London Irvine Report May 11, 2007

Spillover.

“Taxing less and spending more… it’s fun in the short run, but it’s a recipe for disaster”.

Bill Clinton. 42nd US President.

It is bunker time, the sky is starting to fall in the USA and China’s stock market looks set to self destruct shortly ahead. It is time to let others carry the risk. In Europe, Britain is 47 days away from Blair Freedom Day, but far from being an improvement the country looks like it will be turned over to old socialist, chip on the shoulder, class warrior, Gordon Brown. Endearingly called “Stalin” by his cabinet colleagues. In France, they are a week away from a new President, who’s declared policies threaten a return to the riots and anarchy of May 1968. Back then, President De Gaulle was driven from office and into unofficial exile in Ireland by rioting students and mass union opposition. In Portugal, Spain, Italy and Greece, there are real concerns about their ability to remain in the euro currency union. Of all the stormy concerns, it is the USA and China that threaten to bring down the sky soonest.

We open below with signs that the troubles of real estate are spilling over into the wider US economy. Below, Wal-Mart sales suffer a slump. When US consumers undergo a reverse of wealth they downsize to Wal-Mart, K-Mart and Sears, but the most aggressive of those is Wal-Mart. If Wal-Mart’s sales are in trouble, US consumers are hitting the wall, pardon the pun. Stock market highs or not, it’s time to pass risk on to others. Stay long gold and silver, fiat money is about to undergo its first real test since the mid 70’s.

Wal-Mart posts worst sales ever as US retail figures slump David Teather Friday May 11, 2007 The Guardian Wal-Mart, the world’s largest retailer, yesterday posted its worst monthly sales figures since its records began in 1980.
The company said same store sales fell 3.5% in April on the same month a year ago. Same store sales measure the performance of stores that have been open for at least 12 months.

But Wal-Mart was not the only US retailer turning in a poor performance in April, triggering fears that the US housing slump might be spilling over into consumer spending and that the economy might be taking a turn for the worse.

Federated Department Stores, the company behind Macy’s and Bloomingdale’s, reported a 2.2% fall in April sales. The Gap continued to underperform, posting a 16% drop in sales – the retailer’s long-running difficulties led to the departure of its chief executive in January. Abercrombie & Fitch, the clothing brand that recently opened in London, said April sales were down by 15%. The discounter Target, Wal-Mart’s biggest rival, reported a 6.1% decline in same store April sales.

The UBS International Council of Shopping Centres tallies the results of more than 50 of the leading retailers in the US and said combined sales in April had declined by 2.3%, the biggest drop since the index was first started in 1970.
“The slowdown is at hand,” said chief economist at the council Michael Niemira.
The retail slowdown unnerved Wall Street and the Dow Jones industrial average closed down 147 points, or more than 1%, at 13,215 points. America’s widening trade deficit also contributed to economic worries.
http://business.guardian.co.uk/story/0,,2077148,00.html

Rumoured to get quarter of a million a speech, former Guru Greenspan was video speechifying in Singapore this morning. The great man who can only see a bubble after it’s burst, doggedly stuck by his February forecast odds of a US recession ahead. Spun in the media as a bet against a US recession, 2 to 1 odds might not sound like a lot when betting on a horse, but it’s as near as a dead cert as a dead cert will ever be, to a central banker. Bad things look like happening in the US economy from here. Who’d want 2 to 1 odds that they won’t have a car wreck today.

Greenspan sees one-third chance of U.S. recession Fri May 11, 2007 12:35AM EDT By Mia Shanley and Kevin Yao SINGAPORE (Reuters) – Former U.S. Federal Reserve Chairman Alan Greenspan said on Friday he still believed there was a one-third chance that the U.S. economy would slip into recession this year, reiterating a statement made in March.

Greenspan shook markets in February when he said it was possible the U.S.
economy might fall into recession by the end of the year. He later said he saw a one-third chance of a recession.

“My arithmetic says if there’s a one-third probability of a recession, then there’s a two-thirds probability there won’t be a recession,” Greenspan told a closed-door Merrill Lynch investor forum, according to an official at the U.S.
investment bank.

—-Greenspan spoke via a satellite link from Washington. His remarks contrast with those of Ben Bernanke, the Fed’s chairman, who has played down the risk of a recession.
Commenting on the strength of the Chinese currency, the yuan or renminbi, Greenspan said China, the world’s fourth-largest economy, would bear the brunt of its artificially weak currency and that money supply was growing too rapidly.

“It’s in China’s self-interest to allow the renminbi to move up faster,” he was quoted as saying.
http://www.reuters.com/article/businessNews/idUSSIN32357620070511

In China news, “good news” for the dollar for a change. Stating the obvious, the PBOC has no plans to sell their 1.02 trillion FX reserves out of the dollar. Unfortunately they also seem to be saying they have no plans to add more either. I find it hard to believe they can seriously diversify incoming new trade surpluses. They are simply too large and arrive too fast. I suspect China is doomed to keep piling up new dodgy dollar surpluses until they own more of America than Americans. I suspect they won’t willingly rock the boat until after the Beijing games. The rest of us have a little over a year to offset dollar risk.

China’s central bank to retain dollar reserves BEIJING, May 11 — The central bank said yesterday that the country will not sell large amounts of U.S. dollar-denominated assets to diversify its foreign exchange reserves.

The People’s Bank of China also warned of a risk of rising inflation and a rebound in investment as the economy steamed ahead in the first quarter, growing by 11.1 percent year on year.

Authorities have said the country will diversify part of its foreign exchange reserves, which amounted to 1.02 trillion dollars by the end of March and are believed to be invested mainly in dollar bonds.

The central bank said it will mainly address the issue of newly added reserves by widening the foreign currency investment channel and reaffirmed the importance of its U.S. dollar-denominated assets. They will remain an important part of China’s outbound investment, the bank said in its monetary policy
report for the first quarter, which was published on its website yesterday.

The bank also said it would keep the yuan basically stable at a reasonable level.

The bank warned in the report that the country faced the risk of inflation and of a rebound in investment, and that it must prevent the economy from overheating.

In the first quarter, urban fixed asset investment grew by 25.3 percent year on year, 0.9 percentage points faster than in the first two months.
Meanwhile, the consumer price index rose by 2.7 percent year on year, but in March the index grew by 3.3 percent, bypassing the alarm level of 3 percent set by the central bank.

In another development, the State Administration of Foreign Exchange (SAFE) announced yesterday that the country’s current account surplus hit 249.9 billion dollars last year, an increase of 55 percent over the 2005 level of
160.8 billion dollars.
http://news.xinhuanet.com/english/2007-05/11/content_6083732.htm

China’s monthly trade surplus rebounds in April BEIJING, May 11 (Xinhua) — China’s trade surplus in April more than doubled the figure of March to 16.88 billion U.S. dollars, though the country’s exports grew slower and imports rose faster over the past month, according to the General Administration of Customs.

But the figure was still a drastic decline from February’s 23.7 billion U.S. dollars, the second-highest monthly level on record.

Zhang Yansheng, an economist with the National Development and Reform Commission, said that the seesawing monthly surplus figures have indicated the uncertainty in China’s trade growth.

—-The administration said the aggregate surplus for the first four months has reached 63.31 billion U.S. dollars, with the April exports growing at a slower
26.8 percent to 97.45 billion U.S. dollars and imports, at a faster 21.3 percent to 80.57 billion U.S. dollars.

But experts argue that the adjustment remains minute. The rising yuan which has appreciated 5.4 percent accumulatively to 7.6835 against one U.S. dollar since the 2005 exchange rate reform, coupled with high crude oil prices and rising local production costs, should theoretically put Chinese exports into an increasingly unfavorable position, they said.

Mei Xinyu, a trade expert with the Ministry of Commerce, attributed the robust exports to the brisk world market demand. Given that a lion’s share of China’s exports are made by foreign-invested processing companies, their production won’t be easily affected by the rising yuan or changing production costs.

—-The European Union remained the country’s top trading partner, seeing its trade with China reach 103.6 billion U.S. dollars in the first four months of 2007, up 29.5 percent from the same period of last year, the customs data show.

The United States was second with trade volume reaching 91.87 billion U.S.
dollars, followed by Japan and the Association of Southeast Asian Nations.
http://news.xinhuanet.com/english/2007-05/11/content_6084625.htm

But the sky might soon start falling in China too. Goldman sees “market euphoria” in their stock market, the updated buzz words for the 90’s “irrational exuberance”. “Sell in may, go away” has never looked more attractive advice this morning.

Goldman Sachs: China at risk of “market euphoria”
By Polya Lesova, MarketWatch
Last Update: 2:56 PM ET May 10, 2007
NEW YORK (MarketWatch) — China’s booming A-share market could turn into a bubble if speculation among exuberant domestic retail investors is not curbed, Goldman Sachs warned Thursday, as the Shanghai Composite Index hit yet another intraday record high.

“Market trading statistics, liquidity indicators, and anecdotal evidence all point to optimistic, if not exuberant, sentiment in the domestic market,” said Thomas Deng, analyst at Goldman Sachs, in a Thursday research report.

“As speculation continues to be nurtured among domestic retail investors, we see genuine risks of market euphoria materializing if regulators fail to step up their efforts to contain market irregularities,” Deng said.

Other financial firms, including UBS Securities, as well as Governor Zhou Xiaochuan of the People’s Bank of China have also expressed concern in recent days about the possibility of a bubble forming in the stock market.

“A-shares are at the beginning of a bubble, and could go even higher before the eventual reversal,” said Henry Ho, strategist at UBS Investment Research in a May 7 research note.

“Liquidity and sentiment seem irrationally high, but does not appear to abate,”
Ho said. “At this stage, we believe the self-correcting mechanism of stock market is also not able to reverse the overpricing.”

—-On Feb. 27, the Shanghai Composite tumbled nearly 9% on fears that the Chinese government would intervene to slow down the market. The move sparked a sell-off on markets around the world. Read more.

Despite its February plunge, the index recovered its losses and is currently up a whopping 51.3% year-to-date, making China the best performing stock market in the world.
http://www.marketwatch.com/news/story/goldman-sachs-china-risk-market/story.aspx
?guid=%7BEF44CF90%2D18BC%2D46E3%2DA096%2D62E0297C9EA0%7D

Elsewhere in Asia the liquidity boom roars on. Below the latest news from India. But is it all enough to make up for a US on 2-1 odds of a recession?

India’s Production Growth Unexpectedly Accelerates By Cherian Thomas May 11 (Bloomberg) — India’s industrial production growth unexpectedly accelerated in March, as the highest interest rates in five years failed to damp consumer spending.

Output at factories, utilities and mines gained 12.9 percent from a year ago after a revised 10.8 percent increase in February, the Central Statistical Organisation said in a statement in New Delhi. Economists expected a 10.4 percent rise.

Faster-than-expected production growth suggests it may take longer for the Reserve Bank of India’s interest-rate increases to damp the enthusiasm of consumers, who last year received the highest wage rises in Asia. Central bank governor Yaga Venugopal Reddy expects the lagged effect of previous rate increases to reduce spending and slow growth this year.

—-Moody’s Investors Service last month said India’s $854 billion economy was showing “classic signs of overheating” including higher-than-acceptable inflation and rapid rupee appreciation driven mainly by strong capital flows.

India’s central bank April 24 forecast economic growth to slow to 8.5 percent in the year ending March 31, from 9.2 percent in the previous year. China’s economy is expected to expand 10 percent this year, according to the International Monetary Fund.

—–Merrill Lynch & Co. and Franklin Resources Inc. are increasing purchases of Indian government debt, predicting the central bank will end the cycle of nine interest-rate increases since Oct. 2004.

DSP Merrill Lynch Fund Managers Ltd., a unit of New York- based Merrill, last fortnight raised 2.8 billion rupees ($68 million) for its first Indian bond fund since 2002. Franklin Templeton India, part of the San Mateo, California-based money manager, doubled holdings of benchmark debt in one of its funds in March. The increase in demand for the securities may bolster prices for Indian bonds, which have slumped since 2004.
http://www.bloomberg.com/apps/news?pid=20601087&sid=avKJahBd_c54&refer=worldwide

With uncertainty hanging over the US economy and signs that the Chinese authorities are getting ready to act to cool their overheating economy, speculators and users are bailing out of base metals. To me it looks like the long term commodity bull market might be in for one of those periods of high volatility. On 10-1 margining, leverage that worked to enhance profits on the way up, wracks up losses equally fast on the way down. Is another Amaranth shaping up?

Copper Heads for Largest Weekly Drop in 3 Months; Nickel Falls By Brett Foley and Chanyaporn Chanjaroen May 11 (Bloomberg) — Copper headed for its largest weekly decline in three months in London on speculation demand growth will slow in China, the world’s biggest user, after imports soared. Nickel and zinc also fell.

Deliverable stockpiles of copper monitored by the Shanghai Futures Exchange increased 26 percent to 85,269 metric tons, the exchange said today. That’s the highest since May 2004. Imports of the metal into the country may slow in April, said analysts including Kevin Norrish at Barclays Capital.

“The Chinese market is suffering temporary indigestion after the amount of material delivered into Shanghai in the first quarter,” Norrish said today by phone from London. “Some people expected them to buy this week when they returned to the market after the holiday, but that hasn’t happened.”

Copper for delivery in three months on the London Metal Exchange dropped $95, or 1.2 percent, to $7,795 a metric ton as of 8:53 a.m. local time. That would be a 6.3 percent weekly decline, the largest since Feb. 2. The same day a year ago, the contract traded at a record $8,800 a ton.
http://www.bloomberg.com/apps/news?pid=20601012&sid=aJAo.BFelVa0&refer=commoditi
es

In oil news, this just might be the weekend the west finally loses out in the great game for central Asia’s oil and gas. Energised by the west prising the Ukraine from Russia’s orbit, Russia and China stepped up cooperation and set about to tie up the Central Asia Republic’s energy resources. London and Washington essentially were asleep. At this point it’s hard to see the west staging a comeback. President Putin’s visit may finalise the deal. All will be watching the final announcements closely. Will it be game set and match, or merely game and set?

Putin starts C Asia energy tour
By Malcolm Haslett
BBC News
Russian President Vladimir Putin has started a week-long trip to Central Asia’s two prime gas and oil exporters, Kazakhstan and Turkmenistan.

He is due to meet the presidents of both countries on Thursday for tripartite talks on energy supplies.
Kazakhstan has always remained quite close to Russia in its foreign policy.

The recent death of Turkmenistan’s idiosyncratic president has also seemed to open the way for a return to closer relations with Russia.

Yet each of the three presidents will have different aims. For President Putin, the meeting is a chance to reinforce Russia’s argument that it is the natural friend of Central Asia, not the newcomers on the scene – the West and China.

Russia’s is pushing the idea of a new pipeline which will carry Turkmen gas across Kazakh and Russian territory to Europe.
That would enhance Russia’s already dominant position as the main route for Caspian energy supplies to the West.

Kazakh President Nursultan Nazarbayev has long lived with the need to stay close to Russia diplomatically, to keep Kazakh oil and gas flowing westward.

And he seems relaxed about continuing that way, though not averse to exploring other possibilities.

Kazakhstan already sends a significant amount of oil by ship across the Caspian, for transportation along the one major route that bypasses Russia, the Baku-Ceyhan pipeline through Azerbaijan, Georgia and Turkey.

Azerbaijan would like to expand that route further and build an under-water pipeline across the Caspian, but Kazakhstan, aware that this might seriously annoy its Russian partners, has refused to give its full support.

The real unknown in the tripartite meeting is the position of Turkmenistan’s new leader, President Gurbanguly Berdymukhamedov.

Some think he is willing to revive co-operation with Russia, and go along with the pipeline through Kazakhstan.

And yet only last week, the Turkmen leader granted US oil giant Chevron access to the Turkmen sector of the Caspian Sea.
http://news.bbc.co.uk/2/hi/asia-pacific/6641103.stm

Another weekend and the people of Britain are in shock and awe at the prospect
of life without Blair. Well the people at the BBC anyway, who always made the
first “B” stand for Blair from about 1994. Sensible Britons will use the
period between now and June 27, to visit Geneva and Zurich to acquaint
themselves of discrete international banking. The rest of us can only hope
that the Bilderbergers meeting in Istanbul May 31 – June 3, pick someone better
than Stalin to govern Britain after the next general election. TB was never
meant to hand over to GB until after he lost the next election. What a downer
for the elite. Have a great weekend everyone. The European F1 season opens in
Spain on Sunday.

At the Comex silver depositories yesterday, 373,555 ozs was withdrawn from
Eligible at Brinks. 14,932 ozs was withdrawn from Registered also at Brinks.
Final figures were Registered 80.67 Moz, Eligible 5o.85 Moz, Total 131.52 Moz.

The NYSE WIN system is short. Yesterday’s action generated a liquidation
signal to be flat by tonight’s close. The 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.
http://website.lineone.net/~audluk/tocframe.htm

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.

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.
http://www.frontierpacific.com/

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. http://www.birchmountain.com/
Canadian Royalties Inc CZZ. http://www.canadianroyalties.com/en/
MacMillan Gold MMG. http://www.macmillangold.com/
Quaterra Resources Inc QTA. http://www.quaterraresources.com/
MBMI Resources Inc MBR. http://www.mbmiresources.com/
Candax Energy Inc CAX. http://www.candax.com/
Derek Oil & Gas Corp DRK. http://www.derekoilandgas.com/s/Home.asp
Consolidated Spire Ventures CZS. http://www.spireventures.com/pmt.php/index
Cornerstone Capital Resources Inc
http://www.cornerstoneresources.com
Pacific Asia China Energy Inc.
http://www.pace-energy.com

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
girvine@globalprofiles.net
http://www.globalprofiles.net

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: