A Melman Minute — October 7, 2011

HERE WE GO AGAIN! As the chart below depicts so clearly, the world’s financial markets, as exemplified by the Dow Jones Industrial Average, have embarked on a series of rallies followed by declines followed by rallies followed by declines ad infinitum that has been ongoing now for almost three months. During that time, there have been no less than TEN alternating short-term moves in the DJIA of 500 points or more. The most recent in the series is a recent rally which has more than 500 points since the dismal days of last week.

In our opinion, these dizzying up and down moves reflect not so much a change in the direction of hard data, but rather changes in sentiment regarding the degree of danger relating to the overall international economic structure. When it appears that events will overwhelm the world’s economic leadership, markets plunge. When it looks like that leadership is offering a somewhat credible plan to improve matters, markets rally. In other words, at least from the financial point of view, perception appears to matter more than substance.

An excellent example of ‘perception over substance’ is the reaction to the latest series of ‘solutions’ to the Euro crisis. The latest surge in the Dow, which began four trading days ago, coincided with the announcement of yet another plan, this one being labelled as eminently workable. However, when we examine the details of the plan as they have emerged over the past few days, we believe they are nothing but the same warmed over hash with only slightly different wording. In essence, the ‘new and improved’ plan calls for:

An IMF plan to purchase defaulting European bonds...

New austerity measures to be implemented by Greece...

Central bankers instructing Portugal to take significant steps to reduce their deficits...

The central Bank of England offering to make more aggressive moves to stimulate the U.K. economy...

And, as reported by the Financial Times, a generalized statement from Olli Rehn, commissioner of economic affairs for the European Union which stated that, “...EU finance ministers were examining ways of coordinating recapitalizations of financial institutions after agreeing that additional measures were urgently needed to shore up the region’s banks...” Perhaps we are being unfair, but at “The Melman Report” we fail to find the slightest hint of any specific information about what the European Union will actually do and, until some degree of specificity is achieved, we will remain sceptical about the credibility of such ill-defined plans.

By the way, it is quite clear that some major European banks do indeed need ‘shoring up’ as one look at the two-year chart of Dexia Bank, one of the 20 largest such European institutions, clearly reveals. Unfortunate holders of those shares have seen its price decline over the past two years by almost ninety percent from a high of $7.00 to barely 85 cents at present.

As an aside, the chart of Dexia bears an eerie resemblance to many of the financial charts which underwent massive collapses during the second half of 2008.

Financial markets did receive at least a temporary shot-in-the-arm with the release of employment reports in Canada and the USA, with job gains being reported in each country. In America, the widely-followed Department of Labour monthly figures showed a net jobs gain of just over 100,000 for the month of September, a figure which exceeded most predictions. In addition, the August figure was revised upward from ‘zero’ to a gain of over 50,000 jobs. The reaction to these numbers propelled early rallies in stock markets of both countries, but by mid-morning, some selling began to appear.

There is a very curious story which has been building steadily over the past several days and week and we are growing most curious to see if it will have either a direct or indirect influence on our world of base and precious metals. We are referring to what is becoming known as the

“Occupy Wall Street” protests.

They began about three weeks ago with the pitching of a single tent in a park (Zuccotti Park) near Wall Street but quickly became larger and better organized, culminating, at least in the New York City area, with a massive demonstration by over 700 protestors which shut down the famous Brooklyn Bridge and massively inconvenienced tens of thousands of New Yorkers. Since that time, an amazing development has taken place. Instead of being confined to just the New York City metropolitan area, cells have begun to spring up in several cities in America and Canada and many analysts have begun to identify this movement as the Left’s answer to the Tea Party of the Right.

Many of their demands indeed smack of the politics of the Left, including socialized USA health care, nationalization of major banks, and government regulation of anything related to environmentalism. However, their anti-Wall Street bias is also gaining some support among libertarians and other free-market advocates who have decried government special treatment of major banks – and their access to America’s national treasury - for many years.

Support for “Occupy Wall Street” appears to be growing in numbers and spreading geographically. In fact, a Vancouver-based group will be holding a demonstration in mid-October and other public actions are being planned.

There is one suspicion that is also growing, that this is not a truly ‘spontaneous’ movement, but rather one which has been carefully planned, particularly in view of the number of cells which seem to have sprung up out of thin air.

We believe that thanks to this nascent movement, political uncertainty is on the rise prior to the 2012 USA elections as both established parties now have somewhat radical movements with which to contend. It should be most interesting to follow this group.

Rising uncertainty, as we have noted many times, historically usually plays out to the advantage of the precious metals.

As of 9:45 AM PDT, financial markets have retreated somewhat from earlier gains and at this time, the Dow Industrials are actually down by about 35 points while Canada’s TSX Index has seen a 68 point opening gain reverse into a 140 point loss at this time. Metals are contributing to Toronto’s declines as gold is now down by over $10 to near $1,640 while silver is off by about 60 cents to near $31.30. Base metals are presently close to unchanged on balance while mining share indexes are down by about 2%.

In other markets, crude oil is about 50 cents lower; long term interest rates have moved higher, the US Dollar is close to unchanged in currency markets; and one of our favourite indicators, lumber, is sharply lower.

All quotes US$ unless otherwise indicated.

Our next “Melman Minute” is scheduled for Monday, October 10 when we plan to take a close look at one of the major stories in the mining world, the ongoing battles between Ivanhoe Mines Ltd. and the Mongolian government.

← All A Melman Minute