world, the carnage was much worse.  For the month of January, Frankfurt was down 5.85%; Bombay by 6.3%; Sydney by 6.18%; Hong Kong by 8.0% and Shanghai was off by a whopping 8.78%. Does the "January Indicator" really work?  As skeptics would say, 'the proof is in the pudding' and for the January Effect, the pudding is particularly well-flavored as the market's performance for the rest of the year has mirrored the trend of January an astonishing 48 out of the past 60 years!  In our opinion, that goes far, far beyond mere coincidence. When we ask, 'what are some of the reasons why the markets might turn down this year?' some answers have been provided by Toronto money manager Kim Husebye, quoted in this morning's Toronto Globe & Mail.  First, in particularly unequivocal terms, Mr. Husebye predicts, "...The bear market rally has peaked and securities are in the midst of a major turn for the worse...we will take out the lows from March 2009."  (Our emphasis)  He then offers some reason for his negative viewpoint, including 'technical' factors such as trading volume has been consistently light on the way up; we have not yet seen extreme under-valuations which normally accompany major market bottoms and we have not yet seen the level of disenchantment which would cause people to swear off market investments forever, such as occurred throughout the 1930's. We believe another factor which will serve to drive markets lower is a growing awareness that a multitude of people are making the same critical mistake of 2002-07 by loading up on mortgage and other consumer debt and worse, borrowing short term while owing long term, leaving themselves vulnerable to any future general interest rate increases.  Canadian real estate purchases are usually funded short-term, meaning taking on mortgages which then must be re-financed.  Should rates rise sharply during the initial part of the mortgage, many borrowers would then be facing a calamity when renewal time approaches, as they are already stretched to the limit to make payments at today's minuscule rate charges.  One of Canada's best-known economists, Benjamin Tal of CIBC, told the Globe & Mail, "Consumer bankruptcies have risen significantly over the past year, and they will continue to rise.  Clearly, some people are in over their heads and more will get into trouble when interest rates rise." One indication of upward future pressure on rates, particularly to protect the U.S. Dollar, came in the form of President Obama's just-announced annual budget which calls for spending to approach four trillion dollars in the coming year alone and the combined deficits for the next two years to total almost three trillion dollars.  Amounts of this magnitude are simply beyond any precedent in history and would appear likely to heighten concern for the Greenback's stability. Financial markets are taking a more optimistic view of the President's budget, perhaps anticipating that it will fuel renewed economic activity, and both the Dow Industrials and the TSX Index are moving ahead in early trading.  As of 8:45 AM PST, they were ahead by 90 and 140 points respectively.  However, monetary precious metals were also rising sharply, perhaps reflecting concerns about future currency stability, with gold up by about $16 to once again approach the 1,100 level while silver was ahead by almost thirty cents.  Mining share indexes have gained about four percent each while the base metals were moderately stronger on balance.  Crude oil was ahead by about one dollar to near $74.00 per barrel and the U.S. Dollar Index was slightly lower.  Long term interest rates moved higher in futures market trading. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Wednesday, February 3, 2010.   ◄  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.