London Irvine Report June 6, 2007

G-8 Day. Pass round the Valium.

“My fellow Americans, I am pleased to tell you I just signed legislation which outlaws Russia forever. The bombing begins in five minutes.”

President Ronald Reagan.

The mostly lame duck leaders of the free world gather in their luxury resort prison in Germany today, to begin 3 days of highly publicised disagreement. We wonder what is the point. Two years ago at Glen Eagles they promised to save Africa from Africans, and pledged masses of money and goodies as well. After the cameras and sound bites passed, they sobered up and did nothing of the kind. Africa today is still the mess its been since the 60’s, and anything agreed to in this G-8 meeting from climate to energy to democracy, is also likely to be just for the 24 hour news. I doubt they will tackle the coming derivatives crisis, the replacement of the dollar, the out of control lifestyle aspirations of the west, or the coming global energy crunch as oil demand starts to exceed new supply. I doubt they will tackle discretionary war, nor the hidden war coming from economic migration. Like an old fashioned council of the defunct Holy Roman Empire , each Princeling will return to lame duck reality once they return home.

We open today’s time shortened update with news that the commodities super cycle has up to 18 more years left to run.

Developing world seen driving “super cycle” of metals demand

Tue Jun 5

MANILA (AFP) – An “industrial revolution” in the developing world has created a “super cycle” of unprecedented global metals demand that could sustain the industry for up to 18 more years, an Australian industry expert said Tuesday.


The upside is huge because although developing economies now account for half the world economy and two-thirds of world economic growth, their per capita steel and copper use is only a fraction of those of the developed world, said Mitchell Hooke, chief executive of the Minerals Council of Australia.

“Half the world is going through an industrial revolution compared to the United States in the 1890s and Japan in the post-World War II period,” Hooke told an Asia-Pacific mining conference in Manila .

“As incomes rise up goes the demand for industrial commodities,” he said.

This has created global demand for metals products “like nothing” the world has seen before in the past century, Hooke added.

The phenomenon, he said, has been coupled with the “re-industrialisation” of the developed world, particularly Japan , that is creating even more demand.

With the engine of global growth shifting from the so-called Organisation of Economic Cooperation and Development countries to the “Brics” countries of Brazil, Russia, India and China, “increased demand will continue to swamp supply” despite a wave of fresh mining investments, Hooke said.

http://news.yahoo.com/s/afp/20070605/bs_afp/asiaminingsectorresources_070605040846;_ylt=AtLvUXNy5ofVPd40t3V0ExamOrgF

Below, inflation worries are on the rise again. The Journal sees higher interest rates ahead. I have my doubts that in America at least, that will happen. It risks turning a real estate crisis into a depression. Below, the cross currents on the same theme. Stocks would appear to be in for a summer of high volatility as this all plays out.

Years of Global Growth
Raise Inflation Worries
Chinese, Indian Labor
Long Damped Prices,
But Effect Is Reversing

By MARCUS WALKER in Berlin , GREG IP in Washington and ANDREW BATSON in Beijing
June 6, 2007 ; Page A1

For the past decade, low-priced labor from China , India and Eastern Europe has helped much of the world enjoy economic growth without the sting of inflation. Now that damper on prices is beginning to reverse — and global inflation pressure is starting to build.
Companies in many countries are operating at close to full capacity, facing shortages of everything from land to equipment. Western workers and their low-cost rivals both are winning higher pay, thanks to rising demand. In some cases, the global links of the economy are increasing costs rather than lowering them, as far-flung businesses compete for the same resources.

Central banks are increasingly worried about spare production capacity running out — which could force them to raise rates to their highest level in years to stave off inflation. That could puncture the ebullience of stock and bond markets, which have become accustomed to a rare combination of fast growth, low inflation and low interest rates.

Already long-term interest rates are on the rise, in anticipation: U.S. 10-year Treasury bonds hit a nine-month high of nearly 5% yesterday. “Markets have gotten used to the idea that the global economy will keep producing downward pressure on prices,” says Ken Rogoff, a Harvard economics professor and former chief economist at the International Monetary Fund. “But that phase may be ending.”

—- European Central Bank president Jean-Claude Trichet has warned that European industries have little scope left to raise production, and has asked unions to show restraint in seeking wage increases for the overall health of the economy. The bank is expected to raise rates when it meets today.

Germany ‘s engineering sector, the mainstay of its export-led revival, is operating at 93% of capacity, leaving the lowest amount of slack since the 1960s. Amid falling unemployment, Germany ‘s most powerful union, IG Metall, recently pushed through a pay raise of 4.1% to cover much of the manufacturing sector this year

http://online.wsj.com/article/SB118109624836326011.html?mod=home_whats_news_us

Fed chief reignites ‘stagflation’ fears

By Ambrose Evans-Pritchard Last Updated: 12:48am BST 06/06/2007

Ben Bernanke, the chairman of the US Federal Reserve, has doused hopes of an interest rate cut in coming months, warning that inflation is still the chief risk to the American economy.
In remarks that sent shivers through Wall Street, Mr Bernanke said the US faced double pressure from a deep housing downturn and “somewhat elevated” levels of core inflation.

The Dow Jones index fell 106 points in early trading in New York as investors fretted over the growing signs of “stagflation”, which is typically poisonous for equities.

Mr Bernanke said there was a “big risk” that high capacity usage would prevent inflation falling back down to the Federal Reserve’s comfort level.

He reminded investors to control their appetite for risk in a hazardous world. “Lack of attention to risk management is not desirable since we have no idea where the shock will come from,” he said.

The concerns were echoed by Jean-Claude Trichet, head of the European Central Bank, who said:

“The present state of global finance, where we are observing a level of risk pricing which is historically low, isn’t sustainable in the long run.”
While Mr Bernanke expects the economy to grow at a “moderate pace” after the sharp downturn this year, he said unsold houses would hang over the market for a long time. “The slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected,” he said.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/06/06/cnfed106.xml&CMP=ILC-mostviewedbox

Goldman now sees no Fed rate cuts in 2007 and 2008

Tue Jun 5, 2007 3:20PM EDT

NEW YORK (Reuters) – Goldman Sachs on Tuesday abandoned its forecast for any interest rate cuts this year, adding that it sees none in 2008 either, citing tightness in the labor market and expectations for stronger economic growth.

Previously, the bank’s economics research team expected three quarters of a percentage point of cuts in benchmark U.S. interest rates this year by the Federal Reserve’s rate-setting Federal Open Market Committee, beginning at the September FOMC meeting.

Goldman’s decision came a day after a similar forecast change by Merrill Lynch
“Although the economy has slowed and inflation moderated in line with our forecasts over the past few quarters, we’ve been very surprised at the stability of the unemployment rate,” he added.

The bank’s economics research team said the absence of any tangible evidence of rising unemployment makes it unlikely that Fed officials will cut the funds rate target.

Goldman’s team said they have boosted their estimates for real GDP growth on an annual basis in the second and third quarters of this year to 3 percent and 2.5 percent, respectively. Previous estimates were for 2 percent for both quarters. The group said it raised real growth estimates “on accumulating evidence of an impending rebound in manufacturing output.”

Goldman’s move comes a day after Merrill Lynch slashed its expectations for a rate cut this year, reducing its call for 2007 from 100 basis points of cuts to none. The firm cited its revised view on the Fed’s persistent hawkish inflation stance and a recent string of stronger-than-expected data.

http://www.reuters.com/article/reutersEdge/idUSN0528971620070605

Foreign central banks’ demand for debt may ebb

Tue Jun 5, 2007 4:34PM EDT

By John Parry and Lynn Adler – Analysis

NEW YORK (Reuters) – Slowing foreign central bank demand for U.S. Treasuries and mortgage debt may push yields even higher, just as those holdings approach a record $2 trillion.

Overseas demand has helped lift bond prices and depress Treasury yields perhaps as much as 0.90 percentage point, some studies show.

Demand for higher yielding agency debt has held up in the early part of this year, though central banks’ buying of

Treasuries has started to waver, according to the latest trends in the weekly custody holdings data from the New York Federal Reserve.
“Treasury securities have struggled over the last few weeks as foreign central banks have temporarily become net liquidators of marketable debt,” said William Sullivan, chief economist at JVB Financial Group in Boca Raton , Florida .

Custody holdings of Treasury debt the Federal Reserve maintains on behalf of foreign and official institutions have fallen in five out of the last seven weeks, declining a net $5.0 billion over that period, Sullivan noted.

That is just an initial hint that foreign central banks may be diversifying out of Treasuries, although it is not yet a clear trend, Sullivan added. But it could have a big long-term impact on the U.S. government debt market.
“Treasury securities have struggled over the last few weeks as foreign central banks have temporarily become net liquidators of marketable debt,” said William Sullivan, chief economist at JVB Financial Group in Boca Raton , Florida .

http://www.reuters.com/article/reutersEdge/idUSN0530187820070605

Japanese stocks flat after Wall Street drop

Toyota leads export shares lower on concerns over U.S. economic outlook

By Chris Oliver, MarketWatch Last Update: 11:21 PM ET Jun 5, 2007

HONG KONG (MarketWatch) — Asian stocks traded on a mixed note Wednesday, with Japan’s Nikkei edging lower as exporters such as Toyota Motor Corp. and Canon Inc. lost ground following comments from Federal Reserve Chairman Ben Bernanke on the U.S. economy that diminished hopes of an interest-rate cut in the near future.
In Tokyo , the 225-issue Nikkei Average entered the mid-session break 0.1% lower at 18,037.31, while the Topix index rose 0.1% to 1,778.25.

Australia ‘s S&P/ASX 200 index was down 0.3% at 6,354.0 and New Zealand ‘s NZX-50 shed 0.3% to 4,300.7.

In China , the Shanghai Composite Index reversed early declines, rising 0.4% at 3,782.08 in late morning trade. The Dow Jones China 88 Index bounced from an early deficit, gaining 0.5% at 312.96.

Hong Kong ‘s Hang Seng Index was up 0.2% at 20,879.34. The Hang Seng China Enterprises Index, Hong Kong ‘s benchmark for China shares, climbed 0.3% to 11,054.33.

Throughout Asia , “sentiment remains quite positive and liquidity remains strong, so that is why we do not follow the decline in the Dow,” said Alex Wong, director of Ample Finance Group in Hong Kong .

http://www.marketwatch.com/news/story/japanese-stocks-flat-after-wall/story.aspx?guid=%7B3A33FD29%2DF53E%2D48E4%2D85D5%2D3B2F5C9972B1%7D

Later today we get news from the ECB meeting in Frankfurt , where another ¼% interest rate rise is expected. Expect trouble from France , Italy and Spain .

We close with the latest from the Arabian Gulf where cyclone Gonu should be making landfall as I write. The latest storm track now takes it much closer to the Strait of Hormuz , though only in a much weakened form. If global warming is real, is this what the future holds?

Powerful cyclone bears down on Oman

Wednesday June 6, 3:23 AM

A cyclone packing huge winds of up to 260 kilometres an hour advanced towards the Gulf state of Oman on Tuesday, posing a potential threat to the key route for oil exports from the energy-rich region.

Oman has evacuated about 7,000 people from coastal areas in the sultanate, where the weather service said Cyclone Gonu was expected to make landfall by early Wednesday.

The first signs of the cyclone, with winds of up to 260 kilometres (160 miles) an hour and waves up to 12 metres (40 feet), have already been felt along Oman’s coastal regions with torrential rains and pounding winds.

Weather officials said Cyclone Gonu is expected to be the strongest to hit the Arabian Peninsula since 1977.

The army, police and civil defence have all been mobilised.

“The cyclone is advancing toward the Omani coast at a speed of 12 kilometres an hour, accompanied by torrential rains, storms and winds at the centre of the cyclone of 115 to 140 knots, or 212 to 260 kilometres an hour,” the weather service said.

Residents of the island of Masirah in the Arabian Sea as well as of Oman ‘s eastern coastline have sought refuge on higher ground.

The Musandam peninsula on the northern-most tip of Oman which juts into the Strait of Hormuz could also be affected, the weather service said.

Except for oil from OPEC powerhouse Saudi Arabia, all crude exports from the Arab states in the Gulf — or about a quarter of world supplies — go through the strait, making it the world’s most important oil passage.

An official in the ministry of transportation, who requested not to be named, told AFP however that shipping was continuing through the strait.

http://sg.news.yahoo.com/070605/1/491p5.html

Latest storm track prediction.

http://tsr.mssl.ucl.ac.uk/tracker/dynamic/main.html

At the Comex silver depositories there was no change yesterday. Final figures were Registered 80.23 Moz, Eligible 50.13 Moz, Total 130.36 Moz.

The NYSE WIN system is short. The NASDAQ system is flat. Yesterday’s action produced 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.

http://website.lineone.net/~audluk/tocframe.htm

The monthly Coppock Indicators finished May:
DJIA: 175 up. NASDAQ: 108 up. SP500: 149 up.

All three have confirmed the long trend as up.

This week’s featured link:

Cornerstone Capital Resources Inc. TSX.V CGP

Cornerstone Capital Resources Inc. has a strong and dedicated technical team who are focused on generating new projects that have great potential for discovery. Cornerstone leverages its own exploration funding through joint venture and strategic partnerships, providing shareholders with potential for success at lower risk. Cornerstone has a diversified portfolio of gold, silver, copper, nickel, VMS, and uranium properties in Canada and Ecuador .

Cornerstone Capital Resources Inc. has a strong and dedicated technical team who are focused on generating new projects that have great potential for discovery. Cornerstone leverages its own exploration funding through joint venture and strategic partnerships, providing shareholders with potential for success at lower risk. Cornerstone has a diversified portfolio of gold, silver, copper, nickel, VMS, and uranium properties in Canada and Ecuador.
http://www.cornerstoneresources.com/s/Home.asp
http://www.cornerstoneresources.com/s/NewsReleases.asp

Note: I hold a position in CGP.

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 company and good management. Going forwards, I expect the commodities demand cycle to last another couple of decades due the economic rise of Asia . 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.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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