London Irvine Report June 8, 2007

Inflation + Higher Rates.
Once more unto the breach, dear friends, once more,….

Anon PPT.

Are we on the brink of the worst of all worlds – a serious global inflation pick up, triggering higher global interest rates all round? While higher interest rates are unlikely to slow much the “BRIC” countries, Brazil, Russia, India and China, if they happen they will wreak havoc on the US mortgage market, the real estate industry, and probably stop the US auto industry recovery overnight. Without the US consumer, consuming like there’s no tomorrow, the rest of the world is about to find out if “this time it’s different” and the really can shrug off trouble in the land between the shining seas. While the G-8 lie to each other and fiddle with the largely imaginary problem of man-made global warming, the problems of the fiat money, liquidity driven, low interest rate, global derivatives gambling economy, look like moving to centre stage.

We open with the scripted economy starting to go horribly wrong. Can the PPT stage yet another “do or die” Friday turnaround rally? There maybe a lot more die ahead than do. While the jury’s still out, it looks to me that US interest rates just broke out of the long term down trend that started under Paul Volker in 1981. If that’s true, the carry trade is about to get carried out. While it may get rough in precious metals for a few days, they’re the only effective hedge against a coming fiat currency race to the bottom.

Stocks end sharply lower amid rate, oil worries

Dow sinks almost 200 points as bond yield tops 5%, oil tops $67

By Nick Godt, MarketWatch

Last Update: 4:49 PM ET Jun 7, 2007

NEW YORK (MarketWatch) — U.S. stocks fell sharply on Thursday, sending the Dow Jones Industrial Average down by nearly 200 points, as the yield of a key benchmark bond surged above 5%, further challenging the attractiveness of stocks.

“We’re seeing a continuation of the sell-off of the last couple of days, based on the move up in yields, and particularly with the 10-year bond above 5%,” said Mike Malone, trading analyst at Cowen & Co.

Losses accelerated in the last half-hour of trading after-bond guru and PIMCO chief investment officer Bill Gross said global growth will likely keep bond prices under pressure, lifting yields further, over the next three to five years.

Global growth and rising interest rates in Asia and Europe have put the U.S. bond market under pressure, lifting yields to levels last seen nearly a year ago. U.S. economic data, including falling jobless claims and a slight uptick in May retail sales Thursday, further pressured bonds.

Adding to market jitters, crude oil briefly topped $67 a barrel, amid delayed tanker loadings due to a storm in the Persian Gulf .

http://www.marketwatch.com/news/story/us-stocks-fall-sharply-concerns/story.aspx?guid=%7B560971FA%2DDF68%2D4A9A%2D83D8%2DD2A4BEEE10EB%7D

Bond turmoil raises fear of end to easy credit

By Michael Mackenzie and Richard Beales in New York and Joanna Chung in London

Published: June 7 2007 19:46 | Last updated: June 7 2007 22:34

The benign credit conditions that have helped fuel the global buyout boom came under threat on Thursday as the yield on 10-year US government bonds registered its biggest daily jump in years.

Some analysts suggested the dramatic rise in yields could herald a sustained period of higher interest rates, increasing the cost of borrowing for companies, deflating borrower-friendly credit markets and eventually crimping the outlook for equity markets.

“Stocks need to reflect what bond yields are saying,” said Michael Kastner, portfolio manager at SterlingStamos. “Rate cuts have been taken away and if yields start to reflect that rate hikes are likely this year, then it will get pretty ugly for stocks.”

http://www.ft.com/cms/s/1baa406e-1525-11dc-b48a-000b5df10621.html

New Zealand rate shock as inflation stalks the world

By Ambrose Evans-Pritchard Last Updated: 2:40am BST 08/06/2007

New Zealand has stunned investors by raising interest rates a third time this year to 8pc to head off an inflationary spiral, adding to fears that central banks across the world may need to tighten much more than originally thought.
The rise was denounced as a “kick in the teeth” by the Auckland Chamber of Commerce, a sign that consensus over monetary policy is starting to break down as the overheating crisis turns serious.

Alan Bollard, the reserve bank governor, said roaring demand for commodities called for draconian measures. “We may once again be surprised about the persistence of domestic inflation,” he said.

Mr Bollard blamed a 60pc surge in milk prices during the last year for the latest rise, saying it amounted to a NZ$120,000 (£46,000) bonus for the average dairy farmer. Domestic inflation has already reached 4.1pc.

Dairy prices are being driven by new tastes in Asia as urban migrants in China switch to an animal-based diet. World milk consumption is growing even faster than oil use. But it takes years to build up a dairy herd.

Milk is merely an extreme example of the food, mineral and energy inflation sweeping world markets, fed by five years of excess global liquidity. The New Zealand dollar reached a 25-year high yesterday, touching $0.7550 against the US greenback. Mr Bollard said the Kiwi dollar had risen to an “unjustified and exceptional” level.

Most economists blame hedge funds and Japanese investors borrowing at rock-bottom rates in Tokyo to exploit the yield difference with New Zealand (and other high interest countries) – a play known as the “carry trade”.

Mr Bollard has blamed “easy money” policies by world central banks for allowing a credit bubble to develop, made worse by the emergence of debt securities and derivatives.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/06/08/cnnz108.xml

Dr. Bernanke warm up your helicopters, the inflation news from China is bleak.

“People tend to underestimate the deflationary impact over the last 10 years” from Chinese exports, said Michael R. P. Smith, the chief executive of HSBC’s Asian operations. “It has got to the limit: you’ve had wage inflation, you’ve got rising natural resource prices. There’s just no more give.”

“Tell them to send everything that can fly.”

President Richard Nixon.

June 8, 2007

Rise in China’s Pork Prices Signals End to Cheap Output

By KEITH BRADSHER

GAOYAO, China , June 1 — Few things are as essential to the Chinese as their pigs.

From pork spare ribs and mu shu pork to char siu bao — barbecued pork buns — pork is a staple of the Chinese diet. So in this Year of the Pig, an acute shortage of pork has been national news, as butchers raise prices almost daily and politicians scramble to respond.

Steep increases for pork loins and bacon are the most tangible sign that after a decade in which prices have fluctuated but not moved significantly upward, inflation is creeping back into China . In response to this pressure at home, Chinese companies are starting to raise prices for exports, removing what has been a brake on inflation in the West.

With the global economy expanding at a robust pace, and prices rising in fast-developing countries like India and Mexico , central bankers and investors are becoming concerned. Interest rates are inching up in the United States and Europe as lenders demand that borrowers pay more to offset the erosion of buying power over time.

Business executives say that with wages rising 10 percent or more a year in many Chinese cities, the country’s days are numbered as the world’s lowest-cost producer of many cheap labor-intensive products, like toys and shoes.

“People tend to underestimate the deflationary impact over the last 10 years” from Chinese exports, said Michael R. P. Smith, the chief executive of HSBC’s Asian operations. “It has got to the limit: you’ve had wage inflation, you’ve got rising natural resource prices. There’s just no more give.”

http://www.nytimes.com/2007/06/08/business/worldbusiness/08prices.html?ei=5090&en=fdc4241ac1b34a72&ex=1338955200&partner=rssuserland&emc=rss&pagewanted=print

Yesterday we reported the outgoing UK Prime Minister offering free advice for potential investors in Russia, it didn’t take Russia long to notice his tone was mostly, if not totally, negative. This morning the FT print’s Russia ’s reply. Just as well it’s the German’s making the tea, at Heiligendamm.

Russia hits back over Blair’s warning

By Jean Eaglesham in Heiligendamm

Published: June 7 2007 20:54 | Last updated: June 7 2007 20:54

Moscow sounded a discordant note in Tony Blair’s international swansong on Thursday, rejecting this week’s warning of a potential economic backlash against Russia if it failed to meet democratic standards as the “emotional words of, after all, an ex-prime minister”.

This dismissive rejoinder from Sergei Storchak, the Russian deputy finance minister, to British diplomatic pressure highlighted the extent to which the prime minister’s imminent departure from office is overshadowing his last global summit.

http://www.ft.com/cms/s/6ddc368e-151c-11dc-b48a-000b5df10621.html

In other Russian news, REBCO futures are headed to St Petersburg , and it’s not the warm friendly one down on the Gulf of Mexico . I suspect moving the contract might prove harder that first meets the eye. But I also suspect if it happens, it’ll trade in euros or roubles.

Russian export oil futures to trade domestically -deputy minister

MOSCOW, June 5 (RIA Novosti) – Trading in the Russian Export Blend Crude Oil (REBCO) futures will move from the New York Mercantile Exchange to a new commodity market in St. Petersburg, a deputy economics minister said Tuesday.

“Trading in the REBCO futures will move to St. Petersburg as soon as we register the new commodity exchange,” Kirill Androsov said, adding that the new trading floor was expected to be launched before the end of the year.

The new blend, the third crude brand currently trading on the NYMEX, after WTI and Brent, is expected to replace Urals as Russia ‘s price index used for calculating supply prices, export duties and mineral extraction tax.

REBCO is expected to fetch a higher price than Urals, generally priced at a $5-6/bbl discount to Brent, as its quality is much nearer to Western standards.

Androsov also said an oil exchange in Russia could be launched on August 1.

President Vladimir Putin said in his state of the nation address last year that Russia , as a leading oil exporting nation, should set up domestic markets to trade crude oil and derivatives in the national currency, the ruble.

http://en.rian.ru/russia/20070605/66679704.html

Back at the ego meeting in Heil.., President Putin set a wedge for the two halves of NATO. In the best traditions of the old devious USSR , this ploy has the potential to set all against all.

Putin calls US bluff with base offer

By Andrew Ward in Heiligendamm and Neil Buckley in Moscow

Published: June 7 2007 19:19 | Last updated: June 8 2007 00:52

Vladimir Putin on Thursday seized the initiative in the dispute over US plans to site anti-missile defences in central Europe by suggesting instead a joint plan to base part of the system at a former Soviet radar station in Azerbaijan.

The Russian leader took George W. Bush by surprise when he made the proposal at the G8 summit in Germany following weeks of rising tensions over the programme.

Mr Putin said he had secured agreement from Azerbaijan to use the radar as part of a collaborative system that would protect Europe from incoming missiles.

If Washington accepted the proposal, he would not have to carry out his recent threat to retarget Russian missiles against Europe, Mr Putin said.

“This will make it unnecessary for us to place our offensive complexes along the border with Europe,” Mr Putin told reporters, standing beside his US counterpart.

Mr Bush described the proposal as “interesting” and said both sides had agreed to engage in “strategic dialogue” to “share ideas” over missile defence.

Stephen Hadley, US national security adviser, said the proposal demonstrated Russian willingness to engage in “real co-operation” on missile defence.

But the two sides were at odds over the potential role of the Azerbaijan radar. Mr Putin portrayed it as an alternative to a planned US facility in the Czech Republic that Russia opposes. But Mr Hadley said only that Azerbaijan could make a “contribution” to the broader system.

http://www.ft.com/cms/s/5cf1212e-151f-11dc-b48a-000b5df10621.html

In comodities news, the great grain weather market is seriously getting under way. Below, more bad news for the prospect of food inflation ahead. Nothing makes for social unrest quicker than good old fashioned “let them eat cake”.

Wheat Rises as Rains May Cut Oklahoma Yields More Than Expected

By Tony C. Dreibus

June 7 (Bloomberg) — Wheat futures rose in Chicago and Kansas City on reports of lower-than-expected yields in Oklahoma , where fields have been inundated with heavy rains.

Parts of the state, the second-biggest producer of winter wheat, have received four times the normal rainfall in the past month, according to National Weather Service data. Fungal diseases that can reduce yields, including leaf rust and powdery mildew, thrive in warm, moist conditions.

“All the reports we’re getting out of Oklahoma said farmers are getting terrible yields,” said Lane Broadbent, vice president of KIS Futures Inc. in Oklahoma City . “They were thinking 50 bushels an acre and they’re getting in the high 20s to low 30s. We’ve had a lot of rust disease problems. Farmers are just sick about what kinds of yields we’re having.”

—–“We started getting a lot of moisture in March and those plants really took off and grew rapidly enough that there’s some stalk-strength issues,” he said earlier this week.

Winds reaching 40 miles an hour broke plants already weakened from a freeze on April 7, when temperatures dropped as low as 17 degrees Fahrenheit (minus 8 Celsius), Broadbent said.

“The freeze late in the growing year hurt us,” he said. “We had the 30- to 40-mile-an-hour winds that laid a lot of the wheat on the ground.”

The rains have also delayed the harvest in parts of Oklahoma and Kansas , the biggest winter-wheat producer. Only 3 percent of the Oklahoma crop was harvested as of June 3, compared with 45 percent at the same time last year and the five-year average of 23 percent, the USDA said this week.

Winter varieties account for about 70 percent of all wheat grown in the U.S. Hard-red winter varieties, used to make bread, are grown in the southern Plains, including Kansas and Oklahoma. Soft-red winter wheat, used for cookies and cakes, is grown in the eastern Midwest , including Missouri , Indiana and Ohio .

Wheat was the fourth-biggest U.S. crop in 2006 with a value of $7.7 billion.

http://www.bloomberg.com/apps/news?pid=20601012&sid=a8zOssyHBfcg&refer=commodities

Next month the action swings over to the pollination of the US corn crop. In August we can all get to play in US soybeans. Thankfully, both Russia and the Ukraine ought to be having a bumper wheat year, but don’t count those harvests until they’re safely in the bin.

Another summer weekend but one to be spent pondering over events in US interest rates. Is a 26 year reversal really underway? What happens when a 500 trillion derivatives market seizes up? Will extending discretionary war into Iran really make any difference? I suspect we have a long and testing summer ahead, to say nothing of a highly nervous next week. Those not watching NASCAR can watch the overpaid millionaires of Formula 1 take their version of scripted sports over to one of my favourite great world cities, Montreal . Have a great weekend everyone.

At the Comex silver depositories there was little movement yesterday. Final figures were Registered 80.23 Moz, Eligible 50.12 Moz, Total 130.35 Moz.

The NYSE WIN system is now flat. The NASDAQ system is also flat. Yesterday’s action generated new buy signals on both to go long an 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

Yesterday’s NYSE action generated a 90% down day by volume. The shares closing at new highs to new lows, on both NYSE and NASDAQ also swung from many more new highs to many more new lows. This crossover point is one of the few uses for tracking this data. It can be a signal of a reversal in momentum traders basic positioning. If the “age of easy money” has finally drawn to a close, playing stocks by the old rules of the last 26 years will have closed too.

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

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