A Melman Minute
By: Leonard Melman
Regrettably, this will be a very brief MM this
morning as our private plane is waiting for the flight back to Durango City.
We pan to add to this later today, time and travel conditions permitting.
Metals markets are split this morning with the precious metals somewhat higher
but the base metals, specifically lead and zinc, continue their declines, both
falling to about 85 cents per pound - less than half their record high values of
several months ago. (All figures US$)
One possible cause of their recent collapses could be questions relating to
sustainability of the Chinese economic dynamo. Some very real threats to
continued Chinese prosperity are being discussed and these include severe air
and water pollution brought about by too-rapid industrialization, infrastructure
problems, domestic inflation which the Chinese government must address, economic
slowdown in industrialized nations which purchase the bulk of Chinese exports
and, most recently, considerations regarding the cost and availability of
imported petroleum products.
Much of the case for robust base metals markets into the future rests on
continuation of economic growth in China and India - and if that growth fails to
materialize as expected, the supply demand equation for the base metals would
become seriously altered to the negative. Perhaps that is what metals traders
are already beginning to sense.
Overnight markets traded in a relatively quiet manner with the currencies mostly
unchanged, crude oil modestly higher at about $133 per barrel and securities
markets in Asia and Europe mostly close to unchanged.
As we have noted, while financial leaders in America talk a good game about
returning robust prosperity and solvency to the banking and financial systems,
we continue to see deterioration in major investment banking stocks. One of the
latest to undergo severe declines is Lehman Brothers, the giant investment
banking firm. During the past two days, it was hit by additional strong selling
as plans for their rejuvenation have fallen through.
At $27.50, the stock is down about $55 from its high
of this year. Since there are about 550 million shares outstanding, this means
that Lehman shareholders have suffered a loss of equity of about thirty billion
dollars in less than one year! The value in their accounts - along with the
consumer purchasing power it represented - has simply vanished into thin air.
Add to that the horrendous losses in other financial stocks such as MBIA,
Countrywide, Citigroup, Merrill Lynch and many others and the damage that is
being done to consumers' wallets - and psyches - can be readily observed.
One of life's more interesting experiences is flying in a small, four-seat
aircraft through immense canyons and over towering mountains on a hot day with
strong thermal currents. However, thanks to a skilled pilot, all went well and
we returned safely to Durango City. However, one cannot say the markets
concluded the day as safely.
In the five hours since our initial message, gold, silver and platinum have
moved higher, but the base metals continue to encounter troubles. Despite higher
gold and silver prices, mining share indexes are giving off signs of potentially
serious trouble - and oil is once again on the move upward. One other item of
importance: food grain commodity prices are flying off the top of the charts
with corn, soybeans and wheat all showing mammoth gains on the session. As a
result of these economic problems, securities markets have now fallen to their
lowest levels in three months, with the Dow Jones Industrial Average, down over
200 points at today's close, now threateing to break under the 12,000 level.
Just a few weeks ago, the Dow had risen above 13,000 and optimism among market
bulls reigned supreme. What a difference a few weeks can make to the markets'
psychology.
We are very concerned about action in the mining share indexes. One of the
widely held concepts in mining share analysis is the importance of the
relationship between metals price movement and the performance of the shares
themselves. In theory, the spot metals quotes look at the immediate time frame
while share investors generally look ahead into the future.
With this understanding, it can be seen that if metals prices are weak, but
share investors remain bullish and the share indexes outperform the metals, this
would be positive. However, as in today's case, when the metals are strong (gold
+$15, silver +$0.32, platinum +$45) but the shares are going nowhere with XAU up
by less than a point and HUI down by less than a point, it shows a distinct lack
of enthusiasm among shareholders going forward.
If there is one chart that gives us the chills regarding the economy at large,
it is the Banking Index, BKX. It has traded out a profoundly negative pattern,
with the worst of the action coming AFTER the Fed took its corrective measures
in mid-March 2008. The chart clearly shows strong support earlier this year in
the 75 level, but that support has now been violated and these giant financial
corporate shares are now moving relentlessly lower.
The dollar losses to shareholders is becoming staggering - amounting to hundreds
of billion dollars of lost assets. We wonder what the government and the Fed
will do net to 'hypo' the economy. The measures they have taken to date not only
haven't worked, but in our opinion, they have made matters worse.
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