A Melman Minute — March 7, 2008

Financial markets got hit with another dose of bad news this morning when it was reported that job losses in the USA (job gains seem to be a thing of the past in recent months) amounted to an unexpectedly huge 63,000 for the month of February. This was the largest monthly reduction in the past five years and was interpreted as yet another indication that America was sliding into recession (or worse?). To make matters worse, the Labor Department revised January’s figures to show the economy actually lost 22,000 jobs during that month, above the previously reported 17,000.

What might be even worse is that the Labor Department reported that the Unemployment Rate actually fell by one-tenth of a percent. While this would normally be interpreted as good news, in fact, it seemed to reflect the fact that hundreds of thousands of individuals had given up hope and left the work force for good during the past month.

However, perhaps to offset the negative implications of the jobs report, the Fed announced it was making yet another $100 billion (all figures US$) available to banks in order to assist in solving the spreading foreclosure debacle, now estimated to involve a monstrous 900,000 American homes.

So, once again, the question remains: “Can the Fed’s programs provide for future improvement in the economy despite the horrendous tone of current reports?”

One means of trying to answer the question is to look at the actual market performance of important financial securities because that reflects what prominent investors, mutual funds and industry leaders are actually doing, rather than just what they are saying. And what they are doing isn’t at all positive when it comes to the performance of two of the world’s leading financial institutions.

As readers may recall, we devoted considerable time during late summer to mid-autumn detailing the virtual collapse of several financial securities, many of which lost huge portions of their capital values. Now, several months later, it would appear reasonable to believe that if the various crises were not as serious as first indicated and were not as insoluble as first appeared, the stocks would have significantly as the government’s ‘solutions’ began to take hold.

On the other hand, if the difficulties were not so easily resolvable, then those shares might not have with any vigor whatsoever.

In order to resolve this question - at least to a reasonable extent - we offer the charts on the world’s largest securities brokerage house, Merrill Lynch, and the world’s largest bank, Citigroup. Each stock lost about fifty percent of its value during the severe decline in the period referred to earlier. Each stock then rallied, at least moderately, for a short period of time. And now, we can report that each stock, recalling that they are among the most important in the world of finance, has now plunged to new multi-year lows!

It is our opinion that this dismal stock performance reflects the market’s belief that the Fed’s efforts are not likely to succeed, that the ballooning of the money supply will weaken the Greenback and exacerbate inflationary pressures, and those pressures will drive long-term interest rates higher, not lower, which will further depress the housing markets and create additional serious economic imbalances.

One of the dangers of buying into a commodity (or security) on a particular news event is that when that condition appears likely to be reversed, the gains which quickly accrued can just as quickly evaporate. Platinum and palladium are good examples. About six weeks ago, the South African government announced electric power shortfalls which would directly affect mining. Since S.A. produces 80% of the world’s platinum, that commodity took off like a rocket in the world’s futures markets, rising in short order from $1,600 to about $2,300. Palladium, which is one of the only alternatives to platinum regarding industrial usage, quickly followed suit, rising from $400 to $600.

This morning, the South African government issued a report that it was now able to resume power at 95% of the previous levels - and both white metals fell like a rock on the news. By mid-morning in North America, platinum was trading at US$2,040 - a full $260 per ounce below its peak - and palladium had fallen to $500 - down $100 from its peak.

It is our opinion that trading on ‘quick news’ is inherently risky. That is why at TMR we prefer to identify the long trends wherever possible and place our investment concepts in accordance with those trends.

Financial markets opened lower on the job news, rallied and then began to sell off once again with the Dow down about 55 points and the TSX lower by 20 after two hours of trading. Base metals were quiet, gold traded near $975 and oil held near the $105 per barrel level.

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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