A Melman Minute By: Leonard Melman   July 16, 2008   SPECIAL FEATURE - Given the acknowledged importance of China and its mammoth economy to the world's financial structure, we have been gathering information on that nation for a special series. Our four-part look at China will appear over the next two weeks in our "MELMANIA" section with the parts entitled "History and Facts"; "Great Leap Forward toward Capitalism"; "Prosperity and Problems" and "Looking into the Future." We hope you will find the series to be interesting and of value. We also plan to include a focus on how our junior mining industry might be able to take advantage of the willingness of Chinese investors to participate in the North American mining share markets. Yesterday's MM was devoted to providing information on just how far some segments of the world's economy had fallen and concluded with the question of whether the current situation represented a buying opportunity in accord with the saying "Buy when there is blood in the streets" or whether, in fact, the bad news had only just begun and we were, in fact, in a situation consistent with the saying, "Don't stand in front of an onrushing freight train." Depending on one's choice as to which saying accurately depicts the current situation, completely differing investment strategies are called for. In our opinion, the overall economic situation is more in accord with the latter interpretation, that there remains a substantial body of negative news which is yet to hit the public. Therefore, we continue to suggest the acquisition of well-researched and selected metals investments (subject to our listed cautions and disclaimers), one should approach the conventional investment world with a great deal of caution. Here are some of our reasons. First, it is our opinion that the real estate crisis has a lot further to go, both in America and worldwide. Many of the factors which tend to pile up and negatively influence each other continue to grow more severe. These include: Mortgage foreclosures are increasing, not decreasing, thereby adding to the inventory of unsold homes. Many homes which were purchased during the 'hot years' were bought by investors and not as primary residences. Therefore, they have remained unoccupied and have been deteriorating in condition at a rapid rate, diminishing their value.. Mortgage lenders are tightening up on their loan requirements, not loosening them. This has a tendency to shrink the pool of qualified buyers just as the inventory of unsold homes continues to grow. The "ability to pay" factor of present homeowners continues to come under great pressure as other costs of living such as food and transportation rise rapidly while unemployment is increasing and wage growth stays relatively stagnant. In our opinion, this combination, along with a large number of variable mortgages which continue to be re-set at higher levels, will result in a greater number of future foreclosure proceedings, not a diminishing one. And, we believe there is yet another factor which could become significant. Millions of long-term homeowners, many of whom own their homes free and clear, saw the value of those homes soar from 1999 through mid-2006. As their equity mounted, so did their plans for generous retirement as many foresaw a day when they would sell their homes, pocket huge sums and invest those sums in 'safe-and-secure' high-yielding investments. For the past two years, many of those millions have seen that equity shrink, and, with that shrinkage, so have their retirement plans begun to fade. We believe the potential exists for a multitude of such homes to enter the 'sale' side of the real estate market as those owners see the rising possibility of their real-estate-based retirement cushions vanishing into thin air. Next, the credit crisis continues to grow as one major financial corporation after another declines in value. These are no minor entities but the best and strongest in the world. One chart that illustrates the depth of the problem is Washington Mutual, America's largest savings & loan association who's stock price and resultant market capitalization has become worth less and less until it is approaching worthlessness. We believe that horrendous declines, such as the ones which has savaged WM and many other similar financial giants, would not be occurring unless the situation was not only dire, but one which held out little hope of rapid and effective resolution.   Third, despite occasional bouts of relief such as we are seeing in the petroleum markets for the past few days, it is our opinion that in the long term, the supply/demand problems that afflict the world of petroleum will be immensely difficult to solve. Remedies, such as those recently proffered by President Bush, will take many years to produce results and, in the meantime, the crisis could easily worsen in a dramatic manner as old fields fail and few new ones are brought into production, while demand continues to escalate from advancing nations. Fourth, both current pressure on the U.S. Dollar and the increasingly obvious threat of rising inflation appear to be resolvable only by a dramatic increase in interest rates, both in America and worldwide. While this may indeed help support the Greenback, rising interest rates will likely crush what remains of the housing market and will place huge additional pressures on America's industries as they attempt to continue operating profitably. There are others such as declining economies worldwide; massive pollution concerns; huge deficits in America in terms of both budget and trade; etc. For these reasons and others, we continue to believe that, despite respites such as the markets are enjoying this morning; we remain far from the point where economic strength will lead to solid financial market performance. In other words, the "onrushing freight train" still appears to us to be gathering strength. Markets this morning have indeed given the optimists a shot in the arm in the form of decent earnings just released by Wells Fargo Bank and a declining price for petroleum. As of 8:30 AM PDT, the price of Crude Oil had fallen by about (all prices US$) $5.00 to just under $134 per barrel and, as oil has fallen, gold has also declined, down about $14 to the low $960s with silver, platinum and palladium also losing ground. Base metals are once again plunging and have managed to give back most of their impressive gains from late last week. Financial markets are mixed with the Dow Industrials up by about 100 points and the TSX about 140 points lower.     ◄  Previous Minute                                                                                                        Next Minute  ►
		DISCLAIMER The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed.  Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only. Any investment decisions should be made only following consultation with registered investment professionals.