London Irvine Report June 21, 2007

Abandon Ship.

Blair Freedom Day: -6.

“Deeply regret advise you TITANIC sank this morning after collision with iceberg, resulting in serious loss of life. Full particulars later.”

J. Bruce Ismay, Director of the White Star Line
Time to get into the lifeboats, there is something seriously going wrong behind the scenes. How else can one interpret the sharks turning on their own. Forget another LTCM type bailout, suddenly it’s become “every man for himself”. I have to assume that the Merrill’s, Morgan’s and Goldman’s hire the best and have access to the best information on the street. If they’re grabbing collateral and scrambling to get out fast, I have to assume an almighty CDO debacle and rout is at hand. Is there another Refco in the wings. Below, this morning latest reports. Are well over a trillion in CDO’s and related derivatives about to re-price sharply lower and by how much? How many entities are about seize up on June 30 ths end-of-half valuation date? While US Treasury Secretary Paulson testified “I do believe that we are at or near the bottom”, he would say that for fear of starting a panic. I doubt we are anywhere near the bottom.

Merrill sells assets of Bear Stearns hedge funds

J.P. Morgan cancels auction, to negotiate with Bear fund managers

By Alistair Barr & Greg Robb, MarketWatch

Last Update: 6:27 PM ET Jun 20, 2007

SAN FRANCISCO (MarketWatch) — Merrill Lynch & Co. is selling roughly $850 million of assets from two Bear Stearns Cos. hedge funds that have been battered by turmoil in the subprime mortgage market, a person familiar with the situation said Wednesday.

An auction by Merrill, one of several investment banks that lent money to the funds, was completed late Wednesday, but more sales are planned on Thursday, the person added. The assets for sale include mortgage-backed securities, collateralized debt obligations and credit default swaps.

J.P. Morgan Chase another creditor, also planned an auction for some of the funds’ assets, but cancelled it on Wednesday afternoon, two other people familiar with the situation explained. J.P. Morgan has now decided to negotiate directly with the Bear Stearns funds to unwind positions via private transactions, they said.

It’s usually a sign of trouble when a lender sells collateral from a hedge fund client. Treasury Secretary Henry Paulson was asked about the problems suffered by the Bear Stearns funds on Wednesday.

“I tried to make clear we will be dealing with the subprime issue for some time and that there will be losses along the way,” Paulson said, while stressing he was not commenting specifically about the Bear Stearns situation. “It is a natural outgrowth of what we’ve seen in the housing market and certain lending practices.”

“As mortgages continue to reset, this will take time to work its way through the system,” he explained. “But I continue to believe that this risk is largely contained. It doesn’t pose a significant risk to the economy overall.”

—–Merrill sold mostly CDO debt that it had seized from the Bear funds on Wednesday, said one fixed-income fund manager who saw the list of assets on offer.

Demand wasn’t very strong for some of the more illiquid assets – those that trade infrequently, the person noted on condition of anonymity.

Other lists of assets from the Bear hedge funds were also circulating on Wednesday. Some of these so-called bid lists were sent out for execution within roughly an hour, which is unusual, the person noted. Sellers typically give investors one or two days to analyze the assets and bid, they added.

That suggests some lenders were keen to sell the assets quickly and weren’t so interested in getting the best price, one expert said.

Rate Rise Pushes Housing, Economy to `Blood Bath’

By Kathleen M. Howley

June 20 (Bloomberg) — The worst is yet to come for the U.S. housing market.

The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported.

“It’s a blood bath,” said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. “We’re talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.”

—– “It’s not just a housing recession anymore, it looks more and more like an economic recession,” said Nouriel Roubini, a Clinton administration Treasury Department director and economic adviser who now runs Roubini Global Economics in New York.

—- “This has been a drag on the economy,” Treasury Secretary Henry Paulson said at a press briefing today after he testified in front of the House Financial Services Committee. “I do believe that we are at or near the bottom.”

Banks fear rout on risky US bonds

By Ambrose Evans-Pritchard Last Updated: 1:09am BST 21/06/2007

Credit markets across the world were braced for trouble last night after Merrill Lynch abandoned efforts to save two Bear Stearns hedge funds, forcing the sale of $850m (£426m) of sub-prime mortgage bonds and other assets for debt repayment.

JP Morgan and other key creditors have yet to decide whether to enforce margin calls as a panic sell-off in the market for 2006-vintage mortgage securities pushes the two asset management funds towards the brink.

Credit markets across the world were braced for trouble last night after Merrill Lynch abandoned efforts to save two hedge funds, forcing the sale of $850m (£426m) of sub-prime mortgage bonds and other assets for debt repayment.JP Morgan and other key creditors have yet to decide whether to enforce margin calls as a panic sell-off in the market for 2006-vintage mortgage securities pushes the two asset management funds towards the brink.
Sources close to the deal said Bear Stearns was trying to organise “an orderly unwind”, conceding that the funds could not be saved.

The mushrooming crisis is the worst hedge fund upset since last year’s collapse of Amaranth Advisers, which lost $6.7bn betting on gas futures. This time, the ramifications may be broader as the worsening property slump engulfs a large chunk of America ‘s $2,000bn sub-prime sector.

Robert McAdie, a credit strategist at Barclays Capital, said traders were watching closely for signs of distress in any other funds playing the securities and debt markets.

—–What’s critical is whether the rating agencies now conclude that losses are so high that they downgrade the better AAA debt. A lot of banks holding these assets would be forced to sell on a very large scale, and that could cause a market rout.”

Mr McAdie said there was risk of a chain reaction through the market for collateralised loan obligations (CLO), a risky debt security now being issued on a massive scale.

“Many of the same investors are also buying CLOs and they are becoming wary of high leverage and ‘covenant-lite’ loans,” he said, referring to deals that impose few if any conditions on borrowers.

Standard & Poor’s published a report last week called The Covenant-Lite Juggernaut warning that these sorts of risky CLO assets exploded to $48bn in the first quarter of this year, double the figure in all of 2006. It said lenders would “rue the day” when the credit cycle turns.

Governor issues ‘toxic’ debt warning
By Edmund Conway, Economics Editor Last Updated: 2:18am BST 21/06/2007

The Bank of England Governor has warned the City that an explosive rise in lax loans and complex debt instruments now represents a major threat to global financial stability.

In a remarkable speech at the Mansion House last night, Mervyn King issued a caution to the corporate debt market, where banks have dramatically loosened their lending conditions and devised ever more advanced means of extending cash to customers.

He singled out collateralised debt obligations (CDOs) as a specific threat, warning those trading in these complex products that they may be dicing with risks “which we do not understand with any great precision”.

He said: “The risk of the entire return being wiped out can be much greater than on simpler instruments. Higher returns come at the expense of higher risk.”
It is the first time Mr King has spoken out publicly about the growing risks faced by lenders, though his warning echoes those from the Bank’s own Financial Stability Report, as well as a host of other City figures.

CDOs – complex pools of debt sliced up, sometimes piled on top of each other, and sold to investors – were once described by former Financial Services Authority chairman Sir Howard Davies as “toxic waste”.

Regulators fear that their complexity means that few traders are aware of the risks of borrowers defaulting. Yet, according to the Bank for International Settlements, sales of CDOs hit a record $251bn (£126bn) in the first quarter of the year alone.

While blood flows in the back rooms of Wall Street, the message is “business is booming” in Washington. Below, the global economy has never been better, says US Treasury Secretary Paulson. Non Americans never had it so good.

Global economy ‘firing on all engines,’ Paulson says

Treasury chief hails progress on narrowing U.S. current account deficit

By Greg Robb, MarketWatch

Last Update: 10:23 AM ET Jun 20, 2007

WASHINGTON (MarketWatch) — Treasury Secretary Henry Paulson on Wednesday gave Congress an upbeat report on the global economy, saying it was stronger than any time in the past two decades.
“The global economy is now firing on all engines in a way that produces better balance, more sustained growth and expanding opportunities,” Paulson said in testimony prepared for delivery to the House Financial Services Committee.

Worldwide, gross domestic product expanded at a 5.4% rate in 2006, the highest rate of growth in over 30 years, according to the International Monetary Fund. Current projections call for continued strong growth this year and next, Paulson said.

“In sum, global economic growth is widespread and moving at a faster pace than in the 1980s or the 1990s,” he said. “Inflation is down, fiscal positions have improved and vulnerabilities have been reduced.”

Acceleration in world economic growth has heightened concern that imbalances in global financial conditions might lead to a sharp decline in the value of the U.S. dollar.

But Paulson was sanguine on the matter, pointing out that the U.S. current account deficit has narrowed to 5.7% of U.S. GDP in the first quarter from a peak of 6.8% in the final three months of 2005.

—-“Openness to trade and competition fuels economic dynamism, innovation and deployment of new technologies that raise standard of living and productivity across the globe,” Paulson said.

“We cannot turn back the clock; the global economy is here to stay,” he said.

As if to drive home his point, Japan ’s exports are on a roll largely due to a US approved rigged Yen. Below, the FT reports the news with just a hint of trouble ahead.

Japan export hits record on Asian demand

By David Pilling in Tokyo

Published: June 21 2007 04:28 | Last updated: June 21 2007 04:28

Japan’s exports rose 15.1 per cent to a record high for May, but brisk imports and sluggish shipments to the US meant the trade surplus rose a slower-than-expected 9.3 per cent from a year earlier.

Exports rose to Y6,565bn, the 42nd consecutive monthly increase, according to preliminary finance ministry figures released on Thursday. But imports rose an even faster 15.5 per cent, to reach a record Y6,176bn. Economists say the heftier import bill largely reflects higher prices resulting from a weaker yen rather than stronger demand.

Exports to the US rose by a meager 0.4 per cent, following a fall in April. Economists are watching the effect of the slowing US economy on demand for Japanese goods. Most say that Japan’s recovery would struggle to withstand an abrupt fall in US demand.

If the US stumbles, this time it’s supposed to be different, and the global economy is supposed to shrug off any spillover effect. I have my doubts that it will, but in theory at least, the rest of the world has never been in better shape. But trouble is brewing in Europe , where yet another ill willed EU summit kicks off in Brussels today. The 28 Supremos who meet, each have their own agenda and plan. Ideally, the summit will do nothing, that way the meddlers can’t make anything worse. Traditionally, they reach a ill fitting compromise, and another bad tempered camel gets added to the EU stable of thoroughbreds.

With the world’s largest debtor about to spar again with it’s largest creditor, and ex Guru Greenspan publicly musing that China won’t dump its dollar holdings because there’s no one to buy them, China yesterday fired a truly frightening shot across America ’s fiat reserve currency bow. Below, how the FT buried the news. Someone in China read the old frauds musings.

China warns IMF over renminbi

By Richard McGregor in Beijing

Published: June 20 2007 19:41 | Last updated: June 21 2007 00:56

China on Wednesday issued a pointed warning to the International Monetary Fund not to back US pressure for a faster appreciation of the renminbi in a planned review of global exchange rates.

The People’s Bank of China, the central bank, said in a statement on its website that the IMF “should carry out its duties based on mutual understanding and respect”, especially for the views of developing countries.

Without directly naming the US, the PBoC said the IMF should step up supervision of member states issuing “major reserve currencies that play a pivotal role on the global systemic stability”.

The IMF announced this week a decision on a new framework. It will expand its coverage of currencies to “all major emerging market currencies”.

Will Treasury Secretary Paulson soon be reporting to an IMF currency board, and implementing a Latin American style, IMF imposed restructuring plan. Not on your life, but time is getting called on the free lunch from the fiat dollar. Stay long precious metals. Each year about 60 billion of new gold is mined, (using current prices.) Each year the G-7 countries lead by the USA , issues many times that in fiat currency. The unreality gap gets ever wider. I doubt the fiat dollar in its present form reaches 2017. I doubt that the euro, whose member central banks are still selling of their gold, will last in its present form either. The great transition is already underway, just don’t tell the G-7 voters.

At the Comex silver depositories 631,230 ozs left Registered at HSBC. Another 1.4 Moz was added to Eligible at Scotia Mocatta. Final figures were Registered 71.32 Moz, Eligible 59.66 Moz, Total 130.98 Moz. Stay long precious metals.

The NYSE WIN system is short. The NASDAQ system is flat. Yesterday’s action produced a buy liquidation signal on the NYSE system and a signal to go long on the NASDAQ at 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.

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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