London Irvine Report June 22, 2007

Contagion, Denial, Desperation.
Blair Freedom Day: -5.
“I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern ship building has gone beyond that.”

Captain Smith. Commander of the Titanic

The entire CDO class of assets is now over priced, many perhaps completely worthless. Few will bother to make adjustments in their books. Like central banks pretending that “leased” gold hasn’t been given away and sold into the market never to return, the hedge funds, banks and pension funds will pretend that nothing has changed and list the assets at full price on the books, hoping that no one notices.

But despite the pretence, the emperor has no clothes. The half a quadrillion derivatives lockup, has already kicked off. The funny money game so beloved by former Guru Greenspan, has gone into toxic shock. Behind the scenes the PPT will be trying to monetise a solution, but with over a trillion of CDO’s alone, spread around a global largely unsuspecting money manager world, the problem is far beyond the control of a US shady agency mostly charged with keeping fiat dollar supremacy working. Stay long gold and silver and add more for the backstop pension plan. The financialisation of the global economy process, set in motion by President Nixon’s adoption of fiat money in August 1971, has begun the process of collapse. But first, Wall street has found a new group of “investors” to load up with some of the new cheaper, if dodgy, CDOs.
Colleges Buy Up
Risky Debt After
Bear’s Debacle

June 22, 2007 ; Page C1

With Wall Street scrambling to offload risky mortgage-backed securities, potential buyers of subprime debt are emerging — among university endowments.

“There’s an opportunity out there to buy these loans at a discount,” says Lou Morrell, vice president for investments and treasurer at Wake Forest University in Winston-Salem , N.C. The university’s $1.2 billion endowment is in the process of placing about $25 million with a hedge fund to invest in subprime mortgages. Because these loans could sell for steep discounts, he says, “they will be popular with a lot of endowments out there.”

Late Wednesday, Merrill Lynch & Co. — a lender to the Bear hedge funds — auctioned off some assets it had seized from the Bear funds. The investment bank sought bids for $850 million in securities, some of which were backed by subprime mortgage bonds, but ended up selling less than half that amount, according to people familiar with the matter.

Most of the trades Merrill made were at prices of 85 to 95 cents on the dollar. A person familiar with the auction said some bids — which didn’t result in trades — were as low as 30 cents on the dollar.

I suspect few will want to buy at 85% and many won’t be cheap at 30% before the gathering CDO rout is over.

Before the fiat currency system ends in return to intrinsic value, many countries will go through some version of the Zimbabwe tragedy. Like the unfortunate and wrong Captain Smith, few now see the tragic end all fiat currency achieves, but most never saw Enron and Refco for the frauds that they were either. Most stayed in denial right up to the end. The CDO debacle will be little different. We open with the sad case of how a fiat currency ends.

Zimbabwe currency crashes; inflation as high as 9,000%

POSTED: 1701 GMT (0101 HKT), June 21, 2007

HARARE , Zimbabwe (AP) — The value of the Zimbabwean dollar suffered its worst crash in memory, dealers said Thursday, sparking a run on dollars and forcing stores to close early to put new prices on their meager stock.

Black market exchange rates — fueled by the central bank buying at the illegal rates to pay the mounting debts of crumbling state fuel and power utilities — rose to upward of 300,000 Zimbabwe dollars to one U.S. dollar in large offshore deals, said one trader.

The official exchange rate is 15,000-1.

“It’s gone crazy,” said the trader, who spoke on condition of anonymity because his dealings are illegal. “People are holding out for the highest bidder and mentioning as much as 400,000-1 which could be tomorrow’s price. It’s changing by the hour.”

The going rate doubled since Monday, he said

In local deals, the U.S. currency fetched at least 140,000-1 in cash and around 200,000-1 in electronic bank transfers.

Shortages of Zimbabwe bank notes created the premium on bank transfers, said the illegal dealer.
Zimbabwe has the world’s highest rate of inflation, estimated officially at around 4,500 percent but calculated by independent finance houses at closer to 9,000 percent.

A hardware store in northern Harare closed its doors Monday through Tuesday to re-price all its goods. Supermarkets and other shops are planning to shorten opening hours to make price changes, enabling them to buy replacement stock at higher prices.

A journalist for Zimbabwe ‘s official Herald newspaper reported that she had returned home from a week in South Africa to discover that during her absence the price of beef had increased 2.5 times, a bottle of cooking oil had doubled and bus fares had gone up between three and fivefold.

“The price movements in the past week are nothing short of total madness,” wrote Victoria Ruzvidzo in Thursday’s edition of the newspaper, a government mouthpiece.

—-“If it goes on like this, we’ll have nothing to sell, we’ll have no staff and we’ll have to close down completely,” said one store manager who asked not to be identified out of fear of being targeted for being “a prophet of doom” by often-violent ruling party militants.

So how could two obscure and relatively small Bear Stearns hedge funds have put us further down the road to ruination? Quite simply because though all will try to pretend for a while that the CDO’s are still worth face value, when investors want their money back, the collateral isn’t there to be sold, in some cases, in others it will be worth just a tenth to a half of face value. Merrill and BS have just established what the true market value is for toxic junk. A value likely to get lower with the passage of time. There was no such thing as a triple A rated CDO. Now everyone’s rushing to read the small print. Below, we open with contagion starting to spread. Is Barclays, approaching its Overend, Gurney & Co. moment? Get Yale and Harvard on the phone, fast.

Barclays faces hit over sub-prime loans turmoil
By Ambrose Evans-Pritchard Last Updated: 1:31am BST 22/06/2007

Barclays Capital is at the centre of concerns over its exposure to two Bear Stearns hedge funds facing collapse.

Sources said the bank may have lent far more money to the high-risk funds than originally thought, much of it linked to the lower tier “sludge” category of sub-prime mortgages most vulnerable to rising US default rates.

“This could hit Europe harder that people realise,” said one banking specialist. “We understand that Barclays Capital has lent $1.2bn (£603m) to these funds.”

CNBC reported yesterday that Barclays held $300m of the assets in the Bear Stearns pair, which are battling for survival after Merrill Lynch and Deutsche Bank invoked their right to seize more than $1bn in securities.

Barclays has declined to comment on the extent of its exposure, or whether it plans to join the liquidation drive.

Merrill appears to be having second thoughts about the forced sale after receiving “pitiful” prices for some of the riskier tranches of debt.

All the creditors are under intense pressure to avoid an auction process that could set off a chain reaction, causing a wholesale markdown in prices. The risk is of a sweeping downgrade of mid-quality debt that forces mass liquidation by institutional investors.

JP Morgan, Goldman Sachs, and Bank of America have all chosen to do deals with Bearn Stearns to limit risk rather than cause a “disorderly unwind”. Barclays appears to be in the same camp.

Chris Cox, head of the US Securities and Exchange Commission, said he was keeping a close eye on the Bear Stearns crisis. “Our concerns are with any potential systemic fall-out,” he said.

The securities, known as Collateralised Debt Obligations, are packages of mortgages that are sliced and diced into segments according to credit-worthiness.

The process allows the bulk of sub-prime mortgages to be marketed as high-grade AA or even AAA debt, while concentrating all the risk in the bottom tier.

CDO issuance exploded to $503bn last year. There is now over $1,000bn in outstanding CDO debt.;jsessionid=CBON5I3APXT4HQFIQMGCFFOAVCBQUIV0?xml=/money/2007/06/22/cnbarc122.xml

Below, BS considers monetising the solution. While $3.2 billion might cover the hapless investors who fell for a line from BS, they might even borrow it from the Fed, who will monetise the remaining holders of over $1 trillion in other CDO’s, spread as they are round the world? Besides is it really the American taxpayers roll to bail out giant banks in London?

Bear Stearns May Take on $3.2 Billion of Fund Loans, People Say

By Jody Shenn and Yalman Onaran

June 21 (Bloomberg) — Bear Stearns Cos. may take over about $3.2 billion of loans that banks and securities firms made to one of its money-losing hedge funds to prevent creditors from seizing more assets, according to people with knowledge of the plan.

Bear Stearns, the biggest broker to hedge funds, offered to assume the loans after Merrill Lynch & Co. took assets that backed $850 million in credit lines, said the people, who declined to be named because the proposal is confidential. Lehman Brothers Holdings Inc. and JPMorgan Chase & Co. also put some of their collateral up for sale.

An agreement between the creditors and New York-based Bear Stearns, the second-biggest underwriter of mortgage bonds, may avert a fire sale of the fund’s assets. Bear Stearns has spent the past few days attempting to rescue the two hedge funds after they made bad bets on so-called collateralized-debt obligations, securities backed by bonds, loans and derivatives.

“For the sake of its reputation, Bear needs to put this behind it as soon as possible,” said Peter Goldman, who helps manage $600 million at Chicago Asset Management, including shares of Bear Stearns.

Eventually, after denial ends, some savvy City slickers will try to invoke the protection of the credit default derivatives, it’s partly what they are there for after all. The trouble is that many were issued by poorly capitalised SPEs, little more than brass nameplates hanging on a wall in Bermuda, who knew they might one day be called on to do more than take in the premiums. As the reality of the CDO collapse sinks in, and the reality sinks in of the extent of America ’s financialised, often fraudulent, real estate bubble, central banks will eventually be monetising trillions of failed obligations. Don’t laugh at poor Zimbabwe’s currency fate too soon. Stay long precious metals for the long run, I don’t think we know the meaning of contagion and spillover yet.

Below, the latest wheeze spawned by the liquidity bubble, to keep the Us lifestyle “non negotiable”. We will borrow and spend our way to prosperity.

Reverse-mortgage market zooms forward

Plenty of new products are emerging, but consumers still need to be wary

By Andrea Coombes, MarketWatch

Last Update: 8:25 PM ET Jun 21, 2007

SAN FRANCISCO (MarketWatch) — As more homeowners nationwide tap into reverse mortgages, banks are jumping into the market to offer their own versions of these sometimes controversial loans.

The new breed of reverse mortgages generally allow for higher loan amounts and lower fees than the traditional, government-backed loans, but may charge higher interest rates.

There’s even a new product that sidesteps banks entirely and structures a reverse-mortgage loan between family members.

Reverse mortgages allow homeowners who are 62 and older to convert home equity into income, with the lender paying out via a lump sum, monthly payments or a credit line. When the house is sold, the lender is paid back with interest. With a typical reverse mortgage, the homeowner never owes the lender more than the value of the home.

“More lending institutions are getting comfortable with reverse mortgages and offering more variety so there is more choice available. There are more resources, more products. I think we’re going to see an explosion of this kind of lending,” said John Rother, policy director at AARP.

For instance, Bank of America) , which recently acquired the reverse-mortgage business of Seattle Mortgage Company, said it will soon launch nationwide a reverse-mortgage product it’s offered to customers in Arizona since November. The product, called Senior Equity Maximizer, offers loans on up to $10 million of home equity, said Colin McCormick, reverse-mortgage product executive at Bank of America.

—–Today about 90% of reverse mortgages are the traditional government-backed product, the most prevalent of which is the Federal Housing Administration’s home equity conversion mortgage, according to the National Reverse Mortgage Lenders Association, a trade group.

Borrowers have taken out about 71,500 new FHA-based reverse mortgages so far this fiscal year (which began Oct. 1), a 49% jump from about 48,000 loans in the same period a year earlier. From 1990 through to the present, about 310,000 such loans have been taken out, according to the NRMLA.

Something tells me this smacks of desperation and eating the seed corn of tomorrow.

Below, the beauty and charm of Potsdam , failed to soften the hearts of the negotiators at the world trade talks. “Make poverty history” looks like being a slogan to be around for quite a while.

Talks to rescue trade deal fail amid recriminations

Carl Mortished, International Business Editor

Efforts by four leading trading powers to salvage a world trade deal foundered in Potsdam yesterday when the European Union, the United States, Brazil and India failed to reach a broad agreement on reducing tariffs and subsidies.

The last-ditch effort to bridge the gap between richer and poorer nations failed amid recriminations on both sides of the wealth divide. The collapse of the Potsdam talks is a severe setback to Pascal Lamy, director-general of the World Trade Organisation, who nevertheless insisted that a global deal was still possible.

The Doha round of trade talks, launched in 2001 in the Gulf city and intended to lift the developing world out of poverty through expansion of trade, has been stymied by the unwillingness of rich countries to abandon tariffs and subsidies that protect their farmers.

At the same time the emerging industrial powers of the developing world, such as Brazil and India, are resisting demands that they lower tariffs on imported industrial goods. The row continued in Potsdam as Brazil and India cut short the talks two days ahead of schedule. “It was useless to continue the discussion on the basis of the numbers put on the table,” Celso Amorim, Brazil’s Foreign Minister, said.

Kamal Nath, India’s Commerce and Industry Minister, blamed the collapse of the talks on America’s unwillingness to reduce trade-distorting subsidies to US farmers sufficiently. “If the round is to move forward, there will have to be a substantial attitude change,” he said.

The Doha talks will now return to the wider forum of 150 nations in Geneva but Peter Mandelson, Britain’s EU Trade Commissoner, said: “It places a very major question mark on the ability of the wider membership of the WTO to complete this round.”

We end for the week with an update from China . This time Xinhua reporting in the well watched English language media edition, a message meant for the trade and currency negotiators in Washington . I hope it won’t be misread in Tehran. We are trading in very interesting times.

Poll shows Bush’s approval rating hits new low

WASHINGTON, June 21 (Xinhua) — The latest Newsweek poll found U.S. President George W. Bush’s approval rating has hit a record low, with only 26 percent of the respondents endorsing him.

Meanwhile, a record high 65 percent disapprove of him, including nearly a third of Republicans, according to poll results released by the Newsweek website on Thursday.

Most notably, the 26 percent rating, a two-point drop from the last Newsweek poll in May, puts Bush lower than Jimmy Carter, who sunk to his nadir of 28 percent in a Gallup poll in June 1979.

In fact, the only president in the last 35 years to score lower than Bush is Richard Nixon.

Nixon’s approval rating tumbled to 23 percent in January 1974, seven months before his resignation over the botched Watergate break-in.

The war in Iraq continues to be the major factor that drags Bush’s rating down.

A record 73 percent of Americans disapprove of the job Bush has done handling Iraq .

Despite “the surge” of U.S. forces in Iraq , a record-low 23 percent of Americans approve of the president’s actions in Iraq , down 5 points since the end of March.

Moreover, Bush scores record or near record lows on every major issue: from the economy (34 percent approve, 60 percent disapprove) to health care (28 percent approve, 61 percent disapprove) to immigration (23 percent approve, 63 percent disapprove).

Another weekend and time to investigate what the weather has been up to in terms of global crops. Not too good in the case of northern hemisphere wheat, I think. Despite the already high price and a harvest under way in the first producing areas, a few out-of-the-money call options look interesting to me. Have a great summer weekend everyone.

At the Comex silver depositories 623,267 ozs was added to Eligible at Scotia Mocatta. Final figures were Registered 71.32 Moz, Eligible 60.28 Moz, Total 131.60 Moz.
The NYSE WIN system is now flat. The NASDAQ system is long form last night’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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