A Melman Minute
By: Leonard Melman
As long time readers might recall, some of our
favorite lines come from the movie industry and one of them originated with the
film, "A Few Good Men." Tom Cruise plays a young lawyer called on to defend two
Marines who appear guilty of murdering one of their company mates. As bad news
continues to pour in, he declares sarcastically, "The hits just keep on
coming!" Well, when it comes to economic news for the industrialized world,
"The hits just keep on coming" seems to be an appropriate comment as the
cumulative effects of oil price increases, declining real estate values, turmoil
in credit markets and various food supply crises continue to spread around the
globe.
Several nations which had appeared almost
recession-proof have now begun to feel the effects of this spreading trauma and
Canada and Denmark particularly come to mind.
Canadians have developed an almost blasé' attitude
toward their domestic economy, believing that the country's spectacular natural
resource wealth would carry them through any period of weakness. However,
cracks in Canada's economic armor are now beginning to appear.
For example, real estate prices across Canada are
beginning to show a worrying resemblance to those in America which occurred
early in that nation's developing real estate crisis. First came a sudden and
unexpected decline in the residential sales rate, followed by a marked rise in
the inventory of unsold homes. Next came news of a reduction in the rate of
price increases and, now, actual price declines are beginning to show up. The
Victoria Times-Colonist just carried a story headlined, "Price cuts cool the
sizzle", a story line which carries particularly worrisome implications because
Victoria has been one of the most consistent success stories in Canadian real
estate history.
According to the article, the average price of a
single-family house in June was C$580,104 - down from May's figure of C$601,897
- while the number of homes for sale reached 4,513, a full 27% higher than one
year ago.
Another news story which carries considerable
potential impact for the Canadian economy is a report that auto sales in Canada
are plunging steeply, particularly for poor-mileage but high-profit vehicles
such as large pickup trucks and SUVs. General Motors Canada was particularly
hard hit, with their Canadian sales in June down almost 24% from last year.
Declining auto sales are beginning to have their effect on the Canadian auto
industry as manufacturers trim back their production plans and several
communities, particularly in Ontario, are now feeling the brunt of this trend.
Denmark had been one of Europe's best economic
success stories during the past two decades and, in fact, it was just announced
that an international survey had shown that citizens of Denmark ranked as the
happiest people on earth on average. Therefore, it came as a distinct shock to
the European community to learn that Denmark had just seen their economic output
decline for two quarters in a row, satisfying one of the classic definitions of
a recession. In addition, the spreading worldwide real estate woes have now hit
hard in Denmark as the average home price is now expected to decline by a
further 5 to 10% in the coming year. A Reuters article was also unkind enough
to point out that real estate markets in Ireland, Spain and Britain were also
coming under price pressures.
However, it is still the enormous American
economy that continues to grab a large share of the world's attention and
matters there are not improving - far from it. Just this morning, the
Department of Labor reported that the number of employed persons in June dropped
by a further 60,000+ persons, the sixth consecutive month of such declines, and
it must be remembered that this figure is net of the many artificial adjustments
which have been recently incorporated into the final, published number.
Two other articles dealing with America's economic
troubles emphasize that the negative trend is far from over. One of the
hardest-hit areas of economic activity has been the banking and credit sector
and a Bloomberg News Service story just reported that, "...Manhattan's office
vacancy level rose to its highest level since 2006 during the second quarter as
financial firms, beset by losses, fired workers and reduced their office
space...Vacancies in the most expensive U.S. office market rose to 7.1% from
5.3% a year earlier." We also learned that office occupancy in San Francisco,
"...fell the most in five years during the second quarter."
The other story dealt with the auto sector in
America, particularly as it relates to the "Big Three" automakers; General
Motors, Ford and Chrysler. June's sales figures were devastating with GM down
by 18%, Ford off 28% and Chrysler's plunged by a whopping 36%. To make matters
worse for these giant companies, the declines were most severe in their most
profitable lines and speculation is growing that General Motors in particular
may see their 'cash on hand' evaporate by the end of 2008, leaving the auto
giant vulnerable to being forced into bankruptcy proceedings.
One look at the long-term chart of General Motors
stock shows the devastation which has taken place during the past few years as
the stock has fallen from a high of about $93 (all prices US$ unless otherwise
noted) to a low of slightly below $10.00 reached yesterday. Given that there
are more than 500,000,000 million GM shares outstanding, the total losses to GM
shareholders from the stock's peak now amount to more than forty billion
dollars. Other implications of the merciless weakening of this industrial giant
include a potential inability to meet medical and pension requirements, further
reductions in employment and possible default on some corporate indebtedness.
Ford's situation also appears ominously weak looking
forward as they face huge indebtedness payments, massive corporate medical and
employment costs, huge operating losses and a sharp sales decline in their most
profitable lines. Their stock's decline has been almost as dramatic as that of
GM, down from a peak of about $37 to under $5.00.
Indeed, "The hits just keep on coming."
American markets will stop trading at 10:00 AM PDT
this morning prior to closing for the July Fourth holiday. After opening on a
relatively strong note, some selling ensued, but renewed buying has driven the
Dow Industrials up by about 90 points at 8:30 AM PDT. In Canada, the TSX sold
off sharply yesterday by over 400 points and lost another 250 in early trading,
before suddenly reversing to the upside and that average is now +20 for the
session. Gold sold off sharply on strength in the US$, at one time falling to
$927, before rallying back to $937, down about $7 for today's trading, while
silver and platinum are also modestly lower. While copper continues to hold
near $4.00 per pound and continues to gain some strength from supply problems
associated with worker disruptions in South America, the other base metals
continue to fall with nickel, zinc and lead sharply lower.
Crude oil made a new historic high just under $146
per barrel in overnight trading and presently sits near $144.50.
While U.S. markets will be closed tomorrow,
Canadian, Asian and European markets will be remain open.
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