A Melman Minute
By: Leonard Melman
Those who optimistically believe that the credit
mess which originated from the subprime mortgage fiasco is now virtually over
were given a hard, cold dose of reality overnight with the news that one of the
world’s major banks, USB AG of Switzerland, is in major difficulty. The bank’s
capital structure has been so weakened that they found it necessary to raise
$15.5 billion (all prices US$) in a special stock and rights offering. The most
significant part of the news was that the offering was priced 31% below the
market value of the shares.
According to an AP story about the offering, this
was the second major injection of capital for UBS in recent months as the
government of Singapore and an unnamed Middle East partner earlier financed over
$12 billion. The bank suffered even further damage yesterday when it was forced
to sell subprime and other mortgage assets with a nominal value of $22 billion
to US-based BlackRock Inc. for only $15 billion.
As can be seen, UBS stock has already plunged from
an earlier high of $65 and this news is likely to take it down sharply in this
morning’s trading. One look at the chart of UBS, as is true of many other major
banking corporations, shows that the markets clearly are not at all sold on the
concept that all is now well in the financial world.
Of course, the new dominant news factor is the
astonishing rise in the price of crude oil which just set a new historic record
in overnight trading above $135 per barrel. The rise in the price of two major
petroleum-complex products, heating oil and gasoline, has been equally
spectacular as heating oil is now approaching $4.00 per US gallon and gasoline
surged nine cents yesterday to about $3.40 - both prices easily surpassing any
ever recorded previously.
We have consistently maintained that the price
problems with petroleum are not simply a matter of an over-heated speculative
market, but lie much deeper. While the steepness in the run from $110 to $135
over just a few weeks does indeed appear to invite a price correction in the
near future, the serious, underlying supply/demand fundamental problems appear
to be virtually insoluble.
With worldwide demand rising relentlessly from year
to year and supplies to the market diminishing from places like the North Sea,
North Slope of Alaska, Mexico, Venezuela and Russia, the situation has become so
critical that any momentary scare sends the market into panicky buying.
In the most recent case yesterday, a report by the
U.S. Energy Department that inventories of Crude had dropped by more than 5
million barrels last week caught the market by surprise and sent prices
soaring. In addition, the market had to content with news out of Nigeria that
civil unrest was creating production problems, plus news that the Nigerian
government was unhappy with present levels of revenue-sharing and was demanding
ever-higher government impositions.
The price of petroleum has now reached a ’critical
mass’ where it is beginning to have a dramatic effect on our societies here in
America, Canada and the rest of the industrialized world.
Price inflation, previously confined to food and
petroleum prices, is now beginning to work its way through the rest of society,
with the core rate of inflation in the USA having just hit its highest level in
sixteen years.
Retailers are beginning to report the toughest
profit picture in decades as cash-strapped consumers are beginning to cut back
purchases. Discount retailer Target just reported a sharp decline in
non-essential product sales. Home improvement giant Home Depot Inc. reported a
sixty percent drop in first quarter profits and the stock plunged.
The airline industry is undergoing dramatic changes
with American Airlines just announcing that they were cutting back on their
route structure while raising fuel surcharges. Passenger ticket price increases
are beginning to bite into travelers’ plans, particularly for non-essential
vacation travels.
Credit card balances are soaring as the price of
gasoline performs likewise. Many consumers are truly tapped-out and banks are
reporting rising delinquency rates. In fact, the Financial Times just authored
an in-depth study which questions whether the typical American consumer is now
approaching a period of actual insolvency.
The situation is clearly becoming perilous in many
ways, and those dangers are no longer hidden from public view. And, to us at
least, gold’s quick rise from the $840 area to a present quote near $930 is no
coincidence. And, as we anticipate a growing flood of news regarding many
problems for the total economic society, we offer the opinion that we are very
early in terms of gold’s ultimate price potential.
As we are leaving before the markets open in North
America this morning, those opening quotes are not yet available. However, in
overnight trading the precious metals were down slightly, crude was trading near
$134.00, currency markets were relatively quiet and securities markets in Asia
and Europe were little changed on balance.
◄
Previous Minute
Next Minute
►
