A Melman Minute — March 16, 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.

Every so often, markets act in totally unexpected ways and this morning is one of those times. It has been accepted almost as received Gospel that gold and the U. S. Dollar move in opposite directions; that when the U.S. Dollar weakens, gold rises, and vice versa. How then can we explain these two very short-term charts from this morning's trading?

First, as can be readily observed, the U.S. Dollar has fallen sharply this morning from Friday's close, with the DX Index down by about one full point, a very significant move.

Yet, when we look at the short term chart of gold's ETF, instead of rising, gold has also declined this morning.

The lesson we obtain from these crosscurrents is that markets frequently can operate in unpredictable manners and market participants must be constantly aware that investments can move contrary to expectations.

It is also worth noting that the financial markets in both America and Canada have traded higher all day, based on optimism that the American economy may not be in such dire shape as had been supposed and that recovery will not be too far away, a position just reinforced in a speech by Fed Chairman Bernanke over the weekend.

However, despite the Fed Chief's speeches and promises, the economic news continues to indicate that it may take much longer than expected before economic stability and prosperity return. One important reason is the diminishment of the elderly consumers' power to participate in economic growth.

The Wall Street Journal just published a study on the effect of diminishing dividend payouts, which for decades has been a primary source of retirement income. As they note, "So far this year, companies comprising the S&P 500 stock Index have cut more than $40 billion from their collective dividend stream as of early March..." Since last September, the total is over $60 million. (All figures US$ unless otherwise indicated.)

Ironically, these income-diminishing dividend cuts have come at precisely the same time the US government is striving to increase consumer participation. Mark Zandi, Chief Economist at Moody's rating service noted, "...The dividend cuts could impose an even bigger toll because those are not 'paper losses', but real dollars that once were paid to stockholders."

We have noted recently that one of the hardest hit areas of the retail marketplace has been the reduction in purchase of luxury goods. Since a significant portion of dividend payments is frequently received by the wealthier segment of the population, those dividend cuts will likely further diminish the luxury goods marketplace.

Two other items crossed our desk this morning which also indicate further economic difficulties ahead. In the first case, the Massachusetts Bay Transit Authority is in deep trouble. As AP Financial Writer Steve Leblanc relates, "...the MBTA is staring over the edge of a fiscal precipice." The specific problem is that Massachusetts state tax revenues have been declining of late and the state has indicated it may not be able to contribute as large an amount as last year to the transit authority. That problem is compounded by the mountain of debt outstanding and the size of the interest payments required to service that debt.

In a nutshell, the problem is simple. MBTA is facing a $160 million shortfall in its projected annual budget and, by law, it cannot carry a deficit forward into their new fiscal year which begins this coming July. As of this moment, the only two solutions being proffered are (a) a proposal to raise gasoline taxes by 19 cents per gallon, and (b) to reduce some services. Both are politically unpalatable.

Not surprisingly, part of the problem is the same as that which is afflicting the auto industry, namely the generosity of union contracts. For example, an MBTA transit worker can now retire on full pension after only 23 years of service. This means that a high school graduate of age 18 could go to work for the system, retire at age 41, and be on full pension - at great cost to the service while no production is contributed - for the next forty years or more!

The other item concerns another New England state, New York. Reuters just reported that manufacturing activity in the Empire State just dropped below all previous records for that data series. Also, the downward rate was accelerating, not diminishing.

New York State was hardly alone as the Institute for Supply Management (ISM) showed that national factory activity for February contracted for the thirteenth consecutive month. Among other problems, thanks to over-purchasing last spring and summer, inventory levels at retail warehouses are at exceedingly high levels, and, until those are worked off, there is little need for newly-manufactured products. That last item is reflected in the Capacity Utilization figures for February which came in at the lowest levels in the entire 61 year history of that number. Almost one-third of America's plant capacity now sits idle.

One last piece of data, and this could be the most important of all. Early this morning, the TYX Index, which measures long-term 30-year bond rates, broke up through the 3.8% level, thereby rising above the chart congestion zone which had contained trading for the past several weeks. It is our position at TMR that rising long term interest rates could lead to a financial crisis of immense magnitude, one for which the governments of the world have no ready solution.

As of 10:15 AM PDT, the Dow Industrials continue to rally, now up over 140 points while Canada's TSX is even stronger, up by over 230. Metals are mixed with precious metals lower while base metals are sharply ahead, with nickel and copper leading the way. Mining share indexes are mixed, crude oil has reversed earlier losses and is now higher by about $1.00 and, as mentioned, the U.S. Dollar is trading lower on foreign currency exchanges.

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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