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 21, 2010 - - - - - A new specter is beginning to haunt previously-bullish investors around the globe.  That question relates to the possibility that despite all the stimulation, all the bullish talk and all the Keynesian remedies which have been applied, is the world now ready to plunge once again into economic recession - or worse?  That question also lies at the heart of our discussion today which re-visits the question of whether the world-wide securities rallies which have taken place since March 2009 truly represent the emergence of a new and powerful bull market, or whether they have simply been an unusually potent rally within an ongoing bear market. We initially dealt with this question on May 6, 2009, after the 'bounce' had been in effect for about two months.  He is some of what we noted at that time: "From the bottom of November 1929 through early May 1930, the Dow Industrials went on a prolonged, powerful rally lasting six months which drove the Dow back to the 300 level - a recovery of 110 points of the previously lost 190+ - or almost sixty percent.  Newspapers of the day trumpeted the 'fact' that matters were not nearly as bad as many had supposed.  Unfortunately, that burst of optimism turned out to be ill-founded as from May 1930 through June, 1932 the markets went into a pattern of sharp drops followed by moderate recoveries, eventually reaching their historic low at Dow 41 - or almost ninety percent below their 1929 peak. And now, let's fast forward to the recent weeks.  Starting in early March, the Dow Industrials have rallied from near 6,400 to about 8,500 - a recovery of slightly more than 2,000 points from the previous total decline of 7,800 (from 14,200 to 6,400), or about 24 percent.  In other words, so far the recovery from the early March bottom, impressive though it may look, is still far less than half the comparable recovery from November 1929 through early May 1930 - and that one was followed by the most devastating, continual pattern of selling waves in market history up to the present era.  Even the psychological background was similar.  In the previous period, the Hoover Administration made aggressive moves to counter the initial effects of the Depression and people had confidence that these measures would improve the country's economic performance.  In fact, some of these 'stimulative' measures were so aggressive that in the 1932 campaign, Governor Roosevelt and the Democratic Party adopted a platform calling for "a reduction of federal expenditures and a balanced budget" and "a sound currency." (University of San Francisco study of 1932 election). Today, we also have governments in power which have adopted perhaps the most aggressive stimulative measures in American history and the public is awaiting the improvements 'certain' to come from infrastructure programs, restoration of the credit systems, etc.; and the result has been a rally similar in tone, if not yet in duration, to the 1929-30 episode.  But there is a dire similarity which, in our opinion, is not yet receiving adequate news coverage.  Declines of over fifty percent in securities markets are rare birds indeed.  In the last 85 years of market history, there have been only two!  While the debacle of 1971 through late 1974 came close, only the 1929-32 episode and the recent declines qualify.  We would suggest that they represent something greater than a normal, run-of-the-mill recession and, if history does indeed repeat itself, this would also suggest that the final bottom is not at hand, but rather some time in the future. At least, that's the way we interpret market history.  Therefore, our expectation is that the financial markets may indeed continue the recent rallies, but we believe this is not the beginning of a protracted bull market but rather an important correction within an ongoing bear.  We also believe that just as the initial optimism generated by Hoover's initial moves to fight the onrushing Depression eventually faded, so too will the optimism generated by the Obama Administration's massive interventions likewise fade as economic reality bites hard in the future." The rally from the bottom in early March 2009 (Dow 6,400) through early May 2010 (Dow 11,200) spanned approximately 4,800 points - or 61.5% of the preceding decline from 14,200 to 6,400 - quite eerily, it would seem, almost exactly the percentage magnitude of the November 1929 - May 1930 Dow rally, which, at that time, was supposed to have represented the restoration of prosperity to the American and world economic pictures.  Of course, that rally represented nothing of the sort.  It represented only a period of delusion, one in which sad economic realities were ignored, but which burst upon the world's consciousness in an incredibly devastating manner over the next several years.  And when the economy turned "south" with relentless determination, as it were, in the summer of 1930, the disillusionment was epidemic. And so, now, we are watching markets turn south again, and they are doing so in no minor manner.  In just a few trading days, the Dow has fallen from 11,200 to under 10,000.  Basic commodities such as zinc, lead, copper, palladium, nickel and other building blocks of industrial expansion have been sliced by 10, 15 and 20% - and in the cases of palladium, zinc and lead, by over one-quarter of their value.  Financial markets have seen panicky moves out of vulnerable currencies into the presumed safety of American government dollar-denominated debt instruments, driving yields in America sharply lower, but making foreign nations appear even more vulnerable. Our evaluation of the overall financial market situation can be boiled down to making a decision about the market rally which took place from March 2009 through May 2010 and which has since been followed by the recent sharp downturns.  It would appear to be either of the following: A - It was nothing but a rally within an ongoing, and very powerful bear market and the recent steep declines tell us that the bear is about to resume its downward path, perhaps with particular ferocity. B - It was an entirely new and durable bull market and the recent declines represent only a correction within that bull, to be followed by renewed and substantial buying within short order. Our belief remains that it is "A" and, if that turns out to be the truth, given the fervor and deep-seated belief frequently expressed by Barak Obama's followers in his implicit promises to improve life across the American spectrum, it is our opinion that should both the economy and financial markets descend into new collapses, the potential for massive disillusionment is at a very high level indeed.  The next few market weeks should tell us quite a story. As of this morning, early trading declines have finally been replaced by some buying and we are seeing intraday rallies across a wide area of securities and commodities.  As of 9:30 AM PDT, financial markets have rallied strongly after opening sharply lower.  The Dow Industrials have transformed a 150 point loss into an 80 point gain and for Canada's TSX the comparable figures have been -227 to +120.  Precious metals have rallied from earlier selling with gold trading near $1180 after declining to $1,169; silver at about $17.70 from an earlier low near $17,40; and platinum up from the mid 1400s to about $1,500.  Base metals are showing gains of about 1-3% across the board while mining share indexes have also rebounded from earlier losses.  The Greenback is now down modestly on the session while crude oil is once again above $70.00 per barrel. To our Canadian readers, please accept our best wishes for the upcoming Victoria Day holiday on Monday. - - - - - All quotes US$ unless otherwise indicated. Due to the Canadian holiday on Monday, May 24 our Melman Minute schedule for next week will be Tuesday, Wednesday and Friday.  We can only wait in wonder at what the markets will deliver by then.   ◄  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.