A Melman Minute By: Leonard Melman   July 16, 2010 We have been endlessly fascinated by the world of mining for many years, from exploration to development to pre-production to production.  It is an amazingly interesting industry and we truly enjoy visiting projects and reporting on them.  We have just completed one such visit to Golden Hope Mines' gold project in southeastern Quebec in an area known as the Beauce and an updated report will be prepared for their Company Report on this site over the next few days.  It was good to escape from the 'real world', if only for a few days, since events 'out there' seem to have taken on the aspect of a roller-coaster or a yo-yo.  The changes from optimism to pessimism; from a strong economic outlook to a weak one; and from political stability to seeming political instability have taken place with astonishing rapidity - and today is no exception.  Markets which had been rallying strongly of late have suddenly turned much weaker across the board this morning as yesterday's strong economic outlook has suddenly become much more cloudy. It is worth citing once again our favorite quote relating to the swift changes in direction of news.  It was written by Sir Winston Churchill in his monumental six-volume series on World War Two and reads, "Those who are possessed of a definite body of doctrine and of deeply rooted convictions upon it will be in a much better position to deal with the shifts and surprises of daily affairs than those who are merely taking short views, and indulging their natural impulses as they are evoked by what they read from day to day." Of course, in today's world, those impulses are evoked in an even more rapid manner through information transmitted on elaborate cell phones, on computers or in the electronic media.  But the principle is the same. That quote seems completely appropriate this morning when short-term news has taken a dramatic turn for the worse and markets are responding in that direction.  Two items in particular have affected the financial markets where the Dow Industrials are off by nearly 200 points and Canada's TSX is down by around 160.  Both markets had been rising for several days until yesterday. The first news items related to a dramatic downward shift in consumer sentiment in the U.S.  According to Reuter's, the University of Michigan consumer sentiment index plunged from 76 in June to only 66.5 in July, the lowest number since last August, and the drop in that index confirms a recent similar figure from the Conference Board.  Analysts had expected a number close to last month's figure. In addition, according to the Labor Department, the U.S. Consumer Price Index fell 0.1% in June.  This is the third consecutive monthly decline for consumer prices, and is raising genuine fears of price deflation - something government economists dread since it frequently results in contracting government revenues. As if that was not enough to deal with, Bank of America just reported Second Quarter 2010 earnings and they were a bitter disappointment for the optimists, falling by 3.1% from the previous quarter and revenues from several different sources declined as well.  GE's 2Q10 report also raised alarms since revenues for that giant corporation actually declined, in their case by 4.3%.  Whatever earnings improvement was achieved was accomplished by control of expenses, not by robust business conditions. GE's stock performance would seem to coincide with our general viewpoint that the rally from March 2009 through late April 2010 was a strong rally inside an ongoing and powerful bear market, with worse news yet to come.  GE's decline from just over 30 to barely 5 was starkly swift, but it can be seen that the recovery rally to 20 was much slower and laborious, and recently the stock has turned down again, presently priced below $15 per share.  That does not strike us as aggressively optimistic performance.  Much the opposite. Our "definite body of doctrine", to use Churchill's phrase, remains this:  The world's economies did receive some degree of improvement from the towering amounts of debt undertaken by government, but that improvement was far less than might have been expected, given the enormous degree of fiscal stimulation.  That improvement, as we noted in this space on July 12, is now running into the reality that for millions of people, there has been scant positive impact in their lives. Accordingly, consumer activity is weaker than what had been projected, retailers and auto dealers have no pricing power available to sell their goods at higher prices, and price indexes are now contracting, an indication of a weakening, not strengthening, of the economic picture.  We also see another factor.  Many corporations tightened up their expenditures dramatically as the economy contracted from late 2007 through mid-2009.  As a result, in many cases they reported comparatively strong earning's growth in the past few quarters.  However, as we have seen from GE's report, sales continue to contract and unless that is changed, we believe the rate of earnings improvement will begin to reverse itself into the future. Our basic position remains constant.  Despite all the "austerity" rhetoric, when governments are confronted with declining revenues; civil unrest and perhaps even rioting in reaction to austerity; and they also face a continuing inability to properly service their mountains of government debt, we will soon see a return to strong stimulation in government after government - and a commensurate improvement in the quotes on gold and silver. We note one news event of considerable importance, the passage of the Dodd-Frank financial reform bill, just passed by the Senate with a 60-39 majority.  Whatever else may come out of this 2,300+ page law, it presents a means of expanding bureaucracies, laws, regulations and impositions by government on the world of financial management that is unprecedented.  As Senator Richard Shelby of Alabama stated, the bill "...is a 2,300-page legislative monster that expands the scope and powers of ineffective bureaucracies." That segment of the population that wanted new regulatory domination over the world of finance got what they desired.  We can only wonder if they will be as happy just a couple of years down the road. Our major concern is that such massive intervention by government will diminish the efficiency of commerce, reduce profits, reduce tax revenues and exacerbate the already perilous government debt and deficit situations. Ergo, our opinion remains positive on the long-term outlook for the monetary precious metals.  However, we must note that because the overall economic picture is becoming cloudier and less optimistic, we are less sanguine about the base metals. As of 9:45 AM PDT, financial markets remain sharply lower with the Dow Industrials down by about 200 points and the TSX Index off by about 160.  Precious metals are being sold down with gold about $20 lower to near $1,189 and silver off by over 50 cents to near $17.80 per ounce.  Base metals are down across the board and mining share indexes have fallen back by more than three percent.  Crude oil is also down, the U.S. Dollar is recovering slightly after heavy recent selling and long-term interest rates are headed lower once again as investors pour into U.S. government debt instruments, searching for safety above all else. All quotes US Dollars unless otherwise noted. Next Melman Minute scheduled for Monday, July 19, 2010 when we plan to discuss recent sharp weakness in the US Dollar Index and some of that number's implications.              ◄  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.