London Irvine Report May 3, 2007

Asia Coming of Age.

“When in doubt, predict that the present trend will continue.”

Anon. Claimed by many.

The world is in a period of great transition. The old trend of the west dominating, is ending. In the UK today, English voters in effect are holding a referendum on what they think of the departing Prime Minister and his experiment with “New Labour”. Not much if polls are to be believed. Scottish voters are expected to use the opportunity to vote in the Scottish Nationalists, possibly starting the process that leads to the dissolution of the United Kingdom. As the Queen in the 55th year of her reign sets off on a 6 day visit to America, she could be forgiven for asking for asylum, Great Britain is on the cusp of marginalising itself in the world, compromising the safety of the Pound, and giving up its Security Council seat and veto at the UN.

In France a somewhat similar process is underway. On Sunday their voters must choose between a return to old sclerotic socialism and continued economic decline, or pick a reformist centre-rightist, with policies resembling Maggie Thatcher on speed. Either option seems likely to spell a period of French domestic introspection and trouble. The polls predict France will be getting Maggie Thatcher on speed. A second major European power seems about to absent itself from the world stage.

In the Middle East, the Economic Recovery Conference on Iraq is underway at Sharm el-Sheikh, with 50 countries attending. The reality is that the world’s only super power has been unable to force its preferred solution on Iraq, and now desperately needs help in stabilising the region before an all against all regional war breaks out. The reality is that in the decade ahead, the world if it is to maintain its living standards and accommodate the living standard rise of China and India, badly needs access to every
drop of oil Iraq can produce. Iraqi oil is desperately needed to replace the declining production from aging oilfield all around the world.

In Riyadh today, west Asia is sitting down with east Asia to map out how best to maximise each’s energy future. No westerner need apply.

In Asia today, the beginnings of a parallel financial structure is underway to challenge the dominance of the G-1 and the six dwarfs. The 250 year old Anglo-American empire is looking tired. Below, Bloomberg covers the Asian news. Under played here in London, this potentially is the financial story of this decade.

Asia Draws on $2.7 Trillion of Reserves to Safeguard Currencies
By Shamim Adam
May 3 (Bloomberg) — Asian finance ministers will this week probably agree to pool part of the region’s $2.7 trillion in foreign-exchange holdings to prevent a repeat of the crisis that depleted reserves ten years ago.

Japan’s Koji Omi, China’s Jin Renqing, South Korea’s Kwon Okyu and Southeast Asian ministers are meeting at the sidelines of the Asian Development Bank’s annual gathering in Kyoto to discuss a plan to combine some of their reserves to be tapped by member nations when needed. The current arrangement, called the Chiang Mai Initiative after the Thai city in which the accord was forged in 2000, only allows for bilateral currency swaps.

Broadening the initiative is more than just a safeguard against turmoil, analysts say. It’s an instrument for the region’s governments, stung by conditions attached to loan packages by the International Monetary Fund during the 1997-98 financial crisis, to reduce reliance on the agency in the future.

“These are attempts to achieve some form of independence, not to subject themselves again, should there ever be another crisis, to bailout packages and the rather draconian terms that come with it,” said Joseph Tan, a Singapore-based economist at Standard Chartered Bank Plc.

—–Finance ministers from China, South Korea and Japan will gather for a meeting tomorrow, before getting together with their counterparts from the 10-member Association of Southeast Asian Nations a day later. Besides reserve pooling, other issues that may be discussed include the development of the region’s bond markets.

The pool of reserves may ensure central banks have enough to shield their currencies against any speculative attacks.

—–In the years since the crisis, total Asian reserves have risen from $485 billion in 1997 to $3.37 trillion now. China’s foreign-currency holdings grew by $1 million a minute in the first quarter to $1.2 trillion. South Korea’s reserves are now the world’s fifth-largest, burgeoning to $244 billion from $7 billion in November 1997.

—-Talks on the pooling of reserves or other initiatives on cooperation should be secondary on the agenda of finance ministers at this week’s meeting, said V. Anantha-Nageswaran of Julius Baer & Co. Ltd. Foremost should be a discussion of China’s currency policy which is inflating its reserves and spurring export growth, he said.

“The Chiang Mai Initiative is just a talking shop,” said Anantha-Nageswaran, head of research at Julius Baer in Singapore. “The
elephant in the room that everyone’s tiptoeing around is the issue of China’s exchange rate and how its export-led growth is coming more and more at the expense of other nations. It’s going to come to a point where it’s going to really hurt everybody.”

Below, the WSJ reinforces the sense of transition, this time in energy trading.

Oil Lubricates Asia-Mideast Ties
Intertwining Economies
May Alter Power Balance;
Implications for the West
May 3, 2007; Page A3
RIYADH, Saudi Arabia — A gathering here of Asian and Middle East energy ministers has cast a fresh spotlight on how rapidly the petroleum-rich Persian Gulf and energy-hungry East Asia are intertwining their economies, with potentially significant consequences for the international balance of power.

The Asian Ministerial Energy Roundtable, which met yesterday, surveyed oil demand, supply possibilities and energy-investment opportunities in Asia, where explosive economic growth is helping drive the world economy. The 16 ministers at the meeting — jointly hosted by Saudi Arabia and Japan — represent the huge oil exporters of the Persian Gulf region, dubbed West Asia by the group, and such major consumers from East Asia as China, South Korea and India.

—– Mohamed bin Dhaen Al Hamli, oil minister of the United Arab Emirates and president of the Organization of Petroleum Exporting Countries, said the Arab nations of the Persian Gulf are spending $270 billion on new energy projects from now to the end of the decade alone. A significant amount of that funding comes from rising East Asian purchases of Middle Eastern energy
supplies, as well as from joint energy projects.

The growing ties have broad implications for Western nations as the Mideast and East Asia gain oil-market clout. State-controlled oil companies, particularly in the Persian Gulf region, have taken the lead in developing major new reserves, while major Western oil producers find access to new supplies increasingly limited. Where companies and decision makers once focused on events in Western energy capitals such as Houston, New York and London, these same players are increasingly concentrating their efforts in places like Dubai.

Rising East Asian investment in the Middle East could prompt burgeoning powers China and India to take a more active interest in trying to stabilize the region, while also encouraging Middle Eastern leaders to look East, not just to traditional powers such as Washington and Moscow, as players in the volatile region’s diplomacy. In Middle Eastern capitals, decisions made in Beijing and New Delhi could ultimately gain the same heft as decisions made in Washington.

—- Asia already consumes more oil than Western Europe. The Asian and Persian Gulf ministers meeting here in the Saudi capital represent more than half the world’s population, the majority of its oil and gas reserves, and some 70% of the expected rise in world energy demand in decades to come.

—– Saudi Arabia’s Mr. Naimi said two-thirds of oil exports from West Asia, including Saudi Arabia and Iran, go to East Asia. And these shipments account for 70% of East Asia’s crude-oil imports.

—- In Saudi Arabia, the world’s largest oil exporter, some 60% of crude-oil shipments, or 4.5 million barrels a day, now head east to South Asia and East Asia. The kingdom has been signing deals to deliver even more oil to voracious energy consumers such as China and India, even as it expands oil output and invests in refineries at home and abroad.

Stay long gold and silver, a new economic order is evolving.
Back in the world’s leading economy, now running on debt and fumes, ADP eported yesterday on weakening job growth. Tomorrow we get the official figures, albeit massaged so they understate the real position in the opinion of many economists. Below, ADP’s curtain raiser for tomorrow’s release.

ADP Employer Services Says 64,000 Jobs Added in April
By Courtney Schlisserman
May 2 (Bloomberg) — Companies in the U.S. added 64,000 jobs in April, the fewest in almost four years, according to a private report based on payroll data.

The increase was the smallest since July 2003 and followed a revised gain of 98,000 in March that was smaller than previously reported, the ADP Employer Services report showed today. The report is based on data from 364,000 businesses with about 22 million workers on their payrolls.

Weakness in the housing market and reduced business spending is leading some employers to cut staff and limit hiring. Fewer jobs and rising gasoline prices may restrain consumer spending, which has been a bright spot in the economy.

“An economy growing a little over 1 percent doesn’t translate into many jobs,” said David Resler, chief economist at Nomura Securities International Inc. in New York. “Critical to the economic outlook is the presumption that we continue to get solid income growth that would continue to be the basis for consumer spending.”

A Labor Department report in two days is forecast to show U.S. employers added 100,000 jobs last month, the fewest in two years, according to a Bloomberg survey of economists. The unemployment rate is forecast to rise to 4.5 percent.

In relative terms Asia is rising and America and the west slipping, the world of commerce and finance is becoming less America centric. In the real world that means a falling dollar for years to come, hopefully without the dreaded crisis that usually comes to fiat currencies in decline. Stay long gold and silver. There’s as yet no sign of anyone in the G-7 willing to address the “sick-dollar” problem.

Below, more of the same from troubled, oil rich, Nigeria, the largest African supplier of oil to the world. In terms of oil, the world now permanently operates just one event away from a new price spike.

Twelve workers seized in Nigeria
Twelve workers, 11 of them foreign, have been kidnapped from a construction site in Nigeria’s oil-rich Niger Delta, a South Korean firm has said.

The eight Filipinos, three South Koreans and one Nigerian were taken at gunpoint from the Afam power plant 30km (20 miles) north-east of Port Harcourt.

Daewoo Engineering & Construction said the gunmen stormed the site at 0200 GMT and drove off with the workers. Nigeria’s oil output has dropped as foreigners are frequently kidnapped.

Militant groups say they want a larger share of oil wealth for locals.

Thousands of foreign oil workers have left Nigeria since the spate of kidnappings began early last year.

Staying with Africa, Zimbabwe has managed to achieve a new low, monthly inflation has reached a new high. The fiat-currency-gone-wrong example to all other fiat currencies, the other fiat operators simply pretend this can’t happen to them. Stay long gold and silver. On present policies it’s only a matter of when.

Zimbabwe inflation reaches 2,200%
Inflation in Zimbabwe reached a record 2,200% in March amid a deepening economic and political crisis.

This is the highest rate in the world. The figures had been due for release earlier this month but were delayed.

Zimbabweans spend any money they have as soon as they can, before prices rise even higher.

At least 80% of Zimbabwe’s population of about 13 million is living below the poverty line, according to figures from the Zimbabwe Congress of Trades Unions.

Central bank Governor Gideon Gono said the official exchange rate would remain 250 Zimbabwe dollars to US$1. But he announced a new rate of Z$15,000 for some exporters, international organisations, gold miners, tobacco farmers and remittances from expatriates.

Analysts say this amounts to an effective 60-fold devaluation but this was denied by Mr Gono.

“We have not devalued the dollar but sought ways to enhance the viability of foreign currency generators in a sector specific way,” he said.

Analysts say Mr Gono is trying to bring more foreign currency into the official economy instead of the black market, where the rate is Z$25,000 to $1.

We close for today noticing rising unease in the bond market. Spillover is trumping containment by the day. Stay long gold and silver as insurance. In today’s “all news is good news environment”, a harsh does of reality seems about to arrive later this summer. Below that, the Fed issues a warning on hedge funds. It’s LTCM deja vu they fear. And below that, despite higher
prices gold production is falling in South Africa.

Bond Investors’ Lament
Fallout as Moody’s, S&P
Cut Ratings on Issues
Tied to Subprime Loans
May 3, 2007; Page C1
More challenges are hitting bond investors who own securities backed by risky mortgages.

Over the past two weeks, Moody’s Investors Service cut credit ratings on more than 30 bonds that were issued in 2006 and backed by pools of “subprime” mortgages, home loans made to consumers with troubled or sketchy credit histories. The downgrades came as more borrowers defaulted on their mortgages and caused losses to spike among the pools.

More than half the bonds that were downgraded were originally rated “investment grade” but were cut to “junk” status, because they now are viewed as much more likely to lose money. A few bonds with weak ratings already have been eroded by losses, which means investors in those bonds probably won’t be repaid.

“It’s unusual to see downgrades in subprime deals so soon after they were issued,” said Jay Guo, a director of asset-backed securities research at Credit Suisse Group. “This is not a normal phenomenon and is a cause of concern.”

The downgrades also are focusing attention on the role of credit-rating companies in the subprime downturn. Their ratings play an important part in the process of creating the bonds and in how they are valued by investors.

“It’s embarrassing for a ratings company to downgrade bonds so quickly” after the bonds were issued, said Paul Ullman, chief executive of HFH Group, a New York hedge fund active in the mortgage market. “It reflects poorly on all parties in the underwriting process and their judgment of the credit-worthiness of the bonds.”

—- Moody’s Investors Service, a unit of Moody’s Corp., is reviewing 81 bonds for potential downgrade, including a few with double-A and triple-A ratings, where risk was supposed to have been minimal. The ratings company lowered a handful of ratings on 2006 bonds earlier in the year, but the recent series of downgrades and reviews has affected many more bonds and has
been more severe.

Hedge fund risks worst since ’98 crisis, Fed says
Wed May 2, 2007 11:40am ET
By Pedro Nicolaci da Costa
NEW YORK, May 2 (Reuters) – Hedge funds may now pose the biggest risk of a crisis since 1998, when the implosion of Long-Term Capital Management threatened the global financial system, the New York Federal Reserve said on Wednesday.

The statement represented the bank’s sternest warning to date over the possible fate of the $1.4 trillion industry.
“Recent high correlations among hedge fund returns could suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998,” according to a paper written by Tobias Adrian, capital markets economist at the central bank.

Back in 1998, the New York Fed helped bring together Wall Street tycoons who eventually cobbled together enough funds for an unprecedented $3.6 billion bailout.

The LTCM crisis was all the more shocking to investors because of the individuals involved, regarded highly for their market savvy and mathematical prowess.

—- The Fed’s latest worry arose from what it described as a rising correlation between the actual returns of hedge funds, which could point to similar trading strategies that excessively concentrate risk on too few market positions.

“Similar trading strategies can heighten risk when funds have to close out comparable positions in response to a common shock,” the economist Adrian wrote.

—- Hedge funds borrow large sums of money in order to take aggressive bets on financial markets. Many operate heavily in the derivatives market, estimated at around $17 trillion, raising fears about possible future shocks.

Gold Rises as Supplies From Mines Decline; Silver Advances
By Claudia Carpenter
May 3 (Bloomberg) — Gold rose, snapping a three-day drop, after Gold Fields Ltd. reported declining production at all but one its eight mines.

Gold Fields, the world’s fourth-largest producer, today reported a 3 percent drop in quarterly output. Gold prices climbed 23 percent last year as global mine supply fell to a 10- year low, according to London-based GFMS Ltd.

“If there is reduced supply, there will be more interest in gold,” said Anil Sharma, a trader in equity sales in London at Cantor Fitzgerald LP.
“The price would appreciate.” Gold for immediate delivery rose $1.85, or 0.3 percent, to $675 an ounce at 8:53 a.m. in London, after declining $8.40 in the first three days of this week. Silver rose 7 cents to $13.29 an ounce, also the first gain this week.

Bullion is benefiting from dwindling supply and “incredibly strong” demand from China, Gold Fields Chief Executive Officer Ian Cockerill told reporters today. Barrick Gold Corp. is the world’s largest gold producer, followed by Newmont Mining Corp. and AngloGold Ashanti Ltd.

At the Comex silver depositories there was no change yesterday. Final figures were Registered 80.68 Moz, Eligible 50.66 Moz, Total 131.34 Moz.

The NYSE WIN system is flat. Yesterday’s action generated a new sell signal to go short at tonight’s close. NASDAQ system is long. Yesterday’s action generated a liquidation signal to be flat by tonight’s close. Since playing a black box system in the current geo-pol/economic climate, isn’t the wisest thing to do, we will adjust long positions to carry an offsetting deep-out-of-the-money matching option position to provide an automatic fail safe stop in the event another 1987 like event occurs before the PPT can step in.

More details on the WIN system are available at link below.

The monthly Coppock Indicators finished April:
DJIA: 156 up. NASDAQ: 91 up. SP500: 131 up.
The NASDAQ turned down in February and has now turned back up. The DJIA is now moving higher again from sideways. The S&P continues to move higher. Technically, the PPT and their helpers have managed to turn the indicators bullish.

This week’s featured link: Galway Resources. TSX-V: GWY
Tungsten and Molybdenum.

Management is focused on developing three U.S. based exploration projects that are favorably located and have over 300,000 feet of historical drilling. We have established a solid technical team that is compiling all the historical data and are now advancing these projects in an aggressive but cost effective manner. Management believes that its strategic portfolio of properties offers investors an interesting exposure to a unique basket of commodities.

I have to thank Dr. Michael Berry for sending along the stock for consideration. More information is also available by contacting him.

A Personal Disclosure.
Over the last few months, many of the stocks we’ve linked to have made some interesting moves. Possibly because of the LIR link, more likely because of the underlying companies and good management. Going forwards, I expect the commodities demand cycle to last another couple of decades. I expect the pace of interest in natural resource stocks to quicken. I also expect many
junior resource stocks will become takeover or consolidation targets. I expect NAFTA based resource stocks to be especially prominent.

Where I hold a position prior to a company being featured as a link, this will be disclosed. Where I will be investing during the week of linking, this too will be disclosed.

In no event should my investing or not investing substitute for doing your own due diligence, if you are considering an investment in the stock.

My circumstances and resources are probably very different to other potential investors. All stocks linked in LIR, I consider to merit the link, whether or not I invest in the company. As before, neither LIR, Global Profiles nor myself get paid for featuring a link. Lastly, because I invest in a stock it does not necessarily turn it into a sure thing winner. Happily though, neither will my investing turn it into an automatic loser.

Below is the list of natural resource stocks I hold an interest in. In no particular order, they are:
Birch Mountain Resources Ltd. BMD.
Canadian Royalties Inc CZZ.
MacMillan Gold MMG.
Quaterra Resources Inc QTA.
MBMI Resources Inc MBR.
Candax Energy Inc CAX.
Derek Oil & Gas Corp DRK.
Consolidated Spire Ventures CZS.
Cornerstone Capital Resources Inc
Pacific Asia China Energy Inc.

If you have a junior resource company you think has merit and don’t mind sharing it with others, feel free to send it along. If space permits and they have no objections, we’ll try to put up a link.

Junior resource companies are not suitable for everyone, but for those who are interested in that sector, we aim to provide companies of merit. As the new century unfolds and natural resource demand soars, I think, that there will be big money to be made from prudent investment in the sector. As always, it’s important to do one’s own due diligence if thinking about making an investment. No one has more at risk in an investment than you do yourself.

If you like this report, feel free to share it with others. It is not copyrighted but open sourced. If you have comments, witty remarks, or information to share, please send them along as well. If permission is granted, we may use them in this report.

Sometimes the daily LIR gets “bounced” out of the receiver’s server. When this happens it sometimes bounces you out of the LIR database as well. If you suddenly stop receiving the daily update but didn’t actually want a break from my daily insanity, just email me at the link below to get back onto the daily list.

Graeme Irvine

Global Profiles LLC


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