A Melman Minute — January 17, 2008

One of the most fundamental facts of human existence on earth is that we must provide the basic support systems for protecting our lives and those of our dear ones. In order of basic importance, we must insure adequate food supplies, clothing, housing and medical care. Beyond that, there are basic transportation, educational and employment needs that must be satisfied. Then, as we move farther out from these basics, we begin to include entertainment, the latest ‘gadgetry’, luxury automobiles, expensive jewelry, ‘toys’ such as motor homes and powerboats, cruise liner vacations and so forth.

One of the signs of an onrushing - or existing - economic contraction is that consumers begin to pull back from those purchases that are ‘fun’, but unnecessary - and that is what we are beginning to witness during the past few months.

Several days ago, we noted the poor performances (putting it mildly) of such mid-range retail stocks as J. C. Penney, Macy’s and Target Stores. Recently, we have noted some other illustrious names which are encountering heavy selling in their shares.

Few names carry the image of desirable luxury like “Tiffany’s.” That renowned jewelry company has been portrayed in movies and novels alike as the purveyor of those truly desirable, but expensive, items that add a little extra pleasure to life. Well, Tiffany’s (symbol TIF, NYSE) shareholders are not feeling much pleasure these days. As can be seen from their chart, the quote on Tiffany’s shares has been dropping like a stone of late, falling from the mid-US$50 range to the mid-thirties in just a few short months.

There is a specific point involved with stocks such as Tiffany’s. Many analysts acknowledge that low-income and even some middle income folks are seeing their disposable incomes shrink, but it has been almost an article of faith that those in the upper income areas will continue to spend without let-up. Sudden drops in high-end companies such as Tiffany’s bring that thesis into question.

Another company suffering from sudden waves of recent selling is “Research In Motion” (symbol RIMM, OTC), manufacturer and distributor of high-end technical gadgetry such as the hugely popular “Blackberry” communication devices. After moving solidly higher into the US$136 range, fully forty percent of the value of RIMM has been erased from early November through mid-January as the stock has fallen sharply to the mid-80’s. Again, this appears to be an illustration that the market for expensive, but not critically necessary devices, is beginning to show signs of weakness.

As we have noted previously, even American Express is seeing rising delinquencies among its middle to upper class customer lists and they are now being forced to set aside ever-growing amounts of their capital toward reserves for future losses.

It would appear to us that as the luxury markets begin to dry up, unemployment in those areas will increase, retail profits will decrease, and these negative influences will be added to the already imposing numbers indicating that this time of apparent economic difficulties is assuming the potential to grow exponentially.

It is not just the consumer who is being affected by these ever-growing instances of economic problems. A recent Wall Street Journal article relating to the growing credit crunch, noted that the outlook for European banks, which had previously avoided the worst of the credit problems, now appears to be worsening as the effect of greater numbers of defaulting clients begins to affect their balance sheets as well.

If only the parade of bad news in housing sales and construction would end, securities markets might be able to right themselves, but the negative beat continues to grow as it was just reported this morning that housing starts have dropped to their lowest levels in twenty-seven years. While some might rejoice that this will diminish the supply of new homes coming onto the market, the number also reflects two profoundly important negatives.

First, employment in housing construction is falling dramatically, resulting in rising job losses in all manner of construction workers, tradesmen and among suppliers of various sorts - thereby putting even more negative pressure on the consumer-driven economy.

Also, the dropping New Starts number shows clearly the immense difficulty that now exists in selling any home - new or resale - and this has resulted in a serious decline in home-building activity. We believe that fear of being unable to sell their homes is going to induce many present homeowners to get out now at a price which still provides a substantial gain for long-term homeowners, rather than wait until prices fall further. Such selling could produce an even-greater glut of unsold homes, particularly when combined with rapidly rising numbers of foreclosed homes now flooding the real estate marketplace.

It is not a pretty picture and few ‘solutions’ seem to be forthcoming, other than to flood the financial markets with almost uncountable quantities of fiat money, but that ‘solution’ seems to be having less and less credibility as time goes by. Financial markets are falling once again this morning with the Dow Industrials down by over 130 points and the TSX lower by about 100 points after two hours of trading.

By the way, we expect that the tidal wave of newly-created monies by the Fed and other central banks will bring to life a term which has receded into disuse in recent years. That term is ‘monetization of debt’, and, in our opinion, nothing could provide the background for a truly explosive gold bull market than public awareness that trillions of newly-created units of unbacked currency were being used to pay off or refinance debt which could not otherwise be repaid in a timely manner.

Gold and the other precious metals are relatively quiet today as are the base metals. Oil is holding firm near US$91 per barrel.

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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