A Melman Minute
By: Leonard Melman
|
July 4, 2008 |
|
|
|
|
Americans today are
celebrating the issuance of their "Declaration of Independence" on July 4, 1776
and, accordingly, all USA stock and commodity markets are shut down for the
day. |
However, markets in Asia and Europe traded overnight
and the Canadian exchanges are in full operation, so we continue to have at
least a moderate flow of trading information to consider.
What we have learned of late confirms the
seriousness of the mushrooming economic contraction which is affecting greater
numbers around the globe with each passing month. What apparently started as a
subprime mortgage crisis which soon led to declining real estate values, rising
foreclosures and declining real estate sales in the USA - combined with the
rising crisis in the petroleum complex - now encompasses the auto manufacturers,
auto parts suppliers, airlines, luxury goods and tourist industries - just to
name a few.
And, of critical importance to future economic
activity, consumer sentiment readings are crashing to new multi-year lows as
people see notices of unemployment rising while the very economic system upon
which their well-being depends appears to be contracting, seemingly on a daily
basis.
New evidence has just come forward, directly
affecting the airline, auto parts and banking businesses.
American Airlines (symbol: AMR), one of the world's
giant carriers, has just announced massive employee layoffs and future service
cutbacks. According to a story just issued this morning by the Associated
Press, AMR will likely to lay off more than 6,000 workers as they attempt to
offset some of the costs associated with rising fuel prices. Some of the
deepest cuts involved the elimination of over 900 flight attendant positions as
well as all staffing areas at sister airline American Eagle, as the parent
company reduces many of the connecting routes which have been servicing smaller
metropolitan areas.
American has been plagued with heavy losses,
including US$328 million in the First Quarter 2008 and an expected US$330 in the
just-concluded quarter. In addition to the operating losses, their balance
sheet is taking direct hits from write-offs of over US$1 billion in their
aircraft fleet values as they mothball their MD-40 and Embraer RJ-135 fleets.
American Airlines' notices have fallen right on the
heels of other major employment cuts recently announced at other airlines
including 4,000 at Delta Airlines, 3,000 at Continental Airlines, 2,550 at
United and 1,700 at U.S. Airways Group. And, perhaps even more ominously, many
airlines recently announced massive fuel surcharges which appear certain to
further reduce traffic, which could easily lead to more job cut declarations.
We also note serious contraction in auto
manufacturing and its associated suppliers as Canada's "Progressive Moulded
Products Ltd." just shut down 11 Toronto-area plants, idling over 2,000
workers. Progressive, already crushed by C$500 million in debt, reacted to GM,
Ford and Chrysler cutbacks in Canadian auto production, which had been the
source of 90 percent of the company's revenues.
As in the airline industry, these workers are
homeowners and participants in the consumer-driven economy, and the sudden loss
of so many jobs cannot help but exacerbate already declining expectations in
those markets.
We noted yesterday that declines in the banking
industry had impacted thousands of jobs in the New York City area and had raised
the rate of office vacancies in that city and others. Well, according to
Meredith Whitney of Oppenheimer & Co., that situation could get a lot worse
before it gets better. She just released a report forecasting that conditions
affecting three financial giants; UBS AG, Merrill Lynch and Citigroup, Inc could
deteriorate further in the near future as the financial industry begins to
undergo the effects of deleveraging (a word we are certain you will hear spoken
much more often in the near future), restructuring, and additional write-downs.
She also noted specifically that Citigroup is likely
to register additional operating losses in the second quarter, and her comments
on UBS AG, the Swiss banking giant, had particularly serious implications. UBS
is invested heavily in other financial institutions and, as earnings, capital
values and shareholder equity in those institutions decline, the impact on UBS
will likely be negative. This comment reflects on the fact that in today's
world, there is a tremendous amount of inter-company activity in the banking
world and what we could be witnessing is indeed the beginning of a downward
revision in banking values worldwide.
We would also note that the banking crisis continues
to spread and now infects several of Britain's largest financial institutions.
One of them in particular, Bradford & Bingley, has seen their stock plunge in a
manner similar to the action in many American financial enterprises. After
trading for a prolonged period near 4.50 to 5.00 British Pounds, or about $9 to
$10 Canadian or American, the stock began to collapse in mid-2007 and now trades
near one-half Pound, or about one Canadian or US Dollar.
Is there a bright light for investors to gather
around in order to offset some of the gloom? Potentially, yes, as it is a
historic market norm that the finest investment opportunities usually follow a
period when everyone is focused in one direction and the opportunities arise
opposite to the prevailing mentality. On that basis, one should look for
advancement in the financial markets as a whole and the investment/banking
securities in particular. In fact, some widely-followed newsletter writers are
offering such specific advice in the present time frame.
However, our opinion at TMR is that the onrushing
financial and economic crisis has a long way to run. Yes, there will be
counter-rallies and some of these may indeed offer spectacular trading profit
opportunities, but we believe they will be counter-trend and should be
recognized for what they are, namely trading opportunities within an overall
bearish scenario. At least that's the way we see it.
For the long run, we continue to believe that the
financial problems facing the world are growing ever more serious, that the
consumers' mood continues to restrict their plans for economic activity, and
that further trauma lies ahead.
Within that scenario, we continue to believe that
gold and the other precious metals will benefit from rising feelings of
financial and currency value uncertainty as holders of significant wealth will
turn in ever-growing numbers to the historic security of hard money.
In today's limited markets the precious metals are
lightly lower, base metals close to unchanged, currency markets are quiet and
petroleum has fallen back to the US$144 level. In Toronto, the TSX is
moderately lower, down about 70 points after two hours of activity.
◄ Previous Minute
Next Minute
►
