A Melman Minute By: Leonard Melman   NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of the developing international financial crisis and its relationship to gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday. Since the work has been expanded to include potential solutions to the growing list of seemingly insoluble dilemmas, the working title of the book has been revised to 'REVERSING THE WAY IN!"   March 26, 2010 Perhaps we are just skeptical by nature, but something quite unusual appears to be taking place in American securities markets over the past few months and we alluded to this in our "Melman Minute" of March 24.  Trading in these markets has followed a highly unusual pattern, to put things mildly, and while we have no criminal-court type proof, we do have our suspicions that perhaps securities markets are indeed being manipulated, with government being the likely intruder.  The three following charts illustrate our concerns. Cotton is a widely traded commodity with a multitude of both producers and users who frequently use the futures market for hedging purposes and, in addition, there are numerous speculators who trade cotton for capital gains.  No one supplier, user or trader can control this market and, as a result, trading is fluid, with substantial swings through a wide price range over time. Now please contrast that chart with the one relating to Federal Funds, a tightly-controlled, government-dominated market.  Three periods stand out.  First, from mid-2003 to mid-2004, the Fed Funds Rate was held frozen at one percent and the chart produced a flat-line throughout that period.  Next, the Federal Reserve then began a policy of controlled rate rises, driving the Fed Funds rate higher at specific intervals, producing a narrow, controlled rate of descent in the Fed Funds quote that did not vary for two full years.  Third, following another flat-line period and a time of falling interest rates (rising Fed Fund quotes), since early 2008 we have another period of flat-lining when the Fed Funds Rate has been controlled at near zero. (*) Having established that there is indeed a difference in the chart appearances between a fluid, open market with many participants on each side versus a tightly-controlled, government dominated market, please turn your attention to the chart of the Dow Jones Industrials for the past two months. Since February 5 of this year, trading in the Dow Industrials has been confined to a steadily narrowing daily range which has been following an unbroken pattern of rising within a range-bound channel with virtually no divergence.  This, to put it bluntly, is completely atypical of free, open markets where sharp moves such as those of February 3, 4, and 5 are characteristic. Our suspicion is that some mysterious buying is stepping in whenever a serious-looking wave of selling begins to gather momentum.  Please note how many times the small horizontal side bar to the right of each vertical daily chart bar has closed nearer its top than bottom.  These side bars reflect the closing price while the vertical bars reflect the total range for the days.  (The side bars to the left of the vertical bars reflect an average of the opening quotes.)  Clearly, a pattern of improving trading late in the day has been established, one which has resulted recently in 22 of 31 trading days, where a definite trend is observable, closing in the upper half of their daily range.  Based on our 40 years of experience observing markets, we believe this is highly unusual, to put things mildly - and these chart observations are confirmed by our half-hour interval studies of the Dow Industrials price action. The obvious question becomes, "Who could gain from such interventions?" and our answer is the Administration of Barak Obama.  It seems reasonable that from their point of view, it is essential that the American public hold to the belief that economic matters are improving and, therefore, the country can now afford the array of regulations and laws which the Administration is admittedly desperate to enact.  Sharp declines in securities markets would obviously raise questions regarding such prosperity and, therefore, it appears to us that there would be great political advantage if such declines could be avoided. Let us make one thing unmistakably clear.  These are only suspicions.  We have no proof, since, if such interventions by the intrusive hand of government were indeed taking place, it is highly unlikely any visible paper trail would be left behind. All we can say is that, by our interpretation, this recent market action is very suspicious and a plausible political motive could indeed be the underlying basis for such actions. (*) - Anyone interested in receiving a detailed explanation why financial quotes fall as interest rates rise - and vice versa - should contact the editor via our web-site e-mail.) .................... Just as we sat down to write this piece, the media erupted with the news that a South Korean vessel had apparently been sunk by North Korea and rescue operations were now underway to save the surviving sailors.  This is the second such episode within the past few months and fears of a new aggressive wave by North Korea against its southern neighbor are on the rise.  It must also be remembered that North Korea is a nuclear power, thereby raising the political stakes considerably. In other follow-up news, yet another "rescue plan" has just been announced by the European Community to 'save' troubled Greece from its own financial follies.  This one will be a combination of guarantees from some European nations combined with cash from the International Monetary Fund.  Our observation is that this is the path to more future troubles, since such rescues remove the consequences of unsound actions.  If Greece and the other PIGS nations become confident that they will be saved with one rescue after another, then why should they endure the rioting and disorder which will probably take place if they adopt severe measures to finally end their corrosive over-spending? Two other quick notes:  Housing in America has not recovered and CNBC just reported that, "Housing Sales are Looking as Bleak as Ever."  According to that organization, prices are plunging once again in several metropolitan areas and mortgage foreclosure rates are still rising for multitudes.  In some communities, one in every five homes is now in some form of foreclosure proceedings.  In the other case, the relentless push for states and municipalities to gain new tax revenues continues unabated with Texas just announcing they want to collect special taxes on customers who patronize strip clubs.  The Wall Street Journal jokingly referred to the proposed law as a "Pole Tax." Metals markets are on the rebound this morning with gold up by over $10, standing once again above the $1,100 mark as of 9:30 AM while silver has gained 22 cents so far.  Base metals are stronger across the board and mining share indexes are ahead by more than one percent.  Financial markets in the USA and Canada are also higher with both the TSX and Dow Industrials ahead by about fifty points each.  The U.S. Dollar is weaker in currency trading while the Crude Oil market is slightly lower, having fallen just below the $80 per barrel level. - - - - - All quotes US$ unless otherwise noted. Next "Melman Minute" scheduled for Monday, March 29, 2010 when we plan to discuss one of the potential threats to both political and financial stability, namely the growing public perception - and resentment - that civil servant salaries and benefits have become one of the underlying causes of our financial problems.          ◄  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.