A Melman Minute — January 4, 2008

The U.S. government’s anxiously-awaited December jobs report was released at 5:00 AM PST this morning, and all it delivered was a huge lump of post-Christmas coal. Not only did job growth come in at a dismal 18,000 jobs - the lowest such number in 52 months and far below most economists’ projections, but the politically-sensitive Unemployment Rate took a three-tenths percent leap to 5.0%.

World securities markets, which had been holding firm overnight, plunged on the news and both the Dow Industrials and the S&P 500 dropped sharply immediately following their openings. Of particular note, the Industrials broke through the psychologically important 13,000 level, confounding the optimists who had been confidently expecting a strong 2008 which would see that average rise as high as 16,000 by year-end. Of course, there are many months to go, but a sharp decline in early January was clearly bad news for the Bulls.

After just 40 minutes of trading, the Dow was down a sharp 134 points and was approaching the 12,900 level. European markets, which had been trading moderately higher prior to the release of the report, changed direction and also turned sharply lower as they neared the end of their trading sessions.

One of the gravest concerns about these dismal figures is that a weakening job market, on top of a less-than-robust Christmas retail selling season, would make consumers much more pessimistic about their own prospects which would result in further contraction of the consumer-driven economy. Consumers have already been reeling due to the onslaught of negative news regarding their real estate markets and these negative numbers would appear likely to exacerbate their falling levels of confidence.

Job losses were particularly severe during December in high salary categories such as manufacturing, construction and financial services while Retailers also cut jobs.

Markets this morning were already nervous following the huge drop in Japan’s market overnight which saw the Nikkei Index fall a whopping 616 points down to 14,691, the lowest level since late fall 2005. Many observers had been counting on a resurgent Japan to help maintain growth in the world’s overall economic picture, but prospects in that economically powerful nation appear to be dimming.

Commodity markets fell moderately on the news with gold down about $10.00 to spot $855, silver holding near $15.20 and platinum remaining strong at $1,540 - very close to its highest price ever. Most base metals fell on the negative economic news but nickel was the exception, continuing its strong rally of recent days which has seen the price of that metal soar from barely above $11.00 to this morning’s $13.29 quote. (All figures US$)

Perhaps reacting to the prospects of some global economic slowdown, the petroleum markets declined slightly as well, with Crude Oil falling to ‘only’ the mid-$98 per barrel area.

One market of great importance is the long-term 30-year bond whose interest rate is reflected in the “TYX Index.” As stock markets have turned south and rising levels of financial uncertainty have entered the scene, many investors have turned to U.S. Treasury Bonds as a ‘haven of last resort.’ This buying has been clearly evident on down market days and this morning is no exception. As can be seen from the TYX chart, long-bond rates have been moving lower of late. The latest quote of 43.58 represents an interest rate of 4.358%, down over one percent from the highs near 5.4% of last June.

The great question is this: are the rates falling because of fear and uncertainty, or as a deliberate and sustainable result of recent Fed policies. Our opinion is that it is the former and will not be sustained into the future and those who are rushing in to obtain yields that are down to well below five percent may find themselves holding assets which will decline in market value as rates rise into the future.

Today’s news background and market actions only appear to confirm our belief that, before it is over, the year 2008 will be regarded as one where major changes took place.

By the way, speaking of ‘changes’ - which has been the undefined and unelaborated mantra of most U.S. Presidential candidates - the first actual voting for the United States Presidential candidates took place at the Iowa caucuses last night with Obama a strong winner on the Democratic side and Huckaby well ahead for the GOP. Hillary Clinton came in virtually tied for second with John Edwards which must have been a major disappointment for the once-dominant front-runner. Whether these results will have any impact on financial markets is yet to be determined.

Unfortunately, I must complete this MM earlier than usual in order to catch a morning ferry to Vancouver, but should conditions warrant, a summary report will be included on our site over the weekend.

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.

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