London Irvine Report May 25, 2007

Change.

Change is the law of life. And those who look only to the past or present are certain to miss the future.

President John F. Kennedy.

With France closed on Monday for some sort of Gallic holiday, Victory Over [fill in the blank] Day, (Luxembourg?) Great Britain and America are taking the day off too. Just as well perhaps, Asian markets are starting to look decidedly vulnerable and with civilisation closed for a holiday, a Black Monday in China, if it happens, will have limited spillover effect. Austrians, Belgians, Danes, Germans, Greeks, and the Dutch, are also celebrating something or other too. Much of Europe will be doing what
Europe does best.

Below, a skittish Asia starts splitting into two camps..

Japan, Hong Kong shares sharply lower, China stocks gain
By V. Phani Kumar
Last Update: 12:25 AM ET May 25, 2007
MUMBAI (MarketWatch) — Most Asian benchmarks were sharply lower Friday, spooked by strong economic data in the U.S. that raised fears of an interest rate hike and weighed on U.S. equities. In Japan, exporters Toyota Motor Corp. and Canon Inc. led decliners. In Tokyo, the Nikkei 225 dropped as much as 1.6% to 17,416.11 while the broader Topix index was down 30.69 points at 1,707.42. Toyota) lost 1.9% and Canon slid 2.2%. The dollar was quoted at 121.32 yen as compared with 121.40 yen late Thursday in New York. Earlier Friday, data released by the government showed that Japan’s core consumer prices were 0.1% lower in April compared to the year-ago period, slipping for the third straight month. Elsewhere in the region,

Australia’s S&P/ASX 200 was down 30.9 points at 6,248.2, Hong Kong’s Hang Seng was off 1.4% at 20,511.58, New Zealand’s NZSE 50 was 0.6% lower at 4,306.21, Korea’s Kospi was off 0.5% at 1,637.96, Singapore’s Straits Times lost 1.1% at 3,492.42 and the Taiwan Weighted index was 0.8% weaker at 8,150.24. China’s Shanghai Composite, however, defied the trend and was up 0.4% at 4,169.52, as the B shares recovered from Thursday’s sharp fall, which was sparked by former U.S. Federal Reserve Chairman Alan Greenspan’s comment that he feared a “dramatic contraction” in the Chinese stock market
http://www.marketwatch.com/news/story/japan-hong-kong-shares-sharply/story.aspx?guid=%7B0B68D7B2%2D6EDC%2D480D%2DB56A%2D4E7380F9B4E2%7D

In energy news, Russia tightens its grip. The decades ahead will be Russia’s, at least as far as natural gas is concerned. Who needs tanks, occupying armies, and control of the seas, when control of natural gas and the pipelines will do. One way or another, the west’s profligate way of using up energy is about to come under stress. Fiat currency, already on life support of massive manipulation, is likely to become one of the early casualties. Euroland, one way or another will be Russia’s milch cow seems to be Russia’s plan.

BP’s Russian gas licence ‘to be revoked’
By Russell Hotten Last Updated: 1:22am BST 25/05/2007
BP’s role in a huge Russian gas field may come to an end as early as next week, a top Moscow official has warned.
Russia’s environmental agency has stepped up pressure on the UK energy group’s joint venture, TNK-BP, saying that its licence to operate at the Kovykta gas field may by revoked by June 1.

TNK-BP’s subsidiary working the field, Rusia Petroleum, has gone to the courts to clarify the terms of its Kovytka licence, a process that could take several weeks. But yesterday, Oleg Mitvol, deputy head of environmental watchdog Rosprirodnadzor, said “the likelihood” of TNK-BP’s licence being revoked was “100pc”.

The relatively under-developed Kovytka field has the potential to be a massive revenue-earner for BP, but the company’s Russian operation is accused of breaching its licence by not extracting gas fast enough. TNK-BP was expected to produce 9bn cubic metres of gas annually, but Mr Mitvol says only 33.9m came out of the ground last year.

TNK-BP says that the government’s failure to invest in infrastructure means that even if more gas was produced it could not be transported to customers.

The alternative would be to burn off the gas. The company says it cannot produce the required amount because state gas monopoly Gazprom will not allow it to build a planned export pipeline to China.

But Mr Mitvol appears to disagree. “When the company [TNK-BP] signed its licence agreement, it had no guarantee from Gazprom. In the West, in any civilised country, you wouldn’t sign an agreement without a 100pc guarantee.” However, analysts believe the dispute should be seen in the wider context of Moscow’s strategy to claw back energy assets controlled by Western companies.

Last year Gazprom took control of the Sakhalin-2 oil and gas project run by Royal Dutch Shell. This followed months of pressure from Mr Mitvol’s office that Shell had breached its licence.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/05/25/cnbp25.xml

May 25, 2007
Austrian deal will extend Gazprom grip on European energy market
Carl Mortished
Gazprom is poised to strengthen its grip over the European energy market with the purchase of a stake in a strategic Austrian gas hub that would give it a powerful lever over an EU project to bring in non-Russian supplies of fuel from Central Asia and the Middle East.

The Russian giant has agreed to acquire a stake in Central European Gas Hub (CEGH), a company owned by OMV, the Austrian energy group, which operates a trading platform and gas storage facilities at Baumgarten, close to the Hungarian border.

The deal, thought to be a one-third share, could give Gazprom influence over Nabucco, a pipeline project that is opposed by the Kremlin because it is designed to bypass Russia and link Europe with gas-rich countries in the Caspian region and the Middle East.

Baumgarten is the proposed terminus for Nabucco, a 3,300 kilometre tube would cost €4.6 billion (£3.1 billion) and is aggressively promoted by the European Commission as a means to bring more nonRussian gas into the EU. However, Nabucco’s stop-start progress has become embroiled in Balkan politics and doubts over the stability of the Central Asian countries that will supply it. Meanwhile, OMV, which has a major stake in the project, has refused to rule out Gazprom’s participation in the Nabucco venture.

—- However, separately, Mr Miller yesterday expressed doubts that the Nabucco project would ever happen.
“We see no resources for [Nabucco] and no gas reserves for it either,” he told an Austrian newspaper.

Nabucco will be launching a marketing campaign for capacity in the pipeline this summer, but Gazprom dealt a blow to the scheme earlier this month when it secured agreement with Kazakhstan and Turkmenistan – potential Nabucco suppliers – to route their gas exports through Russian territory.

That Gazprom deal also put paid to European hopes of a separate subsea Caspian pipeline that would link up with BP’s Shah Deniz pipeline – soon to bring gas from Azerbaijan to Erzurum, a gas hub in Turkey and the proposed starting point for Nabucco.

Analysts believe that Gazprom’s involvement may now be the only way to secure the investment needed to turn Nabucco into a reality. Russia is already exporting gas into Turkey through its Blue Stream pipeline under the Black Sea.
http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article1837771.ece

Stay long a defensive position in physical precious metals. The west’s politicians have squandered the front loaded benefits fiat currency gave. With the rise of resource rich Russia, the euro looks likely to becoming a short term footnote in history. The US has turned the subsidy from being the world’s only fiat reserve currency into a rathole of endless discretionary war. In the early stages of the era of scarce natural resources, a global rebalancing of relative wealth is about to occur in the next two decades ahead. NAFTA based resource companies’ are looking better with each passing day.

Below, yet more bad news for the fiat dollar, Latin America has plans to sideline its use. While hardly as bad as the news of Kuwait abandoning its dollar peg, little by little the world is moving away from a dominant dollar reserve hegemony.

Regional currency to replace dollar in Argentina-Brazil trade
BUENOS AIRES, May 23 (RIA Novosti) – Argentina and Brazil, South America’s two largest economies, will drop the U.S. dollar in favor of a regional currency in their bilateral trade starting in October 2007, Argentine Economics Minister Felisa Miceli said.

The countries’ transition to a new currency, as yet unnamed, is part of a pilot project by the South American continent’s major trade alliance, Mercosur, to replace the U.S. currency in internal transactions with money of its own, Miceli said.
Speaking ahead of a Mercosur ministerial session in Paraguay, she said the new currency should eventually spread throughout the bloc, which also includes Paraguay, Uruguay, and Venezuela.

Bolivia, Chile, Colombia, Ecuador and Peru have associate member status.
http://en.rian.ru/world/20070523/65966459.html

Below, the FT reports on the Paris based OECD’s call for a new 30’s style depression. Thankfully, hardly anyone listens to the OECD.

OECD warns on risk of higher inflation
By Scheherazade Daneshkhu, Economics Correspondent
Published: May 24 2007 09:59
The world’s central banks should “err on the side of tightness” in the face of inflationary pressure, the Organisation for Economic Co-operation and Development said on Thursday.

In its twice-yearly Economic Outlook, the Paris-based organisation urged central banks, with the exception of Japan, either to
raise interest rates or take their time before cutting them, because of strong domestic demand which had increased the the risk of higher inflation.

Jean-Philippe Cotis, chief economist, said inflation in the US had been “more persistent than expected” while in many other OECD countries, notably continantal Europe and the UK: “The amount of residual economic slack is also uncertain….This constitutes a challenge for central banks which, on both sides of the Atlantic, should probably err on the side of tightness.”

In the US, the Federal Reserve should wait until early next year before cutting its main rate, the OECD said, unless the downturn in the housing market were to lead to wider economic distress. In the Eurozone, robust economic growth and rising core inflation suggested that the European Central Bank should raise its main interest rate by two more quarter-percentage points to 4.25 per cent by the end of the year.

While acknowledging that the Bank of England had “already tightened significantly”, most recently putting up its main rate this month to 5.5 per cent, the OECD said: “There may even be a case for additional tightening in the UK.”
http://www.ft.com/cms/s/a8b4a952-094c-11dc-a349-000b5df10621.html

We end for the long weekend with the FT reporting on a different side to the rise of China. While it’s lame duck politics as usual in Washington, and with the US military bottled up in Iraq and Afghanistan, China is effectively and unmistakably telling the US to stay in its own half of the Pacific. In the early part of the 21st century, both Russia and China sense the 300 year old Anglo-American era is ending.

US concerns as China builds nuclear subs
By Demetri Sevastopulo in Washington and Mure Dickie in Beijing
Published: May 25 2007 03:00
China has surprised the Pentagon with the pace of development of a new class of submarine that threatens the nuclear balance by providing Beijing with a more robust nuclear deterrent.

According to the 2007 Pentagon China military power report – details of which were obtained by the FT – the Chinese navy is developing a fleet of five nuclear ballistic missile submarines [SSBNs]. The Jin class submarines would provide a much stronger nuclear deterrent because they would be armed with the new long-range JL-2 missile.

The Pentagon last year signalled concerns about the possible development of the Jin submarine. But a senior US official said the US had been surprised by its “very quickened pace” of development.

“When they develop five vessels like this, they are making a statement,” said the US official. “China’s first effort at developing a SSBN force was not serious, but the next generation presumably will be serious . . . China is diversifying its ballistic missile capability [to have] more sophisticated regional capability and a more survivable force.”

China says it is engaged in a “peaceful rise”. But some US officials and Chinese military experts say that the submarine could alter the strategic nuclear balance.

“If China puts these systems in place effectively on the scale reported in sea-basing and land-basing, it will now have a robust second strike capability,” said Lyle Goldstein, director of the China Maritime Studies Institute at the US Naval War College. “What was grey before now is becoming clear. China now can effectively fight a nuclear war.”
http://www.ft.com/cms/s/bd6cffaa-0a61-11dc-93ae-000b5df10621.html

This weekend we are switching ASP from Microsoft Small Business Centre who are closing down, to IntelliContacts who are not. All should go smoothly, as what could possibly go wrong? If your server administrator allows it, a HTML version will be available in addition to the regular plain text format. If for any reason you don’t receive the daily update on Tuesday, please email and let me know. There wil be no update on Monday. Have a great weekend everyone, especially those lucky enough to be getting a late
spring-early summer long weekend.

There was no movement yesterday at the Comex silver depositories. Final figures were Registered 81.87 Moz, Eilgible 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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