A Melman Minute — April 20, 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!"

Markets continue to receive doses of bad news this morning. However, unlike the recent past, they appear less willing to simply ignore negative data and have opened sharply lower while, in truly normal form, gold is headed higher, up by about $10 in the first hour. (All quotes US$).

One of the more troublesome news stories this AM involves the State of California, an economic giant which has frequently served as a leading indicator for the rest of the United States of America. Just two months after having 'solved' their budgetary problems, it now appears that they are already facing a new $8 billion deficit for the present fiscal year. Not surprisingly, the new deficit projections have been caused by an anticipated reduction in tax revenues due to their continually-contracting economy.

In our opinion, their latest proposed 'solution' is to borrow against future lottery revenues to the tune of $5 billion is specious indeed as it totally ignores the reality that if they do such a thing, future budgets will become compromised. Governor Schwarzenegger has until May 28 to propose a new budget and the state legislature awaits hearing about his specific plans.

Another worry for the markets to consider is a slew of earnings reports on hi-tech companies which are due out in the next several days. During the recent rally which saw the Dow Industrials rise from about 6,400 to over 8,100, many of the best performers have been the tech stocks, but now it is time to "put up or shut up" in the form of actual earnings announcements. There are several due during the coming week from such giants as IBM, Texas Instruments, Yahoo, Apple and Amazon. If the earnings announcements are not positive, we could see sharp sell-offs in those shares.

Historically, PERs have floated through wide ranges. During periods of optimism, they might average from about 17 to 20, while during more pessimistic eras, that figure could easily be in the neighborhood of 8-12. Well, the figures relating to today's markets are real eye-openers, as they have soared into the stratosphere. As of Friday's numbers, the average PER for stocks on the S&P 500 list was 20, and for the Dow Industrial stocks, the average was twenty-eight, a figure more normally witnessed during times of wild optimism.

It will be interesting to see how the markets react to these latest earnings figures. If they are disappointing and bring about a re-adjustment to the downside in the average PER, then substantial declines in the stock indexes become a distinct possibility.

One other note caught our eye this morning and that was a study in the Wall Street Journal by financial writer David Gaffen entitled "Base Metals Outshine Gold." Mr. Gaffen provides substantial information documenting the rallies which have been noted of late in aluminum, zinc, lead, nickel and - in particular - copper. He attributes much of the recent gain in copper to buying from China and also points to growing expectations of an improved economic outlook for many other nations as well.

He also noted that gold may under-perform against the base metals for some time due to declining inflationary expectations.

One last thought before catching an early ferry to Vancouver for some meetings. We could not help but note that during the just-concluded Latin America Summit in Port-of-Prince, Trinidad, some of the most favorable photo-ops granted by the Obama team were to leaders of three of the most socialist regimes on earth; Nicaraguan President Daniel Ortega; Venezuelan President Hugo Chavez; and Cuba's leader, Raul Castro.

As of 7:15 AM PDT, financial markets have opened lower in North America with the Dow Industrials off by about 210 points while Canada's TSX is down by over 250. The Dow Continues to trade near the 8,000 mark (see chart) and that figure is beginning to take on added technical importance.

In precious metals, both gold and silver are moderately stronger, but platinum is showing new weakness and the base metals are giving back some of their recent gains. Crude oil is sharply lower, being down by over $3.50 and the U.S. Dollar is slightly higher in currency trading.

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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