A Melman Minute — March 11, 2011

All other news considerations have taken a back seat this morning to the powerful 8.9 level earthquake and subsequent tsunamis that have rocked Japan. Many people have died, huge damage has been done to that country's infrastructure and, apparently, millions of people have been roaming downtown Tokyo (and other cities) this past night, unable to get home because of the closure of that country's railroad system which carries millions in and out of metropolitan areas.

Aside from the humanitarian point of view, the quake has also strongly affected commodity markets which opened sharply to the downside (but have since rebounded smartly) because of expectations of lower consumer activity in the world's third largest economy as that nation concentrates on rebuilding the infrastructure and restoring commerce to a normal level. Quotes on crude oil, copper, grains, coffee and other heavily traded commodity items fell sharply in early trading, although we must admit that it is sometimes difficult to determine any direct connection between those quotes and the actual situation.

One of the concepts we have discussed in the past is the idea of "round numbers." The financial news media loves to issue quotes such as "The Dow has just broken through the 12,000 level" or the price of oil has soared above $100 per barrel." These round numbers can have some psychological importance and we cannot help but note that two such numbers, the Dow Industrials at 12,000 and the S&P 500 Index at 1,300 have now been violated to the downside.

As can be seen from the Dow Industrials chart, the average peaked just under the 12,400 level before some strong selling moved in and at yesterday's close, the closing Dow number had fallen below the 12,000 level for the first time in several weeks.

Similar action has taken place in the S&P 500 where that index had closed above the 1,300 level every day since the beginning of February but failed to do so yesterday.

By themselves, these closing figures are of minor significance as the major uptrends in both charts continue. However, psychologically, these reversals, minor though they may be, can be added to the other negative news market observers have been facing of late and, when the entire picture is taken as a whole, we at TMR believe that doubts are growing regarding the genuine efficacy of all the enormous number of moves taken recently by governments around the world to set the international economic ship on a secure course.

Among those measures, we have seen the first genuine attempts in a generation by elected officials to cut back on the size and interference of governments. They are finally recognizing - and beginning to fight against - the power of the public service unions to simply make demands and receive outsized benefits. They understand these demands cannot continue indefinitely, simply because governments lack the money to pay them.

The most obvious media focus has been on Wisconsin where a Republican governor, Scott Walker, has taken the brunt of the full fury of the public service unions because he has had the temerity to say that the State of Wisconsin could no longer pay for their endless desires and he was proposing that the public service unions' future bargaining powers be limited on several counts. Of course, we all know the union leaders arose as one with denunciations of the governor, stormed the state capital and have decried the virtual end of civilization as we know it.

In a new development a legal loophole was discovered whereby the legislation affecting the unions' bargaining powers could be limited without a quorum in the state senate if no direct expenditures were proposed and that legislation has now passed. Previous legislation which included financial data had been forestalled by the mass exodus of Democratic state Senators who left because initially-proposed legislation required a quorum which their actions of leaving the state of Wisconsin had prevented.

Once again, unionists have stormed the capital's barricades, but to no avail - and we will now watch and listen for further reaction.

It has also been reported that various governments' efforts to trim expenditures are having a predictable adverse impact, namely that government hiring is moving into reverse gear, negatively impacting unemployment forecasts and putting a crimp into future growth expectations. An AP story was just headlined, "Government job openings plunge in January" and the number of such openings has suddenly declined by over 160,000 positions.

There is yet another facet of the reality that the world's troubles have hardly been corrected by the flood of bailouts and currency creations that have taken place. Europe - and the Eurocurrency - are once again in deep trouble.

First, Moody's rating service has just given a triple downgrade to Greece's government paper, reducing their rating to deep down in "junk" status, an action which is causing Greek debt to plunge in debt markets and effectively raising the interest rate which that country must pay on newly-issued debt, thereby compounding the problem of trying to restore prosperity and stability to that troubled nation.

As if that weren't bad enough, Spain's government debt rating has just received a down-grade as well and there are rumors abounding that Portugal's debt rating will suffer a similar reduction in the near future. One more consideration is the reality that given the tenor of voting in that country's recent election, Ireland's new government is simply not likely to be willing to abide by the European Union's aims nor will it be willing to continue in the subordinate position in which it finds itself.

As part of our "rock and a hard place" outlook, we have warned continuously that should any economic resurgence take place, two problems - rising interest rates and growing trade deficits - were waiting in the wings to inflict new pain on the public. The second of those has just struck with a vengeance.

After remaining dormant for the past two years, America's Balance of Trade Deficit is now widening rapidly as that country's retailers are once again stocking up on foreign-made merchandise as well as spending more money to import foreign petroleum production. January's trade deficit came in at $46.3 billion, or an annualized rate of more than $550 billion, the highest in seven months. In plain language, that means that more American currency is piling up in foreign hands, exacerbating the outflow of dollars and thereby potentially weakening quotes on the Greenback. We would also offer the belief that should the US Dollar decline, that would put additional upward pressure on interest rates, something the economy can ill afford.

This continual sea of troubles remains the primary reason for our opinion that investors should maintain positions in precious metals investments for both profit and insurance purposes.

As of 9:15 AM PST (Daylight Savings Time will return this weekend in most provinces and states), financial markets have reversed earlier losses with the Dow Industrials now ahead by about 25 points and Canada's TSX Index has gained over 60. Precious metals are moderating earlier losses, with gold now trading close to $1,425 after hitting $1,404 in early trading and silver has recovered with even greater vigor, rising from an early low just above $34.00 to around $35.75. Base metals are also rising sharply following lower openings while mining share indexes have moved to the plus side as well.

In other markets, the US Dollar is in sharp retreat; crude oil is rebounding from barely $99 earlier to above $101 at present; and long term interest rate markets are little changed.

All quotes US$ unless otherwise noted.

Next "Melman Minute" scheduled for Monday, March 14, 2011.

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