Treasury Bond yields moved higher again yesterday with the 10 year note breaking through a key 20 year resistance line at 5.01% possibly signaling another end to the bond bull market that started in 1980. 

I think there is something else happening here such as a fund blowing up or the prime brokers tightening credit and the highly leveraged funds are scaling back their exposure because the sell off is coming in a fast and orderly fashion.  In any event, bond returns are nearing stock returns so we should see a flood of cash into the bond market taking yields back down in the next few weeks.  That should create a rally in the stock market as well. 

I am a critic of Ben Bernanke for his ruthless money printing and debasement of the US currency but there is one area where I will give him credit.  He has taken hidden the Federal Reserve back behind a veil of secrecy.  Where Greenspan telegraphed moves months in advance in order to not cause chaos, Bernanke has been rather coy about his views on the economy and interest rates outside of expecting higher growth in the second half of the year.  By bringing back the veil of secrecy, Bernanke returns some uncertainty about forthcoming policy to the market which is how the Federal Reserve operated until the last half of Greenspan's tenure. 

May retail sales numbers looked strong and will give some life to the markets.  It is too early to give credence to a strengthening economy, especially on the back of April's weak data which contributed to the May's strong numbers.  Even the same store sales numbers showed weakness at the low and mid ranges while the high end retailers held up the market.

It looks like you can forget my call of a June rate cut but do not look for an increase anytime soon.  May foreclosure filings rose a whopping 90% from a year ago as the housing bubble is being deflated.  Higher interest rates make it unlikely that holders of Alt-A mortgages will be able to refinance anytime soon.  This in turn, will not stop the rising foreclosures or allow the excess housing inventory to come down in a meaningful fashion.  In any event, you can expect housing to continue to be a drag on the economy.

We are checking out some new junior mining stocks and may have some new recommendations coming shortly.  In my eyes, we are at a point in the commodity cycle where a major shakeout is occurring with strong hands pushing individual stocks down trying to shake out as many shares as possible.  If you are a holder of juniors, stand firm and continue to look ahead.  Many juniors that started near the bottom of the mining cycle have drilled out their properties and completed feasibility studies.  At his point in time you want to focus on late stage development companies who will be mining large deposits with a good sized pipeline as follow up.  There are a number of firms that will be making the jump from the bulletin board and pink sheets to the AMEX, NASDAQ, and NYSE in the next 12 months and Wall Street will now start to focus on these firms.  It would be a good idea to focus on these companies as they will soon begin ramping up production and experience a period of rapid revenue and earnings growth.  A few will merge together and turn into the new large mining companies.  The whole process is playing out similar to the Internet in the 90's.  If this was a baseball game I would put us in the bottom of the sixth inning. 

Sources:  Reuters

Communications from The Loose Cannon are intended solely for informational purposes. Statements made by The Loose Cannon should not be construed as an endorsement by The Loose Cannon, either expressed or implied. The Loose Cannon is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile.

Producer prices in China grew 2.8% in May compared with a year ago as rising foodstuff, raw material, and energy prices pushed inflation to nervously high levels.  In the raw material sector, prices rose by 5.7% over a year ago.  PPI for foodstuffs rose by 6.3%.

Consumer price inflation in China accelerated to a 27 month high on the back of rising food prices.  The CPI for May was reported to be up 3.4% from a year ago.  Pork prices caused the bulk of the rise with a shortage being caused by an outbreak of Blue Ear Disease and a rise in consumption during the Year of the Pig. 

It appears as though the Chinese government may need to raise lending and deposit rates once again as inflation is showing no signs of abating and the Chinese A share market is beginning to recover and move higher.  The problem with the taking away with one hand and giving with the other approach being used by the government is that the painful medicine which needs to be taken in order to cool down the market will not be taken for fear of causing social unrest.  This will only mean a more difficult adjustment period down the road.  But the stock market is not looked at as a form of investment or savings by the Chinese population but rather a form of legalized gambling and the government has warned of pain ahead if people do not heed their warnings.

Recently the Japanese Statistics Agency released 1^st Q 2007 real GDP numbers which show a rise of 2.6% from year ago numbers.  The widely quoted 3.3% number is an annualized rate of growth based on the 1^st quarter number.  Looking behind the numbers domestic demand rose by 1.4% with private consumption also rising 1.4% from year ago levels.  Exports of goods and services rose by 7.4% showing that the recovery is being led by exports while domestic demand is still weak. 

It is expected that the Bank of Japan will hold off on increasing interest rates while domestic demand is still weak.  The export led recovery has not filtered down to the consumer level which will cause problems within the government.  Japan is nervous about losing export market share globally to China but is conscious of the need to raise interest rates to a more appropriate level while not choking off domestic demand entirely.

Chinese mining giant Aluminum Corp. of China (Chinalco) has agreed to purchase Peru Copper for $792 million dollars.  By itself the deal is significant in that it takes one of the last remaining independent copper-mining companies out of the public eye.  But behind the scenes we can see a picture forming as to how the Chinese are extending their footprint in commodities. 

In February of 2006 China Minmetals Corporation (CMC) and Macional del Cobre de Chile (Codelco) agreed to spend $2 billion dollars to set up a joint venture to mine copper resources in Chile.  Codelco received capital to be used to startup the GABY project in Chile while CMC got the right to purchase a 25% interest in the copper mine and both CMC and the joint venture entered into a 15 year contract to purchase copper from Codelco.

China is also reportedly negotiating with uranium miner UraMin on a possible buyout.  China is expected to build 2 nuclear powered plants per year between now and 2020 in order to provide cheap, clean power and mitigate global criticism over its energy policies. China is attempting to secure access to uranium before the spot price moves to a level where building and running new nuclear plants becomes prohibitive.

The key takeaway from these three deals is that China is securing future output from in order to setup a strategic stockpile and take incremental demand off the increasingly volatile spot market.  While China will pay market prices with the Codelco deal they will have secured access to copper reserves for the next 15 years.  As we move forward the spot market is being increasingly being left up to end users who have not secured supplies.  In the event of wars, political uncertainty, strikes, or shortages China is securing uninterrupted access to the commodities necessary to continue the countries economic growth. 

Sources:  Reuters, People's Daily Online, Cabinet Office Government of Japan, Bloomberg

Communications from The Loose Cannon are intended solely for informational purposes. Statements made by The Loose Cannon should not be construed as an endorsement by The Loose Cannon, either expressed or implied. The Loose Cannon is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile.

For months now, the markets have touted the virtues of ethanol as an alternative fuel but there is a dark side to the product outside of its inefficiencies.  Removing a dietary staple from the food chain has its consequences.  Corn is a staple of the diet in Mexico and tortilla prices have more than doubled over the past year causing protests in the streets.  In addition, corn is a basic feed item for meat producers and has sent the cost of meat production higher as well.

Even in the produce aisle of the local supermarket, corn and other produce prices have been rising.  In the winter, a severe freeze in Florida caused enough damage to the orange crop where additional oranges had to be imported and the price of oranges and orange juice shot up. 

In the United States food prices are showing the largest increase since 1980 with the UK seeing comparable increases and Chinese food prices up 6.2% in the first quarter.  In Dubai, rice and other food products are being capped.  In Saudi Arabia, the price of fresh vegetables has risen by 21%.  Globally, food prices are showing a 15% year over year increase for April and May of 2007.

Chinese agricultural demand has grown more than anticipated, with imports rising to $33 billion dollars in the three year period from 2001 to 2004.  At the last ASEAN conference, China signed an agreement with the Philippines to develop an area of land almost the size of Rhode Island with high yielding crops for eventual import into China to satisfy rising demand.

A combination of higher demand, drought, and farmers switching from other fruits and vegetables to growing corn and sugar is creating a perfect storm for agricultural commodity prices.

Fruit and vegetable prices are moving higher for other reasons as well.  As companies like Whole Foods have shown, consumers are willing to pay higher prices for organic and locally grown products.  Organic and locally owned foods have begun to make inroads into people's diets as they move away from eating unhealthy foods to eating organic. 

I am bullish on fruits and vegetables for other reasons as well.  In the rapidly developing areas of the world, like China, India, and the Middle East, rapidly growing disposable incomes allow people to afford better diets.  Those diets are consisting more and more of organically grown agricultural products along with meat products which require agricultural products for feed. 

Unfortunately, there are very few plays on organically grown agricultural products.  Most agricultural products come from small family owned farms and are privately owned.  There are a few plays such as the Saskatchewan Wheat Pool and Chiquita Bananas but my thoughts move towards the forgotten commodities such as broccoli, radishes, onions, and tomatoes.

I am going to add a small Chinese company listed in Hong Kong by the name of China Green Holdings, Ltd. (904 HK, CIGEF) to my portfolio.  CIGEF currently sells for a PE ratio of 19 with expected 2007 earnings growth of 35%.  CIGEF is a vertically integrated agricultural enterprise with 44,000 Mu of cultivation bases across China which produces fresh, processed, pickled, rice, and beverage products for distribution inside China and export to Japan.  A full write-up on CIGEF will be coming shortly.

The author owns shares of China Green Holdings.

Source:  A commodities boom makes itself felt in the supermarket by Jenny Wiggins, Financial Times, Gulfnews.com, Bloomberg.com, China Green 2006 annual report.

Communications from The Loose Cannon are intended solely for informational purposes. Statements made by The Loose Cannon should not be construed as an endorsement by The Loose Cannon, either expressed or implied. The Loose Cannon is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile.

Stocks mentioned:

Date                                                                            Current

Added                 Security                        Cost                 Price                Return

May 2, 2007       General Electric            37.31               37.32               +0.03

May 2, 2007       Barrick Gold                 29.58               28.32               -4.26

May 15, 2007     Pinetree Capital             12.59               10.638             -15.50

May 25, 2007     Kim Eng Securities        0.524               0.703               +34.21

May 25, 2007      KGI Securities             0.045               0.057               +27.12

May 30, 2007     Southern Copper Corp.86.88               87.948             +1.23

May 31, 2007    Bangkok Bank               3.461               3.510               +1.42

May 31, 2007    Rojana Industries           0.413               0.431               +4.34

May 31, 2007    Phatra Securities             1.237               1.306               +5.58

June 4, 2007       Jinshan Mines                 2.080               1.818               -12.60

News:

Barrick Gold:  Received EIA approval from the Tanzanian government for the Buzwagi project in Tanzania.  Buzwagi is expected to share infrastructure with the neighboring Tulawaka mine and produce an estimated 250,000 ounces of production annually for the 10 year life of the project.

Southern Copper Corp. – CFO Mr. Eduardo Gonzalez has resigned to pursue other endevours effective June 15, 2007.  Comptroller Jose N. Chirinos has been appointed as the interim CFO.

Jinshan Gold – A C$20,000,000 note offering is being offered to replace the equity financing which was cancelled in May.  The revised offering is a combination 3 yr, 12% note with 200 transferrable share purchase warrants.  One million tons of ore are stacked on leach pads in preparation for production startup in July of 2007.

Communications from The Loose Cannon are intended solely for informational purposes. Statements made by The Loose Cannon should not be construed as an endorsement by The Loose Cannon, either expressed or implied. The Loose Cannon is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile.

                                    6/8/2007                      6/1/2007                      Change

DJIA                            13,424.39                    13,668.11                    -1.78%

Euro Rate                     1.34                             1.34                             -0.61%

Yen Rate                      121.62                         122.06                         -0.36%

Brent spot price            69.49                           69.61                           -0.17%

Gold spot price             645.6                           670.59                         -3.73%

Silver spot price            12.99                           13.69                           -5.11%

Dow in Euros               10,050.45                    10,170.48                    -1.18%

Dow in Yen                  1,632,674.31               1,668,329.51               -2.14%

Dow/Gold ratio            20.79                           20.38                           +2.02%

Dow/Oil ratio               193.18                         196.35                         -1.61%

Gold/Silver ratio           49.70                           48.98                           +1.46%

Explanations:

Dow/Gold – This number reflects how many units of the Dow an investor may buy with one ounce of Gold.  For further information, search for a 100 year chart of the Dow/Gold ratio.  The chart reflects period of inflation and deflation.

Dow/Oil – A lesser known number but like the Dow/Gold, it reflects how many units of the Dow a barrel of oil can buy.

Gold/Silver – This is used more often by precious metals traders looking to determine which of the two major precious metals are undervalued relative to each other.

Dow in Euros – This is how European investors see our market index and the returns they are getting on an investment in the Dow Jones Industrial Average. 

Dow in Yen – This is how Japanese investors see our market and the returns they receive on an investment in the Dow Jones Industrial Average.

If you would like to see any other averages or information just send an email and I will do my best.

Communications from The Loose Cannon are intended solely for informational purposes. Statements made by The Loose Cannon should not be construed as an endorsement by The Loose Cannon, either expressed or implied. The Loose Cannon is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile.

With the Dow down sharply from its highs last week people are probably wondering why, how far, and what is next.  First I want to take a moment and toot my own horn a bit.

Way back on April 27^th I wrote that "The stock market seems to be holding up well in the face of a very negative report but remember the old saying 'sell in May and go away.'  It would not surprise me to see some weakness in starting in the next few weeks as TV shows are once again touting the benefits of the stock market.  An extended sell off to the June/July Fed meeting would set the stage for the summer rally."

…and on May 2^nd I wrote, "… the markets could be more volatile in the coming months and if the April data comes out weak after the first quarter earnings numbers are digested then we could see the market question whether the Fed is behind the curve and risking a recession."

The TV pundits today are beginning to question if the Fed is behind the curve with regard to lowering the Fed Funds rate risking the possibility of a recession.  Next they will talk about how the Fed should be focused on economic growth rather than inflation.

Now, what caused the most recent sell off?  You can point your fingers at a couple of items.  First, retail sales for May were reported today and same store sales numbers were weak in the low to middle end while the high end retailers did well.  Wal-Mart reported same store sales growth of 1.1% while Nordstrom reported sales growth of 6.8%.  We are beginning to see the downturn in housing flow through to the general consumer.  In short, if you have money you are spending it.  If not, the belt is clearly tightening. 

Second, in a surprise move, the New Zealand central bank raised interest rates and South Africa followed.  The move by the ECB was expected and telegraphed for some time now.  But the message is loud and clear when China's May increase is added into the equation.  Global economic growth is strengthening. 

On the surface the moves by New Zealand and South Africa would not seem important but South Africa is a major commodity supplier and they are seeing wage pressures from mine workers.  It used to be the case that when the US sneezed the world caught a cold but that does not seem to be the case anymore.  The transitioning economies of India and China are taking up an increasingly larger piece of the global pie.  For example, everyone focuses on US gasoline demand, weather, economic growth, etc. when speaking about oil prices but in reality Chinese automobile demand is growing at a rate in excess of 30% and the total automobile market in China is surpassed only by the US.  As growth continues, China will command an increasing share of the global oil market and the US will feel the effects much like smaller economies feel the effects of our growth now.  In 10 years we will be in a position similar to the smaller economies today.  When China and India sneeze we will be the ones to catch a cold.

Finally, the bond market has been sending a strong message to the global financial markets and that message is the same as the second point, global economic growth is strong and higher rates are on the horizon.  It was my thought that as the 3 month and 10 year yields converged, the 3 month rate would fall as the bond market looked for lower short term rates but the 10 year and 30 year bonds have sold off on interest rate increases and the FOMC's revised economic forecast which calls for a rebound in economic growth later this year.  If correct, then the next move will be up, not down in interest rates. 

For the revised forecast to be correct a lot has to go right in the economy.  It will be easy to get core inflation to moderate; we are already seeing lower gas prices which should provide just enough to get the PCE under 2%.  The problem will come with economic growth.  Retail sales are slowing at the mid to lower levels and US auto makers have said that the slowing in the housing market is spilling over into auto sales.  The risks are clearly on the growth side of the equation and more has to happen then inventory replenishment.

As a side note, Bill Gross of Pimco is now calling himself a 'bear market manager.'  That should tell you something.  I am a bond permabear believing that bond yields will eventually rise to 20% in the future.  There will be bull cycles with the larger bear market but until bond yields touch 15% I would rather not be bothered with bonds.  But that is another story for another time. 

So what does that mean for the stock market?  Numerically, the decline looks tough but the sell off has been quite orderly.  No panic selling yet as Asia and Europe sold off last night but there may be blood in the streets next week.  That would be a good thing because the best time to buy is when everyone is running for the exits.  Best to grab some popcorn and watch the carnage unfold.

Back on May 2^nd, we also said '….Barrick Gold and General Electric as attractive because they appear to be breaking out of base patterns….'  Even though they are now selling a the bottom of those patterns we still like the value in both companies and think that current prices are attractive entry points.

So what should you as a small investor do right now?  Selling is not the smart move as it will be done on emotion rather than rational thought.  Print out a copy of your portfolio tonight and look it over noting gains and losses.  Do you have any spare cash?  Does anything look attractive to you at these levels?  What looks attractive fundamentally?  How do the technical's look?  Is it at the bottom of a channel?  Will there be good growth ahead?  You may want to put in some limit orders below the market in the coming weeks and pick up some bargains.  BTW, using margin is not recommended. 

This weekend I will be posting the performance of the stocks I have mentioned as well as the weekend update as a service to you.  I figure if I am going to mention a stock then I should track its performance and follow up with any relevant news.

Source:  Bloomberg, Reuters

Communications from The Loose Cannon are intended solely for informational purposes. Statements made by The Loose Cannon should not be construed as an endorsement by The Loose Cannon, either expressed or implied. The Loose Cannon is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile.

The European Central Bank (ECB) raised its key interest rate to 4% yesterday in an effort to cool off surging economic growth.  Last Friday, April unemployment fell to 7.1%, the lowest level since recordkeeping began in 1993 and Bundesbank President Axel Weber said in an interview that the ECB would stop using telegraphing rate increases to the market. 

ECB President Jean Claude Trichet used a very similar speech to previous ones noting that ECB policy is on the accommodative side and that inflationary risks remain.  The ECB decreased their economic growth forecast for 2008 from 2.4% to 2.3% but in a rather shocking move raised their oil price estimate from $63.4 per barrel to $69.9 per barrel in 2008 and left their inflation outlook unchanged.  Given the falling unemployment rate, rising manufacturing utilization, and industrial output that is surprising to say the least.

Higher interest rates should start to put a cap on economic growth across the continent later this year.  The primary effect will be on businesses as they plan their 2008 budgets.  Look for the dollar to muddle about the 80-85 level through the end of the year.  I am looking for strong Euro area growth to continue through the end of the year with growth beginning to moderate next year.

With the possible exception of the United States, we are in a global cycle of rising interest rates being caused by strong economic growth, rising income and savings, surging stock prices, and double digit money supply growth.  Just one look at equity and fixed income charts shows the strong divergences as bond traders see inflationary pressures building around the world.  Bond traders see the money supply and economic growth numbers and are looking for higher interest rates on the horizon.  Even in the United States, the 10 year bond yield is beginning to rise in expectations of stronger growth ahead. 

The only place where we see a contraction of money supply globally is in Japan where the monetary base has contracted 5.7% in May on a year-over-year basis.  But Japan is an outlier as investment banks are loaning large sums of Yen to hedge funds affecting the massive carry trade we hear so much about.  These loans do not show up in the monetary numbers because the investment banks are drawing on credit lines already in place so no new lending or credit creation is taking place. 

Japan's attempt to exit from deflation has been on the back of rising commodity prices which show up in manufacturing inputs.  Japan's domestic economy is still weak with exports driving the economy.

Source:  finfacts.com

Communications from The Loose Cannon are intended solely for informational purposes. Statements made by The Loose Cannon should not be construed as an endorsement by The Loose Cannon, either expressed or implied. The Loose Cannon is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile.

One can expect the China A share market correction to continue for some time now as air is being let out of the bubble.  The number of new accounts fell to 240,485 on June 4^th from a high of 1.08 million accounts on April 30.  The new account number has been closely correlated with the rise in the A share market and the June 4th number shows that the tripling of the stamp tax and related comments by government officials may have thrown enough water on the fire to cool the rapid advance. 

Before the collapse one could see a top formation in progress by the news articles that were coming out in the press.  Articles claiming the high PE ratio in the A share market was ok because of the strong long-term growth rate in China harkened back to 2000 when investors were not worried about high PE ratios and net income on Internet stocks because of the strong long-term growth rate in the Internet.

Where we go from here is up for debate.  Will we see a complete collapse in the A share market?  No, but first we will briefly describe the difference between A shares traded in Shanghai and the H shares traded in Hong Kong. 

Everyone by now knows of the A share market in Shanghai which is closed to foreign investors with the exception of those foreign investors who hold QFII quota.  The A share market is China's attempt to develop a domestic stock market.  The A share are trades are settled in Yuan. 

H shares are shares in Chinese companies listed and traded in Hong Kong.  The shares are denominated in HK dollars and trade like any share listed on the Hong Kong Stock Exchange.  Chinese residents cannot trade in H shares or invest in the Hong Kong Exchange due to currency restrictions.  H shares are freely sold by Hong Kong residents and foreign investors.

If a Chinese company wanted to raise foreign capital it would list their shares on the H share market in Hong Kong in order to raise funds for expansion and if they chose to list on the local market they are more than welcome to do so as well.  There are no rules limiting capital market access for companies.  The same goes for companies listed on Hong Kong's main exchange.  If a Hong Kong based firm listed on the Hong Kong exchange wanted to list their shares in Shanghai they are more than welcome to do so.

Why does China have two different sets of share classes, one for Hong Kong and one for Shanghai?  As mentioned earlier, the Chinese government is attempting to create a domestic capital markets industry and if they were to combine the currencies of the Hong Kong dollar and the Chinese Yuan all of the Yuan sloshing about the country would immediately flow to the mature Hong Kong capital markets making any attempt to create a capital markets industry in China impossible.

So what does this mean for the most recent correction?  Hong Kong brokerage firms have been tracking the price differential between the A share and H share market and before the crash the A shares were selling for a record 40% premium over their H share counterparts.  So as the A shares pull back, the H share market in Hong Kong will provide a floor and both market prices will begin to correlate more closely.  It is unlikely that the A shares will sell for much of a discount to the H shares since the QFII quota was just tripled and foreign firms will begin to arbitrage the price differential between the A and H shares. 

In the long-term, value does remain in the Chinese local share market as more and more companies choose to list domestically along with Hong Kong.  Blue chip IPO's will mop up excess liquidity and the local market will continue to grow.  Domestic firms will continue to list in Shanghai so that they may tap into the massive amount of liquidity in the country.  If one is considering investing in the country the first place they should start is to review the number of new brokerage accounts opened and then begin looking at A share and H share price differentials.

Sources:  Bloomberg

Communications from The Loose Cannon are intended solely for informational purposes. Statements made by The Loose Cannon should not be construed as an endorsement by The Loose Cannon, either expressed or implied. The Loose Cannon is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile.

Last Friday I mentioned two possible courses and would like to expand upon those trains of thought. 

I will start out with my second scenario.  'The other scenario is a pickup in economic growth which would cause a rise in interest rates sometime later this year to fight off inflationary pressures.'

We are seeing this already in the purchasing and supply manager's data for April. The ISM New Orders and Production data both show increases consistent with expanding production and replenishment of low inventories from late last year/early this year.  While some of these new orders may go to the export market it is not expected that the export data will rise noticeably since the drop in our currency were only a few percentage points making only a nominal difference between our goods and goods coming from China or within Europe.  The competitiveness factor of American goods will not increase substantially with a small depreciation of the currency.  That in turn will only increase exports marginally.

Here is where inflation comes into play.  Buried in the ISM report is the Prices data.  66% of the manufacturing respondents are reporting an average of 4.9% increase in prices paid and 67% of the non-manufacturing respondents report an increase of 5.5% between what they paid at the end of 2006 and April 2007.  These increases will flow through the manufacturing process to the end product and create inflationary pressures along the manufacturing chain. 

At some point the additional costs will show up in prices paid at the user level and cause inflationary pressures forcing the Fed to raise interest rates to reign in inflation.

Now onto my first scenario, 'There are two risks here, one is that inflation fails to moderate and while economic growth continues to be weak causing a recession or stagflation.  In fact, while may not have the high unemployment for a classic stagflation scenario we do have weak economic growth and stubbornly high inflation so one could argue that we are currently in a stagflationary environment which could turn into a recession.'

It is expected that core inflation will moderate as we enter the summer driving season and prices fall.  But if the ISM Price data listed above is correct then there are price pressures already in the system that will eventually feed through to the end user level which will mitigate any drop in energy prices. 

Now, we are also noticing more corporate layoffs and a decrease in personal income and disposable personal income while personal consumption expenditures are increasing.  This means that the average person is feeling a squeeze on their income and may begin to cut back on purchases since the home equity tap has been turned off.  They can turn to credit cards to continue their spending but if corporate layoffs continue to increase then consumer confidence levels will begin to decrease and they will retrench. 

If consumer confidence begins to wane then the inventory adjustment that is occurring will become a one off event.  For production to stay on a steady or increasing level after the inventory adjustment it needs a corresponding increase in sales to keep inventories at the proper level.  If sales decrease while inventories increase then businesses will cut back on orders meaning lower production. 

Finally, 'While the market may be doing well in the short-term there will be an adjustment period sometime down the road and when the adjustment period comes the longer the wait the more painful the adjustment.  We are still a long-term bull (for the next 15 months) but the high PE's given the current economic environment temper my bullishness.'

Given the high PE's, this is not an environment where we would look to chase stocks.  A more defensive posture is more appropriate with overweight's to sectors like commodities where demand will continue to be strong regardless of a US slowdown or structural changes are underway.  Overseas markets like Thailand and Taiwan are attractive in this environment.

Sources:  May 2007 ISM Report, BEA, Personal Income and Outlays:  April 2007

Communications from The Loose Cannon are intended solely for informational purposes. Statements made by The Loose Cannon should not be construed as an endorsement by The Loose Cannon, either expressed or implied. The Loose Cannon is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile.

Jinshan Gold Mines (JIN) is a gold exploration and mining company based in northern and central China.

Mining in China is an extremely risky job.  Most operational mines are poorly regulated and disasters are commonplace.  Many mines have been in operation for a number of years and use outdated equipment along with underground mining.  But Jinshan is bringing western knowledge and equipment to China in the hopes of striking it rich.

Jinshan has three primary properties in China.  One of which is currently starting production, a second in the exploration phase, and finally a third property consisting of a large number of permits in Western China.

The first is the Chang Shan Hao (CSH) 217 Gold Mine in Northeast China.  Mining began in March of 2007 with production expected to commence in June or July of this year.  When production reaches targeted levels within a few months it is expected that CSH will be one of the largest gold mines in China with an estimated annual production of 180,000 ounces per year.  The weighted average cash cost per ounce is estimated to be $253 per ounce.  Jinshan will use open pit, leap leach mining rather than the more dangerous underground mining which has caused many problems within China.

The Didiangou Project in Central China is a very early-stage project with the first drill holes being turned along a 50 meter wide by 3 kilometer long property with the potential for a large, low grade ore resource amenable to open pit mining.  Jinshan received its license in 2006 and acquired over 1,000 channel samples from the Shaanxi Nuclear Geology Bureau of China.  These samples provided the basis for a 5,000 meter drill program which confirmed the resources existence.  The area to the northeast is particularly interesting as the mineralization is still open and appears to be strengthening.  Further mapping is being planned to and additional drilling is expected to take place to confirm the current ore body and expand the area to the northeast

Jinshan can earn an initial 71% percent interest in the project by making a payment of $1.3 million to the Chinese partner and spending $3.3 million on exploration expenditures.  The stake can be raised to 80% if Jinshan makes an additional payment of $300,000 and spends $2.8 million on property expenditures.  At that point, the Chinese partner can choose to participate at a 20% level of be diluted. 

Jinshan has also acquired 13 additional permits in the Xinjiang Province of Western China near the Mongolian and Kazakhstan border.  Initial grab samples are promising and the company is in the process of developing a drill strategy for these permits.

There are 149 million shares outstanding (170 million fully diluted) in the capital structure with Ivanhoe Mines holding a 46% ownership.
Communications from The Loose Cannon are intended solely for informational purposes. Statements made by The Loose Cannon should not be construed as an endorsement by The Loose Cannon, either expressed or implied. The Loose Cannon is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile.