A Melman Minute
By: Leonard Melman
July 24, 2008
MY APOLOGIES - Sorry for today's MM being a little
later than normal, but I did not return from the northern BC trip until the
early hours of this morning, and a good night's sleep seemed to be an excellent
idea! Also, given the shocks of the past two trading days, giving the markets a
couple of extra hours to sort themselves out also appeared to be a sound plan.
In fact, there is a good deal of 'sorting out' going on as of 11:00 AM PDT with
the financial markets in the USA and Canada both sharply lower. South of the
border, the Dow is down about 180 points while here in Canada we are watching
the TSX drop by a substantial 200+ points. America's markets appear to be
reflecting continuing negative economic news while the TSX is reeling once again
from recent petroleum and metals markets' declines.
In the metals markets, gold is the only popularly-watched metal showing
strength, advancing by about (all prices US$) $4.00 to the $923 spot area.
Silver is falling once again to near $17.20 and platinum actually declined under
the $1,700 mark for the first time in a long while. However, it is the base
metals which are being hit the hardest today with copper down about nine cents,
nickel off by over forty cents and both lead and zinc off by about two cents.
Obviously, the sharp declines in the base metals are having their impact on the
Toronto Stock Exchange indexes.
Petroleum prices are up slightly with crude gaining more than a dollar to just
under $126 per barrel and the U.S. Dollar is moderately higher in currency
markets with the DX Index approaching the 73 level.
We noted that the American financial markets were down due to bad news and there
was certainly an abundance of such news on hand this morning. For example, Ford
Motor Co. reported huge losses for the just-completed Second Quarter amounting
to a stunning
$8.7 billion, including write-downs accounting for loss of value for their North
American assets and set-asides for losses at their Ford Motors Credit
Corporation division. Operating losses themselves amounted to about 62 cents per
share, a much larger deficiency than had been forecast by analysts and the stock
is plummeting in today's trading, down by almost 16% to $5.07 as this is
written.
One commentator, David Silver of Wall Street Strategies, noting Ford's
bleak-appearing future as SUV's and truck sales collapse, was quoted by "Marketwatch"
as declaring, "...I think being grim is optimistic for the company."
Ford's news was hardly the only negative for the markets to consider as news on
the labor front in America took a turn for the worse with a report from the U.S.
Labor Department that the number of new weekly unemployment claims had risen to
over 400,000 for the first time in several months. Wall Street had been
expecting a figure closer to about 380,000
Also, there were few smiling faces when the news came out from the National
Association of Realtors that "...Resales of U.S. single family homes and condos
had fallen to the lowest level in the past ten years." The Association's report
also contained several other details which have ominous implications, such as
the fact that 6.1 million housing units now stand vacant. Not only does this
figure represent an enormous over-hang with which the resale market must
contend, but many experts note that vacant homes deteriorate much more rapidly
than those occupied by owners or tenants. This suggests the unoccupied homes
could fall in value more rapidly, putting yet another increment of downward
pressure on America's declining real estate values.
One real estate professional, Mike Larson of Weiss Research, was quoted as
stating, "...The list of reasons is long: Consumer confidence is down,
Unemployment is up, Mortgages are harder to get now that lenders have found
religion and the economy has been decelerating."
It is a combination such as those influences which we would note may have caused
the serious difficulties which now afflict yet another important industry, the
manufacture and sale of large recreational vehicles. Winnebago Industries just
announced that profits for the just-ended quarter plunged by 73 percent as sales
for their most profitable lines have been dropping sharply. Particularly hard
hit have been sales of their "class A" vehicles, ones Reuters describes as "big,
bus-like behemoths", which have fallen by almost 60 percent from their peak.
As can be seen from their chart, Winnebago is yet another major company that has
seen shareholders suffer through huge losses over the past year and, in
addition, they are also announcing the closing of plants and the idling of
workers.
All in all, the economic picture continues to look bleak - but the belief that
the 'authorities' can solve the problems remains alive and well, as was
illustrated by market action over the preceding days prior to this morning's
sell-off.
The next few days should prove to be most interesting, particularly when one
considers the implications for the U.S. Dollar - and, therefore, for gold -
implicit in the huge amounts of additional debt which must be created by the
U.S. Treasury in order to carry out their government's various rescue
operations, such as the ones for Fannie Mae and Freddie Mac, which alone are
estimated to be near $25 billion..
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