A Melman Minute By: Leonard Melman   July 15, 2008   Ever since the beginning days of "The Melman Report", we have adhered to the general guiding outline that the world was headed toward serious trouble; that the housing crisis in the USA was no small, 'garden party variety', but rather one with truly dire implications; that the petroleum crisis could become a matter of the utmost seriousness as demand gradually overcame available supply; and that the financial 'management 'experts' of this world's various government economic leadership teams were not up to the task of guiding our economic societies through this period of crisis. We also believe, profoundly and deeply, that if this combination of events did take place, it would put immense pressure on the U.S. Dollar as lack of confidence in American government economic authorities grew and, as a consequence, the price of gold was likely to soar over time as growing percentages of the human population turned toward the precious metals in their search for financial stability. Well, unfortunately, evidence is coming in rapidly which indicates that the scenario depicted above may indeed be coming true. Stock markets around the world are undergoing severe selling and the growing credit crisis seems to worsen with each passing day. On top of it all, General Motors just announced a massive retrenchment as it concentrates on its very survival. Many of us in North America tend to concentrate our attention on the Dow Industrials, the Toronto Stock Exchange Index and the S&P 500. However, it is important to point out that the rest of the world's securities markets are also of vital importance, and the message they are sending out this morning is, "Watch out below!" Virtually every important market on earth has plunged to its lowest levels in many months. We have constructed the following table which shows the market name, the high for the past 12 months, this morning's quote and the percentage loss from that high to the current level. AUSTRALIA (AORD) 6,873 4,910 29% CHINA (SSE) 6,124 2,779 55% INDIA (BSE) 21,206 12,676 40% JAPAN (NIKKEI) 18,269 12,754 31% FRANCE (CAC40) 6,132 4,046 34% GERMANY (DAX) 8,130 6059 25% SWITZ. (SMI) 9,336 6,492 30% U.K. (FTSE) 6,751 5,179 23% CANADA (TSX) 15,154 13,550 10% USA (DJIA) 14,280 10,859 24% USA (S&P 500) 1,576 1.204 23% Several items stand out quite dramatically. First, Canada's markets have fared relatively better than the others, most likely due to the preponderance of natural resource companies. At the other extreme, markets in China and India have suffered most as economic questions begin to cloud what had been an ultra-rosy picture. In any case, these declines are serious, and their collective impact is a matter of considerable concern going forward as consumer equity continues to diminish because of the triple whammy of falling home values, rising essential transportation and food costs combined with sharply declining stock market equity values. This morning's news summary can only be described as dismal for those who still retain optimism that the overall situation can be resolved without pain or economic trauma. Among this morning's lead stories, we find: General Motors just announced they were taking truly dramatic action in order to turn around their North American operations. As GM CEO Rick Wagoner told Yahoo Finance, "In short, our plan is not a plan to survive. It is a plan to win." The 'plan' includes the laying off of twenty percent of its salaried workers, cutting truck production, suspending its stock dividend for the first time since 1922 - they kept paying throughout the Depression - and increasing its borrowing. They also plan to cut health care benefits to retired salaried (not union) workers American Wholesale Inflation soared to 1.8% in June and 9.2% for the past 12 months, both far above government targets. Soaring gasoline and food costs were blamed. Three of America's major financial institutions, National City Bank, Wachovia Bank and Washington Mutual Inc., appeared to be on the brink of failure. Shares in each company continued to plunge as the value of their capital portfolios appeared to approach the level where they would fail to meet regulatory requirements, causing market participants to wonder if they would meet the same fate as IndyMac Bank which was seized by government regulators last week. The United States Dollar plunged to the lowest level in history as the Eurocurrency rose above $1.60 this morning for the first time ever. (All prices US$) One chart which clearly illustrates the depth of the problems facing the credit world is that of "BKX", the Banking Index on the Philadelphia Options Exchange. The decline over the past few months has been relentless.   Two market 'saws' or adages come to mind at a time like this. First, "Don't stand in the way of an onrushing freight train", meaning that when the tide of news is as overwhelmingly negative for conventional markets as has recently been the case, get out of the way and wait for times when market calculations can be made on a surer basis. On the other hand, there is the oft-quoted line, "Buy when there is blood in the streets", meaning that it is precisely at times such as these when darkness and pessimism prevail that the best bargains are to be found. Tomorrow, we will try to examine both points of view. As of 8:20 AM PDT, financial markets have recovered somewhat from their sharp early losses with the Dow Industrials now down 'only' 50 points, after having been over 200 lower. The precious metals had been sharply higher, beginning to closely approach $1,000 for gold and $20 for silver, but they have reversed and headed lower as President Bush announced yet another rescue plan for the economy. Crude oil is declining after a higher opening and base metals are down steeply. The combination of falling metals, declining petroleum, a stronger C$ and renewed fears in the credit world has resulted in a huge decline in Canada's TSX Index, now down more than 400 points.     ◄  Previous Minute                                                                                                        Next Minute  ►
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