London Irvine Report May 24, 2007

“Clearly Unsustainable”.

“As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact — that is, when its bursting confirmed its existence. Moreover, it was far from obvious that bubbles, even if identified early, could be pre-empted short of the central bank inducing a substantial contraction in economic activity — the very outcome we would be seeking to avoid.”

Allan Greenspan. Ex Guru.

The world’s leading ex-Guru in economics was warning the elite of Madrid yesterday, via video link, of the dangers coming from China’s stock market bubble. The great economist who as Fed Chairman pontificated that you can only see bubbles after they’ve burst, in private practise now has a new crystal ball and now sees bubbles well in advance. Will the Damascene conversion now lead to his re-advocating gold?

Speaking of the 90% rise this year in China’s leading stock index , the CSI 300, ex-Guru Greenspan is widely reported in the press this morning as saying “It is clearly unsustainable. There is going to be a dramatic contraction at some point.” The envelope with the quarter of a million dollare cheque please.

Below, Reuters reports on his forecast of a “dramatic drop” ahead.

Greenspan Says China Stocks May Post `Dramatic’ Drop
By Joao Lima and Simon Kennedy
May 23 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said he was concerned Chinese stocks might undergo a “dramatic contraction” after its main stock index jumped more than 90 percent this year.

The benchmark CSI 300 Index, which tracks yuan-denominated A shares listed on China’s two exchanges, rose to a record 3938.95 today. The index more than doubled last year as investors bet corporate profits would be boosted by the world’s fastest-growing major economy.

“It is clearly unsustainable,” Greenspan told a conference in Madrid today by satellite. “There is going to be a dramatic contraction at some point.”

China last week increased the amount it lets the yuan move against the dollar and raised interest rates to restrain economic growth and a swelling trade surplus.
http://www.bloomberg.com/apps/news?pid=20601089&sid=aKAZRfGA3TT8&refer=china

In Washington-Beijing news, the Strategic Economic Dialog talks ended distinctly underwhelming. They came, they smiled, and tried their best to spend $20 billion. Well on their way to becoming the world’s largest creditor, life is sweet for China. Below, the world’s largest debtor is feeling the heat. The world, but especially China, owes them the highest living standard on the planet. Squeezed by the never ending discretionary war, America’s politicians are edging closer to playing the protectionist
card against China. But will it work better than in the 1930’s? Somehow I doubt it, once retaliation kicks in. Besides, just move the factory to Vietnam.

Congress Fumes
As China Talks
Show Few Gains
Lawmakers Will Grill
Officials on Trade, Yuan;
Threats, Not Theatrics
By MICHAEL M. PHILLIPS
May 24, 2007; Page A1
WASHINGTON — It looks like the bad cops will do it their way.
The good cop/bad cop routine the U.S. has been playing with China — with the Treasury secretary preaching dialogue while Congress threatens to penalize Beijing for its trade policies — may end with angry lawmakers stepping in to retaliate, after two days of talks produced no major breakthrough.

A second round of sweeping economic discussions ended yesterday with only a short list of accomplishments: new air routes between the U.S. and China, slightly more access to Chinese markets for U.S. financial-services firms and the possibility of greater exports of U.S. clean-coal technology. But Treasury Secretary Henry Paulson failed to secure an agreement to combat
copyright piracy or win concessions in the area that raises the most hackles in Congress: Beijing’s practice of keeping the yuan weak against the dollar.

Nonetheless, the Treasury secretary claimed victory, if in subdued terms. “I happen to think that dialogue is good,” he said in an interview after the negotiations. “I have never postulated that by doing the dialogue we would avoid trade legislation.”

Indeed, even as the Chinese delegation went to Capitol Hill for face-to-face talks with congressional leaders, lawmakers signaled that they intend to move ahead with legislation punishing Beijing for its currency policies. “We’re not happy with China’s actions to date regarding currency,” said Democratic Rep. Sander Levin of Michigan, chairman of the House trade subcommittee.
http://online.wsj.com/article/SB117993131465712107.html?mod=home_whats_news_us

Meanwhile today’s WSJ focuses on the employment health of the US economy.
The official figures may be wrong after all. Few serious investors take government statistics at face value any more, most are so over massaged as to be as helpful and relevant as statistics in the old USSR. Below the Journal suggesting consumer spending trouble ahead, so why is the PPT still buying up high priced stocks?

Job Market’s Strength May Have Been Overstated
By SUDEEP REDDY
May 24, 2007; Page A2
As the nation’s economic growth has slowed over the past year, the labor market has remained robust, and the jobless rate is hovering near a six-year low.

But some economists believe the true employment picture may be less rosy, amid new signs official data may have overstated job growth.

—–The bureau releases two monthly employment figures: the unemployment rate, which is based on a household survey, and a tally of nonfarm payrolls, based on a survey of employers. Both are conducted through sampling and depend on voluntary responses.

A lesser-known employment snapshot, based on a quarterly census of state unemployment insurance records, shows the economy created about 19,000 private-sector jobs in the third quarter of 2006, the most recent data available. That contrasts with the 500,000 indicated in the monthly figures for that period. It also shows the number of construction jobs dropped by
77,000, in contrast with the increase of 19,000 jobs shown in the monthly surveys.

The data suggest that “maybe the labor market behaved a little more like we thought it should in times of a slowing economy,” said Michael Feroli, an economist at J.P. Morgan Chase & Co.
http://online.wsj.com/article/SB117996499341212776.html?mod=home_whats_news_us

In commodities new this morning, two largely forgotten commodities are moving sharply higher. Once again the story is China. We are all starting to live in an increasingly China centric world.

China Asks Japan, South Korea to Pay More for Coal
By Michele Batchelor
May 24 (Bloomberg) — Chinese coal exporters are demanding buyers in Japan and South Korea pay as much as 44 percent more for the fuel this year as output fails to keep pace with power station demand, six officials at the companies said.

Sellers led by China National Coal Group want to raise prices as much as $22.90 a metric ton to $75, excluding freight, said the officials, asking not to be identified because the negotiations aren’t completed. Japanese and Korean importers said $65 is their maximum offer. Talks yesterday entered a second round after deadlock in late March.

China, the world’s largest coal consumer and producer, cut exports for a fourth month in April as domestic utilities build more power stations to drive the economy. Buyers in Japan and South Korea prefer to buy Chinese coal, because shorter distances make it cheaper to ship than exports from Australia or Indonesia. Coal freight rates have risen to a record this year

“For China, there’s no incentive to export because selling domestically is more lucrative,” said Donovan Huang, a Hong Kong-based analyst at Nomura Securities Co. “It’s tough for Japan. They will have to come to some compromise.”

The average price at Qinhuangdao, China’s biggest coal port, rose 27 percent in the first quarter to 485.08 yuan ($63.40). Japan paid $52.97 a ton under contracts that expired last month. South Korean buyers are paying $52.10 a ton for annual shipments ending in July, the officials said.

Japan imported 8.3 million tons of coal under the previous contract while Korea’s contract is for 6 million tons. In 2004, Japan imported 94.9 million tons of coal and 62 percent of that came from Australia, 19 percent from China and 12 percent from Indonesia, according to the latest statistics from Japan Coal Development Co.’s Web site.
http://www.bloomberg.com/apps/news?pid=20601101&sid=aDKSdJLZ2G6M&refer=japan

Rubber Futures in Tokyo Gain for 7th Day as Stockpiles Decline
By Jae Hur
May 24 (Bloomberg) — Rubber futures in Tokyo, the global benchmark, rose for a seventh day on a decline in Japan’s crude rubber stockpiles and speculation strong demand for tires in China and the weaker yen may help prices test the 300 yen level.

Crude rubber stockpiles held at Japanese warehouses fell to 17,998 metric tons as of May 10 from 18,101 tons at the end of April and 18,640 tons a month earlier, according to data from the Rubber Trade Association of Japan.

“The market is heading for the 300 yen mark again,” the decline in rubber prices,” said Mutsuki Okubo, an analyst at Kanetsu Asset Management Co. in Tokyo. The market has so far this year tried but failed to breach the 300 yen level, she said.

Rubber for delivery in October rose as much as 2.7 yen, or 0.9 percent, to 298.2 yen ($2.45) per kilogram, the highest intraday level since April 19, and closed up 0.5 percent at 297.0 yen on the Tokyo Commodity Exchange.

The benchmark contract has so far gained 2.7 percent this week after rising 5.4 percent last week, the biggest weekly rally since March 23.

Physical rubber prices in producing countries were high, indicating a delay in production resumption after the wintering season, when rubber trees yield less, Okubo said.

“The rubber market is still bullish on strong demand in China and the yen’s weaker tone against the dollar,” she said.
In the first four months, vehicle sales in China rose 21 percent to 2.93 million, while production expanded at a similar pace to 3.01 million units, the China Association of Automobile Manufacturers said May 15.

Increasing competition and falling prices are making automobiles affordable to more people in China, where the economy grew 10.7 percent last year, the fastest rate in 11 years. China passed Japan as the world’s second-largest auto market last year.
http://www.bloomberg.com/apps/news?pid=20601012&sid=aYx75vUdcd_c&refer=commodities

We end for the day watching the US Navy “exercising” off Iran. A paper tiger or real tiger getting ready to pounce? Either result seems bad from warm, sunny, far away London, though widening the war seems a recipe for collapsing the just-in-time global economy. Stay long precious metals and oil, if provocations don’t work, is a Tonkin Gulf “incident” next? Below, the far away and the local reports on the naval news.

Navy Stages Show of Force Off Iran Coast
May 23, 10:31 AM (ET)

By BARBARA SURK
DUBAI, United Arab Emirates (AP) – The U.S. Navy staged its latest show of military force off the Iranian coastline on Wednesday, sending two aircraft carriers and landing ships packed with 17,000 U.S. Marines and sailors to carry out unannounced exercises in the Persian Gulf.

The carrier strike groups led by the USS John C. Stennis and USS Nimitz were joined by the amphibious assault ship USS Bonhomme Richard and its own strike group, which includes landing ships carrying members of the 13th Marine Expeditionary Unit.

The Navy said nine U.S. warships passed through the narrow Strait of Hormuz on Wednesday. Merchant ships passing through the busy strait carry two-fifths of the world’s oil exports.

Aircraft aboard the three carriers and the Bonhomme Richard were to conduct air training while the ships ran submarine, mine and other exercises.

The maneuvers came just two months after a previous exercise in March when two U.S. carrier groups carried out two days of air and sea maneuvers off the Iranian coast. Before the arrival of the Bonhomme Richard strike group, the Navy maintained around 20,000 U.S personnel at sea in the Gulf and neighboring waters.

U.S. warships have frequently collided with merchant ships in the busy shipping lanes of the Gulf
http://apnews.myway.com/article/20070523/D8PA51600.html

US warships in unprecedented show of strength in Gulf waters
Manama: The US Navy is set to stage a formidable show of force in the Arabian Gulf by deploying the Stennis, Nimitz and Bonhomme Richard strike groups together for the first time in what is seen as a muscle-flexing exercise intended as both a strong message of support to allies and a stern warning to rivals.

US officials, however, insisted that the unprecedented combined training was to acquire new experience and did not target any country.

—–Bahrain’s parliament has put pressure on the government not to allow the United States to launch any military strikes against Iran from the kingdom’s territory.

Five deputies, Ali Salman from Al Wefaq, Ganem Al Buainain from Al Asala, Dr Ali Ahmad from Al Menbar, Adel Al Assoomi from the Independents and Dr Aziz Abul (Independent) on Tuesday submitted the motion, saying that the people of Bahrain fully rejected the military option and were wary of its consequences.

“Iran is a Muslim neighbour and any war launched against it will lead to a terrible catastrophe for the whole region,” said the motion.

But shortly before the Council of Representatives was due to vote on the motion, the Minister of Parliament Affairs requested an one-week postponement to allow the Foreign Affairs Minister to attend the debate and explain Bahrain’s official position on the issue.

Manama, a major non-Nato ally, hosts the headquarters of the Fifth Fleet and signed in 2004 the first Free Trade Agreement by a Gulf country with the United States.
http://www.gulfnews.com/region/Bahrain/10127419.html

The world of 2007 is now very different to our former cosy, western driven, world of 1997. 2017 I think, will be very different again. Stay long precious metals. The world is out of balance.

At the Comex silver depositories yesterday there was again no movement in or out. Final figures were Registered 81.87 Moz, Eligible 50.14 Moz, Total 132.01 Moz.

The NYSE WIN system is now flat. The NASDAQ system is also 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: First Metals Inc.
TSX.V: FMA-T

First Metals Inc. (FMA-T) is a newly formed public company, created to capitalize on favourable upward trends in metals prices.The First Metals management team brings a combination of mining expertise and entrepreneurial and professional experience designed to effectively and efficiently advance the development to production of two identified copper-zinc deposits.

The location of the Fabie Bay/ Magusi River Deposits and their advanced stage of development are key components in making the project successful.
http://www.firstmetalsinc.com/

My thanks to reader Terrence for suggesting taking a look.

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

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