More on oil:

First, I wanted to follow up on the oil piece I posted earliert this week. Today the dollar and crude maintained their tight, inverse relationship they've been following for some time. Here's a pop-up weekly chart since early 2004 showing the mostly inverse relationship between the dollar index and crude. Notice how the dollar just spiked up as crude tumbled (down from nearly 120 to 112 in the past couple of sessions:

View image

The Big Picture:

On the U.S. home front, GDP growth stayed technically positive in the first quarter, coming in at 0.6%. This number is lower than the GDP from the first quarter of 2007, which came in at 1.7%, but it is still in the positive. I do have some doubts about the accuracy of some of the calculations. You see, the GDP is based on a basket of goods. The components - as well as the component weightings and the way the data for each good is interpreted can become more art than science, especially if there is a strong political prerogative to shift the public's perception of how out economy is "really" doing.

Regardless of my doubts, many are looking at the quarter's positive GDP and saying we've avoided what seems to be the most feared recession in all history. You'd think that a recession meant the extinction of all mankind or something the way everybody has been so terrified of the "R" word!

Personally, I don't think it really matters if the numbers say that our economy is slowing dramatically or that it is officially going into negative growth for two consecutive quarters (the common definition of recession). The fact of the matter is that the economy is hurting and it wlll likely get worse.

Because of this, the Fed is doing everything it can to revive the economy. Just yesterday, the Fed cut interest rates by another 0.25%, marking the seventh cut in the past seven months. Although the cut to 2% has given the markets a short-term fix, the cut is also placing more inflationary pressure on the dollar.

The U.S. dollar has been trashed vs. other major currencies in recent months. The dollar is currently trading at about $1.50 against the euro, and it is likely to continue to weaken. Adding to the U.S. economic problems is the fact that more damage will likely become obvious in the U.S. credit markets and housing markets since inflation is making it more difficult for people to stretch their pennies. In addition, consumer spending will probably continue to tank, as March's consumer spending numbers were flat, and consumer confidence has dropped to a 26-year low.

While we may think that our country's economy problems are bad, the credit mess, slowing GDP and housing crisis doesn't stop at the U.S. shores. Much of Europe is feeling the pinch too, especially in the UK and Ireland, where we're seeing some serious housing market problems as the U.S. contagion spreads.

Just like in the U.S., the housing problem in the UK and Ireland started when so many housing loans and other loans were neatly packaged and "securitized" into highly rated-debt instruments, which seemed to have minimal risk. But the risk was anything but minimal, as the rating agencies were either idiots or getting kick-backs, and now this gigantic pyramid scheme is going to come crashing down to the tune of nearly $1 trillion in write-downs.

This has all created a difficult global market environment for investors to profit from. So how are we maneuvering through all this mess? Well, the easy answer would be to focus on some emerging market that isn't ever touched by the problems in the U.S. and other troubled markets. But the problem with this strategy is that emerging markets can no longer automatically and successfully "decouple" from other economies. You can't just blindly buy some ETF focusing on a far-away land and automatically score big. Instead, you have to be a smart stock picker with a global perspective and an understanding of all the interplay that's involved between markets.

This is exactly what I'm here for. A good example is our investment in two Chinese solar stocks, LDK Solar (NYSE: LDK) and Suntech Power (NYSE: STP). They have been doing great since we started positions in them, not just because of how the China stock market is moving up in comparison to other markets, but because of the fundamental promises of these two companies. It's the combination of these factors that make a smart trade, not just where the trade is located. This is a core part of my investment strategy, when looking at new investments.

Now, let's take a look at what is happening in a couple regions around the world, and where I'm looking at for possible new investments.

Global Markets Update:

Asia/Pacific: In this region, China's indexes, including Shanghai and Hong Kong, surged this week. One of the main factors for this strength was a 66% cut in the share trading tax. Unlike the U.S., China doesn't inflict capital gains taxes on its investors' profits. Rather, it has a tax on each trade investors make, and revenues from it go back to the Chinese government. So when this tax rate is slashed, the result is a lower expense to invest in the local stock markets.

The pop in the regions' stocks markets, following the rate cut announcement, helped our China holdings quite a bit (see position update, below). We'll take it!

While I'm glad to see our Chinese stocks moving higher, I'm not confident that this Asian rally is sustainable longer-term. So, for now, we'll continue to ride the strength higher, and I'll keep you posted on any other developments in the region.

The Americas: S&P raised Brazil's sovereign credit rating one notch to investment grade "BBB". This upgrade showed that the country's growing trade surplus and declining interest rates have enabled the country to pay off its debt. The news drove the Brazilian stock index -- the Bovespa -- to a record high. It also helped to buoy the Argentina and Mexican markets due to their close trading ties with Brazil.

I believe the strong rally in Brazil's stock market is primarily commodity driven in nature (oil and ethanol are key here) and is somewhat vulnerable here. That's why I haven't been advising many positions there, even though I am bullish on the region. I have a number of companies in Brazil and the surrounding region that I would love to recommend for long-term trades -- but not at these entry prices.

The bull market in commodities has driven stock markets around the globe to new highs and commodity stocks to higher valuations. So as with many of the commodity-centric markets (Australia, South Africa and Canada, as well as many others), I think we should wait for a dip in the Brazil index before we start buying substantial positions.

Investment Outlook:

The growing middle class in countries across the globe is still one of the biggest investment themes of our time. This theme particularly focuses on Central Europe, Russia and Brazil, amongst the other emerging markets. And I continue to favor the opportunities that I see in these countries because of the strength of their middle classes.

A conversation about the opportunities in emerging middle classes, though, wouldn't be complete without mentioning China. This country also has a fast-growing middle class, but the stocks there may come under pressure in the short-term. Since we already have a number of China-based holdings right now, we're going to be more selective going forward.

As for other countries, I also have some interesting potential plays that I'm considering in Australia, Norway, India, Peru, Chile, the Middle East and Malaysia/Indonesia. I'm sifting through the news and research right now, so I'll be sure to let you know in an Alert or weekly-wrap issue if any of these turn out to be good trades right now. So stay tuned for more details.

Position Update:

Suntech Power (STP) shares continued to back off slightly this week on some normal profit taking, following their late March/Mid-April rally. In light of this recent action, I'm watching the position for possible adjustments. For now, though, hold STP.

LDK Solar (LDK), our other solar position, has run basically sideways this week, after giving us a very strong performance in March and early April. As we discussed last week, the multi-year silicon supply contract that LDK recently inked should keep this company at a competitive advantage for some time.

LDK's edge with the supply contracts and low labor cost advantage should continue to inspire confidence and keep a floor under the shares. Hold LDK.

Wyeth (WYE) shares have backed off a tad this week, moving to just under $45. But the bullish mood in the shares remains intact. As I've been saying, Alzheimer's is a disease that is ravaging the elderly population and has the potential to become one of the fastest-growing pandemics in history. And Wyeth should be releasing data from Phase III trials of its potentially breakthrough Alzheimer's drug, Bapineuzuma, sometime this month. This drug actually works, clearing away the toxic protein that clogs Alzheimer's patients' brains, and I expect it to be a big winner for the company.

Continue to hold WYE in anticipation of clinical trial results. I expect we'll hear some updates on the drug in early or mid-May.

Oriental Education (EDU) shares continue their solid, stair-step run-up, and are now flirting with $76 (up about $14 a share since I first advised). EDU is one of the leading education services companies in China, and it will continue to profit from more and more Chinese people's desire to learn English. Hold EDU.

China Finance Online (JRJC) also had a very solid couple of weeks, moving up from about $14 to over $20. That's a respectable gain over our initial basis of $16.60, but I think we can expect more, based on the technical momentum being exhibited by the shares and due to the strong growth of China Internet usage.

Trading Advice: 1) Take H1 (first half of your position) profits at $25
2) Stop (sell if it falls below) H1 < 18.40.

Turkcell (TKC) is making telecom headlines with its bid to buy the Belarusian mobile operator Belarusian Telecom Network. This buyout would add a modest number of subscribers to the Turkcell rolls, but more importantly it would open up a whole new region for Turkcell to capitalize on.

Turkcell shares are behaving well, but they aren't showing enough amplitude to get excited about just yet. I expect we'll see that change as Turkey enters the global spotlight more, and we see more positive developments and smart acquisitions by Turkcell. Buy TKC up to $20 per share.

Baidu.com (BIDU): Our bearish May $350 put position on BIDU continues to move against us, following last week's positive earnings and this week's positive momentum in the region. I'm may have you make adjustments to this position soon, if it doesn't start behaving the way I originally anticipated. For now continue to hold the BIDU puts, but watch for an alert on any further strength.

That's it for now -- have a great weekend!

Best wishes,

Jeff Manera
Emerging Markets Insider
Email: Jmanera@EmergingMarketsInsider.net