London Irvine Report May 10, 2007

The Age of Resource Nationalism.

The herd instinct among forecasters makes sheep look like independent thinkers

Edgar R. Fiedler

Yesterday the Fed gathered, deliberated, and did what they do best, nothing. The drift towards recession goes on. There was some mild nonsense about watching inflation, but if they really wanted to do anything about inflation, they would plunge the US economy into instant recession, and probably trigger the collapse of the struggling real estate sector, in turn setting off the feared collapse of the global derivatives bubble. Doing nothing passes the imploding real state buck back to the politicians in
Washington and various state capitals. Words not deeds are the order of the day.

Clearly they didn’t notice this report yesterday on Bloomberg.

Home Prices Fall in Rich New York Suburbs Once Immune to Slump
By Bob Ivry
May 9 (Bloomberg) — The U.S. housing slump has hit New York City’s richest suburbs.

The average price in Westport, Connecticut, home of chief executive officers Herbert Allison of TIAA-CREF and Jeffrey Kindler of Pfizer Inc., and actor Paul Newman, fell 8.2 percent to $1.56 million in the first four months of 2007 from the same period last year, according to multiple listing service data. In Chappaqua, New York, where Bill and Hillary Clinton live, properties sit on the market an average of seven months before they sell, up from five months a year ago.

Wealth and excellent credit have until now spared bedroom communities in New Jersey, Connecticut and New York’s Westchester County from declines in home prices. Now the tightening of credit in response to rising subprime defaults has disrupted the real estate food chain, bringing the national housing slump to Manhattan’s doorstep. Prices fell as much as 18.8 percent this year
in 15 of the 24 areas in which data was collected.

Over to London for today’s BOE meeting. They are generally expected to raise their key interest rate by ¼%. Next month the ECB is expected to do the same, probably sending France’s incoming President into a high dudgeon gallic rage. Stay long precious metals, there is the unmistakable sense of drift towards a coming crisis.

This morning the FT reports on the dangers from rising resource nationalism. The west is being shut out of much of the world’s producing area’s of oil. The same could be said to a lesser extent about several of the base metals. Below, the FT reports the PFC Energy warning on oil. To me, NAFTA based resource companies look better by the day. Re-working “old” oil in the USA
too, is probably an industry on the rise. Canada’s oil sands take on added strategic significance by the month.

Politics of oil seen as threat to supplies
By Sheila McNulty in Houston
Published: May 9 2007 22:01
Increasing state ownership and rising resource nationalism are emerging as the main long-term threats to global oil supplies, says a report for the industry by an energy consultancy. The report by PFC Energy highlights the shift in power towards state-controlled national oil companies. Multinationals own or have access to less than 10 per cent of world oil resources.

Resource nationalism, which is limiting access for international oil companies, and the national oil companies’ failure to reinvest profits in production, are limiting outlay required to replace existing resources, which are being substantially depleted.

Robin West, chairman of PFC Energy said: “The concern is not that the world is running out of oil, but rather it is running out of oil production capacity.”

The PFC study shows political factors are limiting capacity increases in Mexico, Venezuela, Iran, Iraq, Kuwait and Russia. Saudi Arabia is also limiting capacity expansion but because of a self-imposed cap, unlike the other countries. These seven account for 65 per cent of the world’s reserves and 45 per cent of crude oil production.

—-Before 1961 the industry could invest almost anywhere except the Soviet Union and Mexico. Then it was pushed out of the Middle East and Venezuela. Investment by international companies shifted to the North Sea, north slope of Alaska and offshore. But the North Sea and Alaska are maturing even as output in key producers is declining.

Mr West said: “Should demand outstrip supply, you will have a run-up in prices, massive demand destruction and substitutions. It will create tremendous pressures in the international petroleum system, the international economic system, the international political system.”

Elsewhere Russia’s “Vlad the Bad” is at it again bashing America. Flush with petro roubles, riding high in the Russian opinion polls, one half of the dominant and rising Eur-Asian colossus, and self sufficient in energy, metals, and technology, Russia’s President served renewed notice again that it’s not the 1990’s anymore. It’s not a uni-polar US dominated world. Give Russia the respect he feels its due. Stay long the precious metals. The world as we knew it is passing.

Putin takes swipe at US and Estonia
By Robert Anderson and Catherine Belton in Moscow in Tallinn
Published: May 9 2007 22:33
Vladimir Putin used the annual celebrations of the defeat of the Nazis in Red Square to make veiled criticisms of the US and Estonia.

The Russian president renewed attacks on what he calls US unilateralism, saying there were “new threats” based on “the same disregard for human life and the same pretensions to international exclusivity and diktat as in the Third Reich”. Speaking only days before Condoleezza Rice, US secretary of state, is due to visit, Mr Putin said only “equitable partnership’’ and “common responsibility’’ would prevent ”the next armed conflict and attempts to shatter world peace”.

In a thinly masked attack on Estonia over its relocation of a Red Army monument, Mr Putin said: “Those who are trying to belittle this invaluable experience, those who desecrate monuments to the heroes of the war, are insulting their own people and sowing discord and new distrust between states and people.”

Estonia’s move sparked riots in Tallinn, the capital, that left one dead and 153 injured.

For Russia, which lost 27m people during the war, the defeat of Hitler’s Germany is one of its proudest moments. Russians make up about one third of Estonia’s 1.3m people but to many Estonians the statue is a symbol of a half century of Soviet rule.

—–Vladimir Putin has embarked on a seven-day trip to Kazakhstan and Turkmenistan seeking to broaden energy co-peration and beat off competition for central Asian natural gas, Isabel Gorst reports from Moscow.

The Russian president flew yesterday to Astana, the Kazakh capital, and is due to visit Ashkhabad, the Turkmen capital.

“Co-operation with central Asia is one of the main priorities in Russia’s energy strategy,” said Andrei Reus, Russia’s deputy minister of industry and energy.

Russia and Kazakhstan are expected to sign a series of deals during Mr Putin’s visit related to natural gas processing, pipelines, coal, electricity and uranium.

With Russia and China increasingly setting the natural resource agenda, it’s mega merger time in the west. Below, the latest rumoured merger among giants, though it might just prove the merger too big for many regulators. Presumably part of the logic is to get in on the cheap, before the new Chinese investment fund start playing the field. Another unintended consequence of fiat money. The first generation got a free ride and a subsidy from fiat money. The next generation will lose their jobs and gets
delivered the bill.

Rio Tinto shares soar amid talk of BHP takeover
By Tom Stevenson Last Updated: 1:21am BST 10/05/2007
Rio Tinto shares soared by more than 20pc in feverish late trading as investors placed bets on a $100bn (£50bn) bid for the mining giant from rival BHP Billiton or a private equity buyer.

Rumours suggested BHP was planning a hostile offer after Rio had rebuffed a friendly approach.

—-With a combined value of around $250bn, it would create the world’s fifth largest company behind Exxon, General Electric, Microsoft and Citigroup.

—–Forced by the Australian Stock Exchange to comment on the sharp rise in its share price, Rio said it was “not aware of any takeover approach from BHP Billiton”. BHP refused to comment.

The mining sector has been a major beneficiary of soaring demand from developing economies in China and India. This has come after years of underinvestment in mines. While world prices languished supply has struggled to keep up.

Prices for many metals have soared in recent years. Bid speculation was triggered by a research note from Citigroup last week
which said that Rio’s strong cashflow might make it an attractive takeover target. It said BHP was a likely bidder because of synergies between the two companies, especially in iron ore and copper.

Speculators dream of a $100bn strike at Rio
By Tom Stevenson Last Updated: 2:23am BST 10/05/2007
The M&A roulette wheel has spun round in spectacular fashion to Rio Tinto as traders place their bets on a $100bn (£50bn) bid for the mining giant from either its bigger rival BHP Billiton or a private equity buyer.

It is a sign of the frenetic state of the market’s merger mania that Rio’s shares should have risen by 20pc at one stage yesterday afternoon despite an unequivocal denial from the company that it had received an approach from BHP.

It is perhaps even more surprising that the rumours sweeping the markets from Sydney to London yesterday appeared to have been triggered by nothing more than a kite-flying note from an investment bank; a note that was more than up-front about the likely competition hurdles the putative mining merger would face.

—–A combination of relatively undemanding valuations and bullish projections for metals prices mean the giant mining combines feature strongly on any banker’s takeover screens. That provided a fertile backdrop for Citigroup’s provocative note headed
“Could BHPB bid for Rio?”. More grist was added to the rumour mill by a Merrill Lynch mining conference in Dublin at which the outgoing BHP chief executive Chip Goodyear was said to have been dining with the incoming Rio boss Tom Albanese.

—–Citigroup’s hypothetical model involves a $100bn bid, half funded by debt. Even assuming a 30pc bid premium, Citigroup believes BHP could make the numbers stack up with ease. It forecast a 7pc increase in BHP’s earnings per share in 2008 and 2009 as a result of a deal.

Thanks to the industry’s excellent cash generation, and buoyant metals and energy prices, BHP would still emerge debt-free within five or six years, Citigroup analyst Clarke Wilkins predicted. The bank forecast annual cost savings of $500m.

Other mining experts are less convinced. John Meyer at Numis said any deal would be certain to run into competition problems. He estimated that the two companies accounted for more than 75pc of the world’s sea-borne iron ore. Citigroup also believed that concentration in iron ore presented the biggest stumbling block to a deal.

—–Prices of metals have soared because of supply bottlenecks after years of under-investment by the industry. Rather than invest in new supply, companies have chosen to cash in on buoyant markets through consolidation.

Staying with commodities, the US the commodities regulator says Marathon Oil may have been manipulating crude oil prices lower. Silver investors will watch this action with glee. The great 20 year silver and gold bear raid
looks more and more like it will be coming to its overdue end. If true, was
Marathon fronting for the Fed?

U.S. Probes Crude-Price Manipulation
Marathon Disclosure
Signals CFTC Scrutiny
May Be Gaining Steam
May 10, 2007; Page C2
Federal regulators are examining whether companies are manipulating crude-oil prices by engaging in a flurry of after-hours trades that push the prices higher or lower on a widely used reporting system, according to a regulatory filing and traders informed of the probe.

In the first indication of pending enforcement action, Marathon Oil Corp. disclosed this week that the Commodity Futures Trading Commission is recommending an enforcement action against one of its units. The action concerns an alleged attempt to manipulate the price of West Texas Intermediate crude oil through bidding activity in what’s known as the cash market for physical shipments of oil.Marathon says it “intends to vigorously defend the proposed enforcement action.”

The move comes amid growing regulatory scrutiny of energy markets due in part to rising prices. It is unclear whether the activity in question would have affected the price consumers pay for oil and products like gasoline. In some cases, manipulations can push a price down.

The case is part of a broader look by the commission, which regulates energy markets, into how trades in certain crude-oil instruments are conducted and reported to Platts, an energy information provider and unit of McGraw-Hill Cos. Regulators are seeking to determine whether activity by a variety of players who report to Platts also may have affected futures prices in the
main public energy-trading forum, the New York Mercantile Exchange. Billions of dollars in physical energy sales and derivatives based on Platts’ pricing assessments.

—-At issue: a little-known trading mechanism known as the Platts window. For a 30-minute period after trading stops on the floor of Nymex, participants in the U.S. cash market for various types of crude oil can report their trades through Platts, which reveals the traders’ identity and details of the transaction. The prices in the window are supposed to be representative of trading for the whole day.

Investigators are concerned certain large traders engage in a flurry of activity in a short period before the window closes to influence where the final price is “assessed,” and that they may even reverse the trades later. Some big oil companies have complained to Platts and to regulators about gamesmanship in the current system in the U.S., lawyers familiar with the
discussions say.

In political news, the leader of the world’s biggest debtor and its largest creditor, held a talk before the upcoming second leg of their bilateral economic meeting in Washington. From London it looks like dressing the stage and upping the ante on the debtor. Below, is China signalling displeasure? Is the falling dollar now causing pain? For now, each needs the other about equally, but with each passing year this gets less true. I suspect a messy divorce some months after the Beijing Olympics are over. I
suspect that the yaun will go convertible some time in 2009.

Chinese, U.S. presidents talk on phone on bilateral relations, int’l issues
BEIJING, May 9 (Xinhua) — Chinese President Hu Jintao and his U.S.
counterpart George W. Bush Thursday exchanged views in a telephone conversation on bilateral relations and the upcoming second round of strategic economic dialogue between the two countries.

On bilateral relations, both Hu and Bush considered that China-U.S. relations have been kept in a momentum of favorable development and that the two sides should beef up dialogue and cooperation, to promote healthy and stable progress of the constructive and cooperative relations between the two countries.

President Hu appreciated the U.S. government’s active attitude toward the development of China-U.S. economic and trade cooperation.

He stressed that the successful holding of the first round of China-U.S. strategic economic dialogue, which was launched in Beijing last September, shows that under the backdrop of rapid development of economic globalization, China and the U.S. can enhance mutual understanding and trust through frank and sincere dialogue, properly settle problems arising from bilateral economic and trade cooperation, promote steady development of bilateral economic and trade relations, and play active roles in global economic development and prosperity.

Talking about the upcoming second round of strategic economic dialogue between the two countries, Hu said he believes that with concerted efforts by both sides, positive achievements will be scored in this round of dialogue, which will contribute to giving fresh impetus to China-U.S. economic and trade cooperation.

For his part, Bush said that U.S.-China strategic economic dialogue is of great significance, which indicates that the two countries are willing to settle the relevant problems through high-level dialogue.

Chinese official slams U.S. report on religious freedom
BEIJING, May 10 (Xinhua) — A senior Chinese religious official has criticized a U.S. religious body’s annual report of making groundless accusations against China and twisting the country’s religious policies.

Qi Xiaofei, deputy director of the State Administration of Religious Affairs, said the U.S. panel watched religious freedom in other countries through “reversed binoculars”, seeing the outside world as “small and ugly.”

In a commentary carried by the People’s Daily Overseas Edition on Thursday, Qi said that part of the report, released by the U.S. Commission on International Religious Freedom (USCIRF), which took aim at China’s religious policies, shows once again the panel’s “ignorance and prejudice.”

The report will not have much of a negative impact to China, which “stands on its ground upright”, and most of the people will simply brush away its repeated rhetoric, he added.

On Tuesday, Chinese Foreign Ministry spokeswoman Jiang Yu expressed the government’s “strong dissatisfaction” and “firm opposition” to the report

At the Comex silver depositories yesterday, a net 424,570 ozs was withdrawn from Eligible at Scotia Mocatta, a net 20,622 ozs was withdrawn from Eligible at Brinks. Final figures were Registered 80.68 Moz, Eligible 51.22 Moz, Total 131.91 Moz.

The NYSE WIN system is short. NASDAQ system is flat. 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: Frontier Pacific Mining Corporation. TSX.V: FRP

Frontier Pacific Mining Corporation (TSX.V – ‘FRP’) is a mineral exploration and development company based in Vancouver B.C. The Company is focused on gold and uranium projects in Europe and the Americas.

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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