London Irvine Report June 25, 2007

No Buyers.

Blair Freedom Day: -3.

Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.

Warren Buffett

Last week several major holders of collateral from the rapidly sinking Bear Stearns hedge funds, found out what LTCM learnt almost a decade earlier, when a one-way bet goes wrong it goes wrong for all the other market participants simultaneously. In the race for cash, after the few plums and cherries are sold off, all the rest is illiquid junk with virtually no buyers at all. Why, because no one can tell what part of a CDO pool may be real, what part was fraudulent all along, and what greater damage is still too come from yet more defaults ahead. In effect, why take a risk and buy now when, if we’re lucky enough to be around at this time next year, even the best collateral may be picked up for pennies on the dollar.
Sophisticated Bear Stearns has gone in a week, from having virtually no capital at risk in the faltering hedge funds, to having $3.2 billion of its capital on the line, with legitimate doubts now about the ability of Bear Sterns to survive if the bailout fails due to continued market events far beyond BS’s control. Having just seen the future of a lock up in the liquidation process, wise investors will start to pull money out of other non involved hedge funds, before the system faces a lock up later in the year. Below, prestigious Bank of America thinks we’re only at the tip of the iceberg. Who am I to disagree. Time to get safely back to cash. I will be liquidating this week, all but my holdings in Derek oil and Gas, Quaterra Resources and MacMillan Gold. It is not that the other companies don’t have very real merit, I just want for now to carry only NAFTA energy and precious metals companies.

Bank of America Report Sees Worse Mortgage Defaults

By Sebastian Boyd and Will Edwards

June 22 (Bloomberg) — Losses in the U.S. mortgage market may be the “tip of the iceberg” as borrowers fail to keep up with rising payments on billions worth of adjustable-rate loans in coming months, Bank of America Corp. analysts said.

Homeowners with about $515 billion on adjustable-rate home loans will pay more this year, and another $680 billion worth of mortgages will reset next year, analysts led by Robert Lacoursiere wrote in a research note today. More than 70 percent of the total was granted to subprime borrowers, people with the riskiest credit records, they said.

Surging defaults on subprime loans have pushed at least 60 mortgage companies to close or sell operations and forced Bear Stearns Cos. to offer a $3.2 billion bailout for one of two money-losing hedge funds. New foreclosures set a record in the first quarter, with subprime borrowers leading the way, the Mortgage Bankers Association reported.

“The large volume of subprime ARMs scheduled to reset at higher rates in ’07 and ’08 will pressure already-stretched borrowers,” putting more loans into foreclosure, the Bank of America analysts wrote from New York. A collapse of the Bear Stearns funds “could be the tipping point of a broader fallout from subprime mortgage credit deterioration,” they said

—-The proportion of income that U.S. households with mortgages used for making payments in the first quarter of 2007 was close to or above the previous high in the late 1980s and early 1990s, the analysts said. U.S. mortgage borrowers will continue to find it harder to pay their debts until the end of next year, the analysts said.

Below, part of why I think the derivatives problem will continue to grow and eventually trigger a crisis.

Central banks should keep raising rates: BIS’s Knight
Sunday June 24, 2:44 pm ET
By Krista Hughes and Sven Egenter

BASEL , Switzerland (Reuters) – Central banks around the world should raise interest rates further to curb inflation pressures, the Bank for International Settlements said on Sunday.

The global economy is poised for a fifth straight year of growth above 4 percent, but risks remain and have as their common thread the highly accommodative financial conditions that have buoyed it in recent years, BIS General Manager Malcolm Knight said.

Tighter rates would have the added benefit of reining in financial markets, which Knight said were still loaded with risk, possibly sowing the seeds for a nasty correction in assets and currencies.

“Financial conditions are still accommodative, access to credit remains easy and credit spreads are at record lows,” Knight said after talks with about 250 central bankers at the BIS annual general meeting.

“Containing inflationary pressures seems to require further tightening in most jurisdictions, as is expected by financial markets.”

BIS warns of Great Depression dangers from credit spree
By Ambrose Evans-Pritchard Last Updated: 8:32am BST 25/06/2007

The Bank for International Settlements, the world’s most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood.

Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a ‘new era’ had arrived”, said the bank.

The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system.

“Behind each set of concerns lurks the common factor of highly accommodating financial conditions. Tail events affecting the global economy might at some point have much higher costs than is commonly supposed,” it said.

The BIS said China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity.

“The Chinese economy seems to be demonstrating very similar, disquieting symptoms,” it said, citing ballooning credit, an asset boom, and “massive investments” in heavy industry.

Some 40pc of China ‘s state-owned enterprises are loss-making, exposing the banking system to likely stress in a downturn.

It said China ‘s growth was “unstable, unbalanced, uncoordinated and unsustainable”, borrowing a line from Chinese premier Wen Jiabao

In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be “cleaned up” afterwards – which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.

It said this approach had failed in the US in 1930 and in Japan in 1991 because excess debt and investment built up in the boom years had suffocating effects.

While cutting interest rates in such a crisis may help, it has the effect of transferring wealth from creditors to debtors and “sowing the seeds for more serious problems further ahead.”;jsessionid=LRRIX1CJ0MPULQFIQMFCFFOAVCBQYIV0?xml=/money/2007/06/25/cncredit125.xml

Not that “cash” is necessarily a safe option. Below, the BIS sees a dollar drop ahead. “And how”, is all I can add. Dollar supremacy is ending, and the US is headed for bankruptcy, on present policies. There is no sign that present policies will change without a crisis triggering event.

Dollar `Vulnerable’ to Drop in Investment, BIS Says

By Lukanyo Mnyanda

June 24 (Bloomberg) — The dollar is “vulnerable” to a drop in the investment inflows that the U.S. relies on to fund its trade and current-account deficits, according the Bank for International Settlements.

The currency has been supported by purchases of Treasuries by foreign investors attracted to U.S. yields and central banks that buy dollars to curb appreciation in their exchange rates. Such investors now own a record 80 percent of Treasuries due in three to 10 years, according to research from HSBC Holdings Plc.

“The dollar clearly remains vulnerable to a sudden loss of private-sector confidence,” the Basel , Switzerland-based BIS said in its 77th annual report today. “The reliability of public-sector inflows has also become more uncertain.”

Central banks may reduce purchases of dollars and allow their currencies to strengthen in a bid to curb inflation, the BIS said. They may also invest a greater proportion of new foreign-exchange reserves outside of the U.S. to earn higher returns, adding to the “threat” to the dollar, it said.

Inflation in China accelerated to a two-year high of 3.4 percent last month, and a stronger currency would help curb gains in consumer prices by lowering the cost of imported goods.

Below, why dollar supremacy is over. Two of the new dynamic players in the global economy have both signalled they want it to end. They are each too powerful to block in the decade ahead. For now, they’re polite in their requests for a global rebalancing, better orderly and agreed and phased. There simply is no sign that anyone is listening in Washington . There, a ruinous trade war against China is in planning. Stay long gold and silver. The age of fiat currency is in its terminal phase.

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”.

Russia calls for new economic world order
ST PETERSBURG , Russia (Reuters) – Russian President Vladimir Putin called on Sunday for the creation of a new world economic order that gives greater clout to fast-growing emerging nations.

Days after attending a Group of Eight summit in Germany , Putin suggested that club was outdated and failed to reflect a shift in economic power away from the industrialised West to countries like his own.

“If 50 years ago, 60 pct of the world’s gross domestic product came from the G7, now it’s the other way round, and 60 percent of the world’s GDP is produced outside,” Putin said in a speech to a major economic conference.

He also took aim at financial organisations such as the International Monetary Fund and World Bank, saying they were created in “a completely different reality” and had lost relevance in the fast-changing global economy.

Russia is enjoying an unprecedented spell of economic growth that has enabled it to pay down its foreign debts and accumulate foreign exchange reserves of over $400 billion — the world’s third largest.

Putin said the world needed to reduce its dependency on the dollar as a reserve currency, and plugged the rouble as one alternative. Russia abolished capital controls last year.

“We need several financial centres and several reserve currencies,” Putin told an audience of international chief executives and government leaders attending the St Petersburg International Economic Forum.

Back in the world of hedge funds, signs of excess liquidity is everywhere. There is a feeding frenzy building to cash in at the top. Below, following Blackstone’s lead, today’s latest development. To me it is a sign that the top is near. Time to let other’s carry the risk.

Hedge Fund Based in London to Go Public in United States


Published: June 25, 2007

GLG Partners, one of Europe ’s largest hedge funds, will go public in the United States through a $3.4 billion merger with an investment company, Freedom Acquisition Holdings, according to people briefed on the transaction.

The unusual deal, which is expected to be announced today, would give GLG, based in London , a footprint in the United States and access to public markets at a time when investors still seem eager for the enormous returns that hedge funds have generated in recent years. GLG, which was founded in 1995 as a division of Lehman Brothers and became independent in 2000, is widely known in Europe but relatively unknown in the United States .

Though GLG had been considering going public for some time and started preparations in April, an approach by one of Freedom’s co-founders, Nicolas Berggruen, helped solidify its plans, a person close to the hedge fund said.

Freedom is a so-called special-purpose acquisition company — a publicly held company that has no operations of its own but is designed to take over other companies. It was founded last year by Mr. Berggruen and Martin E. Franklin, chief executive of a consumer products conglomerate, Jarden.

Freedom will pay GLG $1 billion in cash and 240 million shares, according to people briefed on the transaction. The hedge fund’s management company — as opposed to one of its multibillion-dollar funds — will then be listed on the New York Stock Exchange under the ticker GLG, in place of Freedom, which is listed as FRH on the American Stock Exchange.

GLG’s principals will hold about a 45 percent stake in the new company, while other top-level executives of the hedge fund will own about 11 percent.

The transaction is scheduled to close in the fourth quarter of the year, these people said. After the deal closes, GLG’s investors are expected to reinvest about half their after-tax profits into the company’s more than 40 funds.

Next, how hedge fund madness has consequences for nearly all. Forgotten now, how a change in the make up of a Goldman index, set up Amaranth for a fall.

Amaranth gas trades ‘hit US consumers’

By Jeremy Grant in Washington

Published: June 25 2007 03:20

Hedge fund Amaranth and its star trader Brian Hunter built up such large positions in the US natural gas derivatives markets last year that they single-handedly sparked abnormally high gas prices for consumers across the US, a congressional report claims on Monday.

The report is the first to lift the lid on months of frenetic trading that eventually cost Amaranth over $6bn in losses and sparked renewed fears over a hedge funds meltdown.

Concern is focused on the over-the-counter markets, where deals are negotiated privately between counterparties. Industry experts say OTC accounts for 75 of US energy trading.

Yet they fall largely outside the scope of the US futures regulator, the Commodity Futures Trading Commission.

Hedge fund managers aren’t gods after all. The many times bigger CDO problem risks over the summer turning into a 500 trillion derivatives crisis. A giant monetisation will probably follow. Better to be long precious metals early rather than late. Suddenly silver is piling up in the Comex depositories, I suspect some smart money is swapping paper for metal.

At the Comex silver depositories there was a lot of movement on Friday. 592,422 ozs was added to Registered at HSBC. 1.88 Moz was added to Eligible at HSBC while 592,000 ozs was withdrawn, while 3.1 Moz was added at Scotia Mocatta. Final figures were Registered 71.91 Moz, Eligible 64.67 Moz, Total 136.59 Moz.

The NYSE WIN system is now flat. The NASDAQ system is long. 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: Quaterra Resources Inc.


QUATERRA RESOURCES INC. is a junior exploration company focused on making significant mineral discoveries in North America . The Company uses in-house expertise and its pipeline of consultants, prospectors and industry contacts to identify, acquire and evaluate prospects in mining friendly jurisdictions with the potential to host large base, precious metal or uranium deposits.

The Company’s preference is to acquire a 100% interest in properties through initial evaluation.

Note: I have a position in the company and will continue to hold a position in Quaterra.

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.

BUT, I expect a particularly difficult summer ahead as the CDO problems start to surface far from where we might expect. Owning most stocks at this time offers a poor risk-reward balance, accordingly I will sit out the summer largely in cash and precious metals stocks. While the last Fed chairman Mr. Greenspan sees the odds as 2:1 against a US recession, I would put the odds as 2:1 on a US recession, due to the speed of the troubles of real estate and derivatives. While others might see opportunity in adversity and seek to gain by doubling up, to me that’s gambling and gambling’s more fun in Atlantic City , or Las Vegas , or Monte Carlo . I will review my stance later in the year.

Below is the list of natural resource stocks I will hold after disposing of most of my holdings. In no particular order, they are:

MacMillan Gold MMG.

Quaterra Resources Inc QTA.

Derek Oil & Gas Corp DRK.

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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