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 - June 16, 2010 - - - - - There is no question that many markets have been on an upward tear over the past few sessions, here in North America (see Dow Industrials one-month chart) as well as in Europe and Asia.  However, the great debate remains whether these rallies constitute a reflection of a new and growing period of worldwide prosperity, or whether they are poorly founded and may represent nothing more than a variety of wishful thinking that all the major financial dilemmas have been resolved. Our own viewpoint tends toward the latter.  While there have indeed been some statistics which lend support to the 'renewed prosperity' theme, the skeptic in us tends to doubt the validity of some of them, such as the startling announcement by China that their exports had surged by 48.5% last month.  Simply stated, we have our doubts about the accuracy of such numbers, since the rest of the world is hardly enjoying sudden boom times which would have required a monumental and sudden increase in ordering; we have not noted international shipping and railroad numbers to be leaping forward; nor have we seen a previous depletion of inventories which would have required such sudden and dramatic re-stocking. There is also the matter of the "Baltic Dry Index".  This little-followed figure actually has a history of measuring international trade with some accuracy as it measures the rates shipping companies are able to charge for their services.  Logic would suggest that those rates would rise during a period of heightened shipping activity (which is how most of China's export goods reach their markets) and would decline when gross trade figures were steady or falling.  When we look at the BDI, we find that the present figure of 3,020 suggests it is in decline and has been in that status since its relative high of 4,661 attained in November, 2009 - and it is 'oceans' below its all-time high of over 11,700, reached during the last period of strong prosperity at the beginning of 2008. If China's trade figure was accurate, how could the BDI be contracting?  That makes no sense to us at all.  It must also be remembered that China is a nation where all information is utterly controlled by government and it is difficult to believe that data is not made to conform to their political goals-of-the-moment. There are many other reasons to doubt the solidity and reliability of this advance and one of them is relatively new.  Banks and other financial institutions along the Gulf of Mexico coast are being hit by the fall-out from the British Petroleum Gulf oil spill which is now being regarded as one of the world's greatest environmental catastrophes. For the coastal states' financial institutions, the problems could be particularly serious.  As the oil spill has spread and previously pristine shorelines are being affected by sticky, black balls of petroleum,  real estate developments are being cancelled, one after another.  In addition, hotel and motel occupancy is down sharply as potential vacationers cancel plans and, as a result, bankers in the region are becoming concerned about a new surge of mortgage payment delinquencies and a surge in new defaults, both from development owners as well as private citizens whose earning power has been negatively affected. Buzz Richie, President of Gulf Coast Community Bank in Pensacola, Florida, summed up the region's fears by issuing a release noting, "...We really believed we were coming out of it.  Now we're afraid we're going back where we were before, if not worse."  This is no small matter as banks in the area have exposure to well over $100 billion in real estate development loans in Alabama, Florida, Louisiana, and Mississippi and, thanks to the heavy losses they have already suffered over the past two years, their balance sheets are poorly structured to withstand yet another wave of defaults. The Gulf oil spill is hardly the only reason to worry about the stability of the world or mortgage lending as data is now being gathered to suggest that the "mortgage modification" programs, initiated by the Obama Administration to save a multitude of homeowners from the loss of their residences, are turning out to be nothing but a temporary stopgap at best as a significant proportion of those rescued by the program are now headed right back toward default. Data presented by Fitch Ratings Ltd. forecasts that most borrowers who get lower mortgage payments through such programs will default again within 12 months.  Their release tells us that among those loans which are not backed by federal agencies, "...the redefault rate is likely to be 65 to 75%.  Almost all of those who got loan modifications have already defaulted once." (Our emphasis.) Diane Pedley, Managing Director at Fitch, suggests that the failure rate was likely to remain high because most borrowers are also deeply encumbered by credit-card debt, car loans or other obligations taken on during the 'good times' up to early 2008.  Ms. Pedley suggested that this period of difficulty would last until the underlying problem of excessive debt was corrected and she didn't expect that to happen any time soon as, "...the other debts don't go away." Additional problems remain.  Many economists who tend to agree with the 'renewed prosperity' scenario have been expecting the residential construction industry to resume strong growth, but serious questions remain in that direction.  A new report from the U.S. Department of Commerce cited a 10% drop in New Housing Starts for the Month of May and we would also note that in Canada, real estate sales numbers are suddenly turning softer while inventories of homes available for sale are on the rise. Nigel Gault, Chief U.S. Economist for IHS Global Insight, told the Wall Street Journal that, "...The plunge in housing starts for May underlines that a substantial housing rebound has yet to get under way.  Now the credit (expired special tax credit) is gone, it's time for the payback." We have also noted previously in these pages that during the past month, numbers suggest that retail sales are weak; pricing weakness instead of strength pervades the retail establishment; and, we believe most importantly, the Eurocurrency mess has merely been temporarily 'swept under the rug' and the basic problems of massive government expenditures combined with reduced government revenues has not gone away and will resurface in the near to intermediate future. So, we would suggest that the underlying assumptions upon which the robust markets of the past few days have been based are truly suspect.  Time will tell. As of 10:00 AM PDT, financial markets are taking a bit of a breather with both the Dow Industrials and the TSX Index close to unchanged.  Gold and silver are trading near $1,230 and $18.50 respectively while the base metals are down slightly on balance.  Mining share indexes are also trading quietly while Crude Oil continues it recent advance, now trading above the $77 per barrel level.  Long-term interest rates are moving slightly higher while the U.S. Dollar Index is holding near the 86 level. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Friday, June 18, 2010          ◄  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.