A Melman Minute By: Leonard Melman   July 26, 2010     Despite many attractive features of southern Mexico, it is good to get back home to Beautiful British Columbia.  Unfortunately, travel from Mexico to Canada frequently involves transit connections through the USA and we would warn you that if your travels to Mexico involve return flights through Houston, Texas, be prepared for enormous delays and aggravation almost beyond endurance.  If you have connections involving less than two hours between flights, you may not make your connection, things are that bad!   The reason we mention this is that one story of note which occurred during our absence also involved out-of-control bureaucracy.  That event involved the stupendous salary and benefits being extracted by a Chief Administration Officer, the City Police Chief and the Assistant City Manager who were "earning" $787,637, $457,000 and $376,288 respectively, all being paid from the budget of Bell, California, a community of less than 40,000 people!  When the Los Angeles Times broke the story in mid-July, the townspeople erupted with such fury that all three resigned.   It is well worth noting that even though he has resigned, the Chief Administration Officer, Robert Rizzo, will be entitled to an annual pension of, get this, six hundred thousand dollars per year!  The town council had done its utmost to hide these payouts, causing former Los Angeles Mayor Richard Riordan to tell the L.A. Times, "Transparency, there is none...The things they hide from the public are monstrous."   We would also offer the opinion that this type of secrecy is rampant throughout many portions of the civil service bureaucracy.  In my home province of British Columbia, just a couple of years ago the Members of the Legislative Assembly (MLAs) and the Premier of the Province voted themselves increases ranging from 27 to 54% of their annual salaries on a Friday afternoon prior to a major holiday.   The reason we bring this up at present is the state of world markets during the past week.  Despite obvious corruption such as noted above; despite horrendous budgetary deficits in nation after nation: despite levels of debt which were previously unimaginable; despite the imposition of regulatory over-kill across wide sectors of society - despite all this and much more, there still remains a large segment of the economic and social community that believes the world is headed toward a basically painless recovery which will see the restoration of widespread economic prosperity without a single important price to pay.   One look at two of our major charts clearly illustrates what has happened of late.     As can be seen, in just the past five trading sessions (including today), the Dow Industrials have risen by about 500 points from near 10,000 to near 10.500, which we interpret to mean many investors are now seeing clear economic skies ahead and are returning to securities investments.     At the same time, every rally in gold has been met by strong selling and the gold chart is looking 'toppy' for the short term, resting near $1,180 - about $80 below its recent peak near $1,260.   It appears to us that every positive piece of positive information is released with a barrage of attention-grabbing publicity while negative commentary is barely noticed.  As an example, when the US reported that June Housing Starts were down by 5%, the data hardly affected market progress, but when a rise in New Home Sales for June was announced, every possible effort to put a positive 'spin' on the data came into play.   A typical comment was the following... "Even though the data was soft, it was better than economists expected and that was the first time that has happened in awhile," said Jeffrey Kleintop chief market strategist for LPL Financial.  The home sales gain gave investors a glimmer of hope for the embattled housing market and sent prices for homebuilders higher. D.R. Horton Inc., Lennar Corp. and Toll Bros. Inc. rose more than 2 percent after the report..." Another item of interest which has provided the bullish camp with considerable support is the "stress test" information on European banks which informed the world that virtually all banks passed the test, with the primary exceptions being a few in Spain.  What the pleased public seemed to ignore was the fact that the test was clearly designed to give a passing grade to the vast majority of the banks involved.   As reported this morning by the Wall Street Journal in a study authored by David Enrich in London, "Europe's 'stress tests' were intended to gauge the ability of large banks to weather an economic storm.  But the exams relied upon some surprisingly docile economic assumptions."  Among those he noted were assumptions that property values would not fall in the event of a 'double-dip' recession; unemployment would not rise; and banks would not suffer any erosion in their capital cushions.  We believe all of those assumptions were inherently risky, to put things mildly. One last thought.  Markets typically enjoy a 'summer rally' and we believe such is the case at the present time, with gold frequently moving in the opposite direction.  However, those same markets often encounter much more difficult times during late summer and fall, with many reaching major lows during October before a 'year-end rally' ensues - with gold, in each case, moving contra to the general markets.   We shall see how matters play out this time around.   As of 9:45 AM PDT, financial markets continue to rally with the Dow Industrials ahead by about 60 points and Canada's TSX up by 45.  Precious metals are trading mixed with gold off by $6 to $1,182 while silver has advanced by 4 cents to $18.16.  Base metals are reflecting the presumed improving economic outlook by rising sharply on balance, with copper and nickel performing particularly well.  Crude oil is holding steady near $79 per barrel; the U.S. Dollar continues to show some weakness; and long-term interest rates have moved slightly to the upside.  Mining share indexes are little changed on balance.   All quotes US$ unless otherwise noted.   Next Melman Minute scheduled for Wednesday, July 26, 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.