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!"   MELMAN MINUTE - May 7, 2010 - - - - - For sheer market excitement - or despair - there is little in the entire history of financial markets that could match the devastation that occurred between 11:30 and 12:00 PDT yesterday.  As the chart below illustrates, within those few minutes, the Dow Industrial Average plunged from just below 10,600 to just above 9,800, but then roared back up to the 10,600 level.  At its bottom, the Dow was down almost 1,000 points on the day, the greatest one day intraday loss on record. What we find of particular interest is the rush to excuse away the decline on the part of normally optimistic general commentators who quickly assigned the blame to an erroneous entry in an order to sell Proctor And Gamble stock.  It has been reported that a clerk accidentally entered the figure of three BILLION shares instead of three MILLION on a P&G sell order, thus causing a massive overload within the system which then resulted in the exaggerated downside move.  However, we don't buy that explanation because, if that were truly the case, the markets would have quickly resumed their uptrend, but that was not the case at all. After returning to the 10,600 area, markets settled near that figure and closed down over 340 points, with massive over-representation among losing shares compared to gainers.  What we also find very significant is that there has been no rebound rally so far this morning.  Much the opposite has taken place as renewed selling has driven the averages to new losses.  What we also find very important is that yesterday's markets combined with those of this morning have served to break below the Dow Industrial Average's uptrend line which has held since March of last year, as illustrated by the Dow's two-year chart. Given the continuing nature of the world's new financial crisis, the one involving many European nations and the Eurocurrency itself, it will be most interesting to see what evolves over the next several days and weeks.  Should selling continue and even intensify, the new level of world economic confidence could easily be shattered. Our belief, and we are willing to state it unequivocally, is that matters have not been resolved by the latest IMF-EU bailout 'solution.'  The fundamental problems of massive deficits, massive power which has accumulated within public service unions, and debt/GDP ratios that are horrendous by historic comparison simply have not gone away nor does it appear at all likely that they will vanish any time soon. Two particular incidents, along with many other examples, lead us to that conclusion. First, it is difficult to erase the picture of huge mobs of supposed civil servants running riot in the streets of Athens, burning, spreading chaos, and eventually killing three innocent bystanders who were asphyxiated inside a burning bank building.  We say "supposed", because if those individuals, led by their toxic union leaders, had any concept of public service, they would be working devoutly to restore financial order to their troubled nation.  Instead, in our opinion, they are endangering Greece by putting immense pressure on their government to maintain the status quo of high civil service salaries, over-hiring of civil servants and huge retirement and other civil service benefits.  Unfortunately, the level of expenditures required to maintain those benefits is bankrupting the country. The other incident involves the state of Illinois which appears to be quickly descending toward financial calamity.  Illinois' problems bear remarkable resemblance to those of Greece as reckless expenditures, declining revenues and enormous civil service salaries and benefits have pushed that state far beyond the brink of fiscal stability.  The legislature met yesterday to find some answer of how to handle a $13,000,000,000 deficit but, by all reports, came up empty-handed.  Given Illinois' terrible credit standing, it may be impossible to float new bonds and bills to raise sufficient additional money, so the only alternatives seem to be a combination of reducing expenditures and raising taxes - each one of those being politically unpalatable. Rather than face those alternatives, the State Legislature is going on vacation without resolving the problems.  One of their fears is to take any unpopular actions with an election scheduled for November.  And so, the crisis builds, no solution is in sight and in essence, the "Nero" of the state legislature fiddles while the financial structure of the sate burns.  And Illinois is not alone as California's financial ratings are BELOW those of Illinois. One of the hopes expressed by lawmakers is that the rising economic tide will begin to increase taxation revenues to the point where deficits can be replaced by surpluses, but they had better recheck their premises on two counts. In the first place, the economic recovery is simply not providing the lift that many anticipate and that concept is supported by the job numbers for April.  While the economy did generate some job growth, it was not sufficient to prevent an INCREASE in the unemployment rate from 9.7% in March to 9.9% in the latest report.  A rising rate of unemployment hardly bodes well for economic growth. Next, we must express our belief that the underlying basis for the so-called recovery, namely the stupendous flow of government cash financed by limitless borrowing, is a particularly unsound basis for economic growth.  I recall vividly from my years in consumer lending management that many borrowers, when receiving their cash, would feel richer and better off, and frequently go on spending binges.  But reality would hit them hard in the face when the installment payments became due as their disposable income would then be diminished until the new loan was paid off.  In the same manner, some economic growth has indeed been generated by the furious pace of government borrowings and expenditures during the pat year, but, in our opinion, such spending is unsustainable and its cessation will ultimately result in renewed recession - or worse. One last uncertainty has been added to the mix and that is yesterday's U.K. election which resulted in a minority government for the Conservative party.  The term in Britain for a government where no party has a majority is a "hung" parliament and that will be the case in the U.K. until their next election.  Hung parliaments typically have a high level of difficulty when it comes to taking decisive actions. And so, we head into the weekend on a sea of uncertainty, awaiting developments which might clarify the situation. Financial markets are in flux this morning as they have sold off, then rebounded somewhat but are now being hit with renewed selling.  As of 10:00 AM, the Dow Industrials are down about 80 points and Canada's TSX is off by more than 150.  Gold is flying high once again, having reversed some earlier standing and the yellow metals has now moved to within $16 per ounce of its historic high of $1,230 last December while silver has come roaring back from earlier selling and now stands up almost one dollar on the session.  Base metals are modestly higher and mining share indexes have recovered strongly from their lowest levels but still remain slightly lower.  Crude continues it recent decline while currency markets are little changed. - - - - - All quotes US$ unless otherwise noted. Next "Melman Minute" scheduled for Monday, May 10, 2010.            ◄  Previous Minute                                                                                                        Next Minute  ►
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