A Melman Minute — February 24, 2009

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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 until about mid-March 2009. The working title of the book will be 'Just a Melman Minute!"

NOTE: Due to travel commitments which will keep us out of computer range for a few days, our revised "Melman Minute" schedule for the next two weeks will be today and Tuesday this week and then Monday, Tuesday, Wednesday and Thursday next week, reporting from the giant PDAC Convention in Toronto.

Well, we are being treated to another "statement rally" this morning. We are referring to the pattern of a government leader stepping up and making an important statement just as the markets are falling steeply, as they did yesterday. For those who aren't aware, the Dow Industrials fell Monday to their lowest level in a dozen years, closing at 7,114, almost exactly half of their peak level of 14,200.

In order to stem the pessimistic tide, Fed Chairman Ben Bernanke testified before the Senate Banking Committee this morning and confirmed that the Obama Administration plans to stabilize the banking system. Marketwatch quoted him as noting, "If there is one message that I'd like to leave you with, if we're going to have a strong recovery, it has got to be on the back of stabilization in the financial system. If we don't stabilize the financial system, we're going to flounder for some time." He confirmed that the Obama plan,"...has all the major components of previous successful financial stabilization plans."

Based only on that generalized assurance that they were on the right track, stock markets turned sharply higher in early trading with the Dow posting an early gain of 125 points and, as of 10:00 AM PST, that index was still holding on to a major portion of those gains. Unfortunately, we have to point out that the record of such "statement rallies" in the past has been less than encouraging with early buying surges almost always being followed by renewed selling.

The news background continues to indicate that economic contraction is still occurring in many areas of the world. For example, Eastern Europe is now declining sharply after having enjoyed several boom years and a new country, Latvia, has been added to the list of those in serious trouble. Their Prime Minister and his Cabinet have just resigned due to the deepening economic crisis, making it three European nations, after Iceland and Belgium, where governments have been toppled by the spreading crisis.

Latvia's problems could have serious repercussions on the International Monetary Fund as repayment of a $9.5 billion loan made to Latvia is now in serious doubt. Latvia may be forced to devalue their currency, which would also affect their close neighbors, Lithuania and Estonia, who then might follow the same path. Such devaluations would have an impact on several Scandinavian banks who were big lenders to the Baltic nations in recent years. (All quotes US$ unless otherwise noted.)

Real estate markets continue to make negative headlines as well. Just this morning, the "Case-Shiller" home index figures for December were announced and the numbers were discouraging, to state things mildly. Home prices in 20 major metropolitan areas in America continued to collapse, falling 18.5% from the year-earlier figures, the worst such number since the index was created twenty-one years ago. It was also reported that the downward plunge in home prices was accelerating as the December decline from November was 2.5%, somewhat greater than the preceding month's fall of 2.3%.

At the same time, another indication of future troubles came when it was reported that one important segment of the mortgage industry, jumbo loans, was in serious trouble. These are loans in excess of government guaranteed limits which now stand at $417,000 for most of America.

Because there are no government guarantees, mortgage companies are growing increasingly reluctant to make these loans, a factor which is contributing to the rapid decline in prices for luxury homes which we noted yesterday. Most mortgage lenders are now requiring cash down payments of as much as 30% before they will even consider a new loan, and then, money will only be offered at unusually high interest rates well above the current 5.2% available for 30-year fixed rate lower-level mortgages.

Without ready sources of credit, the luxury end of the real estate world is in trouble, a fact confirmed by a report that jumbo loan originations fell by 42% in the fourth quarter 2008 compared to the previous quarter.

We have reported several times on the plight of retired people whose sources of income from investments have plunged of late, along with the capital value of their assets. Many of them just received word of another direct hit when banking giant J.P. Morgan announced they were cutting their dividend payout from 38 cents per quarter to just a nickel. Given that there are approximately 3.7 billion JPM shares outstanding, this means that shareholders will be receiving $1 billion less in dividend income each quarter that the reduction remains in effect.

As can be seen by the chart, this loss of dividend income comes on top of a 60% decline in the value of the stock in the past six months, which have fallen from $50 to about $20 per share.

Another giant that just can't seem to stay away from trouble is General Motors. Not only are they forced to go pleading, 'hat in hand' as it were, to the government for their daily bread just in order to survive, now they are faced with the probable loss of their Swedish subsidiary, Saab, as that company has now filed for protection from creditors via Swedish bankruptcy courts.

GM is also facing considerable difficulties in their Canadian operations and has been forced to appeal to that government as well for assistance.

The wipeout in GM share values has been spectacular indeed as they have fallen from a peak of almost $100 to under $2.00 per share - a wipeout of 98 percent!!!

And so the pattern remains the same as we have seen for the past several months. Economic reports continue to indicate economic trauma on an ever-widening scale, while governments continue to offer optimistic comments.

Financial markets as of 10:00 AM PST show the Dow Industrials now up by about 100 points, but Canada's TSX, reflecting lower precious metals prices, is down by about 20. Gold is having one of its periodic sell-offs, down by over $20 this morning to about $970 while silver is 40 cents lower and platinum has declined by about $30. Base metals, conversely, are higher on balance with copper and nickel showing particular strength. Both major mining share indexes are about 7% lower, crude is slightly higher and the U.S. Dollar is trading quietly so far in currency markets.

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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