A Melman Minute — March 30, 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: Mr. Melman will be making a panel appearance and presenting a workshop at the upcoming "Calgary Resource Investment Conference" April 4-5. His workshop topic will be "On the Road to Hyperinflation???" updated for this presentation. Information concerning the conference itself can be obtained at www.cambridgehouse.ca.

Much of the world's attention is now being squarely focused on the upcoming "G-20" meeting in London on April 2, and it is expectations regarding the results of that meeting - or the lack of same - that are moving markets this morning, and those moves are solidly to the downside. After heavy overnight selling hit Asia and Europe, markets in both Canada and the USA have followed suit.

It is said that markets hate uncertainty, and the news released over the weekend appeared to add to such concerns as expectations of decisive action in London began to wane. Many observers had been anticipating that strong moves toward worldwide financial controls under the auspices of a worldwide organization such as the World Bank would take place, but comments from several leaders, specifically including Germany's Angela Merkel, indicated that resistance to such regulatory expansionist moves might be hardening prior to the gathering.

Chief among those leaders who espouse worldwide regulations are American President Barak Obama and Britain's Prime Minister Gordon Brown. Stepping forward to lead the opposition are leaders from several European nations, such as Germany's Merkel, which have been ravaged by past instances of hyperinflation. Discussions between the two groups are expected to be both heated and of penultimate importance.

One other concern that has been growing of late is the question of 'protectionism', or legislation designed by a nation to inflict penalties against imported goods for the benefit of domestic workers and businesses. Such measures have been growing of late as indicated by a recent study published by the World Bank which noted that 17 of the G20 summit nations have already enacted protectionist measures. Examples include India placing a ban on Chinese toys while China has banned the importation of Irish pork.

Such protectionist laws bring back memories of the infamous "Smoot-Hawley" law passed by the United States at the onset of the Great Depression. Many historians blame the tariffs, duties and restrictions on imports contained in that law for drastically reducing world trade and thereby deepening and extending the negatives of that economic collapse.

And so, the world anxiously awaits the beginning of the conference.

However, there were other news items of significant importance which also contributed to the aura of negativity surrounding markets this morning. One of the most important was a release by the American Federal Housing Authority (FHA) that mortgage defaults and delinquencies are still on the rise. Figures for the month of February indicate 7.5% of all FHA loans were, "...seriously delinquent at the end of February, up from 6.2% a year earlier. Seriously delinquent loans are those that are 90 days or more overdue." Several communities from Florida to Michigan to Indiana now show delinquency rates exceeding 12% - or one in eight homes.

One of the obvious questions is exactly what it will take to reduce delinquencies if all the trillions of dollars in stimulation already thrown at the economy have not worked as yet?

Markets also had to contend with a breakdown in talks between the US government and auto manufacturers Chrysler and General Motors. In fact, pressure from the Obama Administration has just resulted in the resignation of GM President Wagoner. The government has rejected the latest plans which had been submitted by the automakers in order to qualify for additional subsidies and the question of future payments in now open and unresolved.

One trend we have noted of late reinforces our opinion that the base metals could rally over the coming months. A recent Wall Street Journal article just noted that, "The most talked-about investing strategy these days isn't stuffing money in mattresses, it's the reflation trade - the bet that the world economy will rebound, driving up interest rates and commodity prices...Investors are looking ahead to the time when massive rescue efforts by central banks and governments gain traction. They are focusing on raw materials and commodity-related stocks that would benefit from the surge in infrastructure spending." (our emphases)

As we have noted many times, it is not the actual future results that counts most in trading strategies, but rather the widespread perception of future results that can be the most important factor.

One chart has been of particular interest this morning, that of the Dow Jones Industrials Average. From a technical point of view, it is worth noting that we could be at a very 8important juncture.

First, following the horrendous January-February declines, the Dow has rallied from about 6,400 to 8,000 - a gain of about 1,600 points. It would be perfectly normal to the average to 'take a rest' after such a strong advance and this past Friday's action combined with this morning's losses could be interpreted as just such a retreat.

Second, and in a different vein, the entire rally from 6,400 to 8,000 could be interpreted as simply a pull-back rally within the long term bear market, and the Dow is once again continuing lower within an ongoing Bear.

Accordingly, we will let the markets inform us, rather than the other way around. If the first case is correct, that this sell-off is nothing but a short-term retreat to be followed by more buying, the situation could turn strongly bullish. However, if the 8,000 level turns out to be solid resistance and the Dow resumes its declines, particularly if it breaks below the previous bottom near 6,400, that would be most bearish in our interpretation.

As of 9:45 AM PDT, both the Dow Industrials and Canada's TSX remain in negative territory, off by 263 and 308 points respectively. Precious metals are all lower with gold down about $8, silver off by 30 cents and platinum down by $11. Base metals are also lower, falling backward from their recent gains and both major mining share indexes have fallen by about 2%. The Greenback is moderately stronger in currency trading while Crude Oil is sharply lower, down $3 and is once again trading under $50 per barrel (all quotes US$).

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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