London Irvine Report June 18, 2007

The Final Act.

Never, never, never believe any war will be smooth and easy, or that anyone who embarks on the strange voyage can measure the tides and hurricanes he will encounter. The statesman who yields to war fever must realize that once the signal is given, he is no longer the master of policy but the slave of unforeseeable and uncontrollable events.

Sir Winston Churchill.

On June 18, 1815 , Napoleon lost the Battle of Waterloo, and Europe brought perpetual discretionary war to a close for the better part of two generations. We seem to have reached a similar turning point in history. The final act seems to be about to commence in the Middle East . Time will tell if it carries the spark to set alight regional war or even World War 3, or will finally create the conditions for a regional peace. We open with history repeating. Below, the 21st century version of Masada . With truly ironic casting, Israel gets to play the role of Rome’s ruthless tenth legion, while Hamas and the trapped Gaza Palestinians, get the role of the first century hapless Jews. Stay long gold and silver, and keep the car fully fuelled at all times. There is little sign that any in the region or in Washington , want to avert a military solution. Where this ends nobody knows. Hope for the best but prepare for the worst. A humanitarian disaster might only be days away.

June 17, 2007

Israel plans attack on Gaza

Uzi Mahnaimi

ISRAEL’s new defence minister Ehud Barak is planning an attack on Gaza within weeks to crush the Hamas militants who have seized power there.

According to senior Israeli military sources, the plan calls for 20,000 troops to destroy much of Hamas’s military capability in days.

The raid would be triggered by Hamas rocket attacks against Israel or a resumption of suicide bombings.

Barak, who is expected to become defence minister tomorrow, has already demanded detailed plans to deploy two armoured divisions and an infantry division, accompanied by assault drones and F-16 jets, against Hamas.

The Israeli forces would expect to be confronted by about 12,000 Hamas fighters with arms confiscated from the Fatah faction that they defeated in last week’s three-day civil war in Gaza.

—- A source close to Barak said that Israel could not tolerate an aggressive “Hamastan” on its border and an attack seemed unavoidable.

“The question is not if but how and when,” he said.

Rockets from Lebanon hit Israel

Katyusha rockets have been fired into northern Israel from Lebanon in the first cross-border attack since last year’s war between Israel and Hezbollah.

Hezbollah denied responsibility and both Lebanon and Israel blamed Palestinians based in Lebanon .

There were no casualties reported after the attack on the town of Kiryat Shmona on Sunday.

Israel responded with five artillery shells into southern Lebanon , Lebanese security forces said, but an Israeli army spokesman denied the shelling was aimed at Lebanese territory, calling the exercise “artillery calibration fire” using empty shells fired into Israeli territory.

The shells hit a mountainous area near the town of Shebaa in the eastern sector of the border with Israel , Lebanese sources said. There were no reports of casualties.

Fuad Siniora, Lebanon’s prime minister, said the attack had “political goals” and was aimed at destabilising Lebanon by casting doubts about the ability of the army and the UN peacekeeping force in South Lebanon to protect the border zone.

—- The Lebanese army said three rockets 107 millimetre Katyusha rockets were fired at Israel by “unknown elements” and that it had prevented another rocket being fired.

Troops had found a Katyusha equipped with a timer at the suspected launch area in the village of Taibeh.

The UN peacekeeping force in south Lebanon condemned the attack as a “serious breach” of a truce since last summer’s Hezbollah-Israel and called for restraint from all parties.

In oil news, Nigeria is drifting closer to active insurrection and anarchy in the main oil production region. Below, the weekend’s latest developments. If regional war does descend on the wider Middle East, access to 100% of Nigeria ’s production potential will be critical for the rest of the world.

Armed men overrun Nigeria oilfield

At least 24 Nigerian oil workers are being held hostage after armed men attacked the Ogbainbiri facility in southern Bayelsa state.

The oilfield station operated Italy’s Eni was overrun on Sunday after a gunfight between the attackers and the soldiers guarding it.

It was unclear if there were any casualties in the attack.

“Eni is already collaborating with the authorities of Bayelsa to find a solution as quickly as possible,” a company spokeswoman said.

The Ogbainbiri facility normally produces 40,000 barrels of oil a day.

The spokeswoman did not say whether oil production had stopped, but it is routine practice to shut down a facility when it is attacked.

The attack was apparently in response to the killing of eight people by troops guarding Ogbainbiri last week, security sources said.
The military said the dead were fighters who had tried to attack the oilfield, but a local group said they were mostly unarmed civilians.

In the less belligerent world of interest rates, major change is underway. Up first, China paves the way for renminbi bonds. For now no threat to the west, but eventually convertibility is coming to the Chinese currency. Within the decade ahead, serious competition for the US Treasury market. Potentially, US paper now needs and will eventually get, a built in risk premium. Perhaps it needs to be stamped with a risk warning too.

RMB bonds good for mainland, Hong Kong
BEIJING , June 18 — Earlier this month, the People’s Bank of China and the State Development and Reform Commission promulgated provisions involving issuing renminbi bonds in the Hong Kong Special Administrative Region.

Ready to make this major move toward financial reform, China Construction Bank, Bank of China and Import-Export Bank of China published their plans to float renminbi bonds in Hong Kong.

Back in 2003, the Chiangmai ( Thailand ) Declaration, in the wake of the Asian financial crisis in the late 1990s, urged that regional financial cooperation be reinforced to stave off possible future financial catastrophes. The declaration placed development of the Asian bond market at the core of regional financial integration.

China holds a particularly important place in regional monetary cooperation. But its backward bond market brings uncertainties for the Asian bond market and financial cooperation.

—– Issuing renminbi bonds in Hong Kong is equally important to the mainland because the undertaking helps quicken the pace of the renminbi’s internationalization and convertibility.

In Hong Kong , a free capital market, the price of renminbi bonds will fully mirror international investors’ expectations of the renminbi’s revaluation. This is of reference value for the foreign-exchange reform of the Chinese currency.

In addition, the floating of renminbi bonds will give China more say in pricing renminbi derivatives.

Monetary products such as renminbi bonds are expected to strengthen Hong Kong ‘s status as the center of renminbi offshore derivatives.

Below, the Telegraph carries a warning on interest rates from one of the City’s highly respected economic advisor’s. The era of very low interest rates is coming to an end.
Business comment: The latest bond adventure is essential viewing

By Roger Bootle Last Updated: 2:17am BST 18/06/2007

At the end of last week the world’s major bond markets stabilised after what had been a torrid time. Over the past three months, UK 10-year bond yields have risen from 4.8pc to 5.5pc. And US 10-year bonds have jumped from 4.6pc to 5.2pc in only six weeks. But the game is not over. Bond yields have further to rise.

The really big bond market moves of the past have been about perceived changes in the inflation environment. Of all financial market professionals, bond market operators are supposedly the canny, cynical, all-seeing ones. Compared to other parts of the financial world perhaps they deserve that reputation. But boy, have they changed their minds at times.

They were initially very slow to see the emergence of high inflation in the 1970s, with the result that realised real yields on bonds were negative. In the 1980s they were slow to see the move to a low inflation environment and consequently real yields turned out to be very high indeed.

Much more recently, they were slow to see the deflation danger, but once they did perceive it, they drove yields down to levels unseen for a generation.

Given this background, when bonds fell last week, the knee-jerk reaction was to say that the markets were now expecting higher inflation. But this idea can easily be dismissed. The market’s expected inflation rate can be deduced from the difference in yields on those bonds that offer no protection against inflation (conventionals) and those that do (index-linked). In this case, the yields on conventional and index-linked bonds rose pretty much together. So this was no inflation scare.

In which case, what was it? It was a real interest rate scare. The markets were coming to terms with the idea that real interest rates and real bond yields needed to be higher.

—– In sum, I suspect that the era of very low real rates is coming to an end. Indeed, if the world can successfully negotiate the rocks and shoals created by trade imbalances and financial bubbles and thereby sustain high rates of economic growth, then we may be about to enter a period of high real rates, short and long.

This would have profound consequences for asset valuations everywhere. It may seem esoteric to you, but the yield on government bonds is the foundation on which all asset values rest. Over the months to come, you need to watch those government bond markets like a hawk.

Below, the bank that advised Britain’s next Prime Minister to sell off half Britain’s gold at a 20 year low, is getting itself all worked up over falling lending standards to the private equity gang, who leverage up debt to devour, asset strip, and fire. Grossly over paid and under taxed, what care they for yet another bubble waiting its pin. With the BOE only willing for now to talk, and the free of tax loophole set to close, a summer of continued excess is likely.
BoE warns on lending standards to private equity

By Edmund Conway Economics Editor Last Updated: 8:25am BST 18/06/2007

The Bank of England will today sound the alarm over a dramatic fall in lending standards to private equity, and warn that the collapse of a major deal is one of the most likely triggers for a major global financial slump.

In its quarterly review of market conditions, published today, the Bank reports a sudden rise in the use of controversial “covenant-lite” loans that strip out many of the conditions usually associated with such advances, and warns that many investors could be overly optimistic, lining themselves up for a fall.

It comes ahead of tomorrow’s Treasury Select Committee hearing at which five of the leading figures in UK private equity are expected to defend their industry, while conceding that some tax breaks on big deals have been too generous.

The Bank’s report warns that with banks desperate to get involved in the sector, lending conditions have become increasingly lax in recent months. Earlier this month, its own statistics showed that banks were for the first time on record lending to the sector at beneath the base rate.

The report warns that the cuts in loan conditions “mean that the underlying value of a firm could be allowed to deteriorate for longer before its creditors can intervene”. It says that banks may have become more willing to cut their terms because they can package away loans and sell them on to other investors.

It says that while some of its market sources remain sanguine about the fall in lending standards, “lower levels of risk compensation may reflect an overly optimistic assessment of the likely level of asset market volatility going forward, a view accentuated by continuing high levels of liquidity in financial markets.

“In this scenario, a large and pervasive enough shock might cause asset markets to adjust quite sharply as required-risk premia increased.”

It says one of the likely triggers for this crunch could be the “failure of a large leveraged loan deal that left the lead intermediaries with unexpectedly large commitments”.;jsessionid=10JHKVGGAKDB1QFIQMGCFF4AVCBQUIV0?xml=/money/2007/06/18/cnbank118.xml

Back in the real world, the mortgage derivatives disaster switched up a gear at the weekend. Below, Merrill seizes Bear Stearns collateral. With Merrill covered, what’s left for the hapless trapped investors? As important, what made MER bolt? What do they think they know that we don’t? How many more to come? Is this really the right time to start raising interest rates? In the choice between saving the dollar or saving real estate, isn’t it already too late for both?

A ‘Subprime’ Fund Is on the Brink
June 16, 2007 ; Page B1

Concerned that an internal hedge fund at Bear Stearns Cos. wouldn’t be able to meet a margin call, Merrill Lynch & Co., one of the fund’s biggest lenders, seized $400 million of its assets and is preparing to auction them off.

The auction, in the coming week, could trigger the fund’s dissolution — the second blowup in recent months of a hedge fund that made dicey bets on the market for risky home loans, known as subprime mortgages.

The surprise move involving the two Wall Street firms came as the Bear fund’s managers, led by bond-sales veteran Ralph Cioffi, scrambled Thursday and Friday to sell hundreds of millions of dollars in bonds to satisfy demands for cash and assets from creditors and stave off liquidation. Mr. Cioffi’s group had successfully auctioned off almost $4 billion in high-quality mortgage bonds Thursday morning. Later that afternoon at Bear’s New York offices, the fund managers presented lenders with a 30-day plan for selling more assets, a blueprint for meeting new margin calls that appeared to have been well-received.

Merrill opted not to wait. Friday afternoon, the firm’s bond traders began circulating a list of securities that had served as collateral, or security, for the credit it had extended to the Bear fund, High-Grade Structured Credit Strategies Enhanced Leverage Fund.

At the Comex silver depositories 3.7 Moz was added to Eligible at Scotia Mocatta. Final figures were Registered 78.35 Moz, Eligible 53.79 Moz, Total 132.13 Moz. Stay long precious metals, funny money is coming under the guns.

The NYSE WIN system is now short from Friday’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.

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:

Longview Capital Partners. TSX-V: LV
Longview Capital Partners is a global resource group. The current portfolio of companies we have founded, developed and invested in now enjoys a combined market capitalization of over $900 million.

Our model is to selectively invest in private or undervalued assets, augment management teams with our expertise and assist in the going public process. Once public, Longview Capital Partners continues to invest and brings an awareness of the opportunity to our network of retail and institutional investors.

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.

Canadian Royalties Inc CZZ.

MacMillan Gold MMG.

Quaterra Resources Inc QTA.

MBMI Resources Inc MBR.

Candax Energy Inc CAX.

Derek Oil & Gas Corp DRK.

Consolidated Spire Ventures CZS.

Cornerstone Capital Resources Inc

Pacific Asia China Energy

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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