A Melman Minute — January 16, 2008

Not too many years ago, a Senator from Illinois, Everett Dirksen, coined a phrase which has enjoyed considerable staying power. During the early 1960s, when the United States Congress really began to step on the financial accelerator, spending every penny they could lay their hands on for both war and social programs, the good Senator made the observation that, “A billion here, a billion dollars there, pretty soon it adds up to real money!”

I was reminded of that observation when I studied financial market charts from the USA, Canada and Japan this morning. In the case of the USA, we have seen several one-day declines in the Dow Industrials of 100, 200 or even 300 points. In the past two days, the TSX has fallen almost 400 points and, so far today, almost another 300 points. In the case of Japan’s Nikkei Index, the drops have been in the area of 200, 300 and even close to 500 points last night. To paraphrase Senator Dirksen, “…soon you’re beginning to see real declines.

In point of fact, the Dow Industrials are at their lowest levels since last March, the TSX is at its lowest level since last summer and the Japanese Nikkei Index has just made a new two-year low and is sinking fast.

One other Index worth our attention is NASDAQ Composite. While most observers cannot escape the fact that an array of financial stocks have taken a pounding, there was always hope that the technology sector would ‘hold the fort’, so to speak, and would perform solidly. That is no longer the case. As the chart of the NASDAQ Composite clearly demonstrates, that average is crumbling as well, and with a fifty point drop in early trading today, it now stands equal with the lows set last March and just a hair away from breaking to a new two-year low as well. Most of the negative action today came from the poor performance just reported by tech giant Intel which has plunged in overnight trading last night and in early North American selling today.

As can be seen, Intel plunged more than a week ago on rumors that something negative was in the offing, and again this morning on news that their revenues had grown less than expectations in the last quarter of 2007. Intel also reported that they were concerned about a weaker tone in the economy going forward. On that news, the stock plunged to below US$20, a loss of forty percent of its value in just the past two weeks. Rapid, fearful, almost uncontrollable declines on bad news, are historically one of the hallmarks of a bear market. (all prices US$)

With the earnings reporting season for Fourth Quarter 2007 results now upon us, we can only wonder what other negative news will be forthcoming which the markets will have to deal with.

We noted yesterday that the government of California is now being forced to content with a huge and growing budgetary deficit. Our belief is that this is only the beginning of an onslaught of news about financial problems for all levels of government; federal, municipal and state or provincial which we will be hearing about in coming months and years.

It is a simple reality that governments at all levels have been spending like drunken sailors, presumably assuming (we know where that leads!) that the growing revenue streams of the past few years were going to proceed in an unbroken pattern into the indefinite future. They have been spending those actual and anticipated revenues as fast as their imaginative politicians and bureaucrats can develop new spending schemes - but they may very well be wrong about the size of those anticipated revenues. Many of those revenues are based on real estate transactions, capital gain components of state and federal income taxes, general sales tax revenues, etc. Unfortunately, as the economy begins to weaken and as capital gains from securities transactions diminish due to recent market losses, those anticipated revenues simply may not be received in sufficient quantities to pay for the new, higher levels of government spending.

We cannot wonder what governments will do if painful shortages develop. Will they be willing to annul those new spending plans to try and bring budgets back into balance, or will they seek out every dollar of potential tax revenue, perhaps imposing new and draconian tax measures against any remaining productive segments of our economic societies?

The question is particularly relevant to the natural resources industries, both mining and petroleum production, which are already being negatively impacted by aggressive foreign taxation policies. Given the gains in commodity prices and the enhanced profitability of some of the more prosperous companies in those industries, one cannot help but wonder if they will become the targets of movements to increase domestic taxation levels as well.

Of course, there is also a potential positive and that would be if politicians, eager to tax one of the few remaining prosperous areas of commerce, became reluctant to impose new and onerous environmental regulations which might cripple one of the few remaining powerful sources of economic strength.

Speaking of natural resources, gold has hit a spate of profit-taking this overnight and morning and is down to the $875 area, off about $40 from its recent peak, with notable declines in platinum and silver as well. Base metals are also encountering heavy selling, perhaps in anticipation of an economic contraction that appears to be gathering force faster than was originally anticipated. The petroleum complex is down as well, with Crude Oil under $92.00 per barrel while gasoline and heating oil futures are sharply lower as well.

Not a pretty picture.

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.

← All A Melman Minute