A Melman Minute By: Leonard Melman   August 20, 2008 How quickly mass psychology can change.  After unbroken years of faith that the expansion of the mammoth Chinese economy would continue uninterrupted into the future, many analysts are suddenly beginning to have second thoughts as China admits to a series of problems.  Air pollution in that nation has become legendary; exports to several nations are beginning to slow; manufacturing costs are rising rapidly which is gradually eliminating some of their international trade advantages; and serious infrastructure problems must be overcome. The consensus now appears to be that while China will continue to grow, their economic growth rate for some time into the future may be somewhat less robust than what has taken place in recent years.  If that indeed turns out to be the case, it would go along way toward explaining the weak performances in base metals during the past two years, a period which has seen nickel drop from (all prices US$) about $25 to just under $9.00 and zinc and lead fall from near $2.00 to the 80 cent per pound range.  Among the widely traded base metals, only copper has held up relatively well, declining from its historic high near $4.20 to about $3.51 this morning. Not only does the financial market have the Chinese situation to now worry about, but also the flood of negative news continues to inundate the financial media. The entire real estate/mortgage complex received additional word over the past few days that recovery in either market could be a long time in coming as conditions continue to deteriorate.  Clearly, home builders are looking at falling residential market prices, perversely combined with rising construction costs, and are deciding against entering new projects, as the rate of construction of homes and apartments during July plunged to the lowest level in seventeen years!  It should also be noted that as construction diminishes, unemployment within the industry rises, putting additional downward pressure on the all-important consumer-driven economy as well as creating additional expenditures for governments, many of which are already facing huge budgetary problems. The mortgage industry itself is facing tremendous, perhaps even unprecedented problems.  Because of the protracted decline in home prices, fewer and fewer homes remain where the market value of the home is greater than the total of mortgages outstanding against the residence.  Therefore, the number of applications for refinancing in order to extract cash out of home equity, a very common procedure during recent years, has fallen sharply.  Combined with a sharp drop in new home financing applications, the mortgage industry is seeing the volume of business drop dramatically. Numbers released this morning by the Mortgage Bankers' Association are stunning as their mortgage activity index figure for the week ended August 15 dropped to 419.3, the lowest figure in eight years.  What is truly noteworthy is that when mortgage activity was at its peak in 2003, the index stood at 1,856.7!  Mortgage woes are also affecting the two giant government agencies, Freddie Mac (FRE) and Fannie  (FNM).  Both stocks are plunging to historic lows this morning as FRE s now down to about $3.33 - down from a high of $65.88 - and FNM has fallen to $4.81 - down from their high of $70.57. And, to think that just three years ago, any securities broker who placed 'widows and orphans' funds in either of those two stocks would have been congratulated for his safe and cautious stance, Two other notes.  Euphoria over declining crude prices was dimmed somewhat by a report issued by Goldman Sachs that forecast a resurgent price for petroleum, which they forecast will reach $149 by year-end 2008. Also, I was just listening to a commentator on one of the major financial television networks, describing the surging U.S. Dollar!  What surging U.S. Dollar?  When the US Dollar Index numbers are put into context, the recent advance appears to be nothing but a modest rally inside a steeply declining trend.  The Index peaked near 124, fell to a low of 73.11 and has now "surged" all the way back to near 77. Perhaps some of thsee 'talking heads' could take a moment to look at a long term chart before making such statements. As of 7:40 AM PDT, precious metals are relatively quiet, trading near yesterday's closes.  Base metals have rallied with zinc and lead up moderately while both nickel and copper are posting solid gains.  Crude is trading near $115 per barrel and the U.S. Dollar Index is holding near 76.90.  Financial markets are split with the TSX up over 100 points while the Dow Industrials are off about 30. ◄  Previous Minute                                                                                                         Next Minute  ►
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