Big Picture:

Inflation!

That one word is just about summing up the primary global "big-picture" concern at the moment. And with good reason.

U.S. inflation, by some measures, is wildly understated in the sugar-coated reports that we have been provided with in recent weeks. These reports have been spoon feeding us easy to digest - but completely fictional - inflation figures a little over 3%. Are they nuts!! Anybody who's eaten, paid for their health insurance or filled up their gas tank knows something is drastically amuck with the official numbers.

So what's the REAL inflation data? I've read more than one compelling analysis that shows -- when you consider the excluded data in inflation and pricing data, and return the cleverly adjusted weightings back to their base levels -- we're much closer to 11% or 12% REAL inflation. And that's painful. That's the type of numbers that you hear about in third-world countries -- and its way too high.

With inflation rates sitting at such high levels, it's no wonder that we're seeing higher prices everywhere. What's important to note, though, is that we're not alone. Globally, you can bet that we're not getting the full picture either, as its in the best interest of central banks everywhere to retain calm and prevent panic, even though we're starting to see inflationary rumblings popping up around the globe.

There's been a 43% jump in global food prices in the first quarter, so it's no wonder that people are starting to complain. These elevated prices have sparked food riots in Asia --Japan, China and Indonesia -- and Egypt. Plus, India is banning commodity futures in the hopes that it will reduce speculation and keep prices down.

Much of these protests can be directly related to the price of rice. Rice is the staple of billions of low-income and poverty-stricken hungry folks in emerging and frontier countries. And with rice prices shooting through the roof, these poor people are struggling to even buy their main food source.

If you look at the two graphics that I've included below, you can see how global economic growth and a weak dollar are fueling this surge in commodity prices. I've pulled these images from a really great article in The Wall Street Journal on April 10 that discussed inflation in depth. These key images from the article help portray graphically the scope and scale of the inflation problem (credits to the original data source are displayed in each graphic).

The first graphic, composed of three graphs, clearly illustrates the close correlation between GDP growth, the weakening U.S. dollar and commodity inflation:

View image

The next graph leaves no question as to the magnitude of inflation in key commodities -- grains, industrial metals and crude oil and oil products.

View image

The Role of Interest Rates

Now, as you know, interest rates are the primary tool that central banks use to keep inflation in check. So isn't it about time for the Fed to start ramping up the darn rate to prevent some kind of inflation disaster?

The problem is Fed Chairman Ben Bernanke and the U.S. Federal Reserve has its inflation fighting guns holstered right now. Not only are they not raising rates to staunch inflation, they just cut rates drastically seven consecutive times in the past seven months!

Sure, slashing the Fed funds rate to 2% has given the financial markets a short-term adrenaline fix and reduced the "hardness" of the landing in the housing and credit markets. But these rate cuts have also unleashed a dangerous amount of inflationary pressure on the dollar and increased the risk of some serious "moral hazard" -- enabling those bad-decision makers, who used cheap credit to get us into the huge global credit crisis that we're now in, to do it all over again!

Also, the Fed's rate cutting campaign has sent the dollar's value on a downward spiral. As I've alluded to before in the blog and here last week, the crashing U.S. dollar is feeding a vicious kind of inflation cycle, both in the U.S. and globally.

While the weak dollar and high inflation rates are pinching your pockets right now, let me just tell you that there is a way to ease your pain. You see, all of this confusion can also create opportunities for those savvy enough to read the undercurrents of these macro trends and (to stretch out this metaphor) know how to sidestroke away from the rip currents threatening to suck your portfolio out to sea.

There are ports in this inflation storm, where we can make outsized returns while avoiding some of the uncertainties here at home. And it's my job to find them for you. How are we going to do it? We're going to focus on taking advantage of the economic growth in emerging markets and the trends that are forming there, and steer clear of U.S. focused plays. Currently, I'm honing in on some emerging markets, and I am also looking at a few key developed markets like Australia.

We've already been following this strategy here at G3 Global Options, and so far it's working out well for us. For example, our investment in the Central Europe & Russia ETF (CEE) has been looking strong. And our two Chinese solar stocks, LDK Solar (NYSE: LDK) and Suntech Power (NYSE: STP) benefit from global macro forces that can sidestep inflation and economic factors, and continue to outperform. These two companies are doing well for us already -- up 45% and 33% respectively. And I also have a couple more strong bets, with similar potential to LDK and STP, in the queue that I'm waiting for clear buying signals on -- so stay tuned!

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 -- Major Events and Economy

Russia: Departing Russian president Putin stole the spotlight, even as his newly-inaugurated successor Dmitry Medvedev took power. Putin made it very clear that he would remain in control of his country, even though his hat would shift from president to prime minister. We can only hope that Medvedev becomes more than a figurehead and shows some back bone to work through Russian's growth pains. I believe he will and that Putin will allow him enough latitude to enact some positive reform which will be good for Russia's economy and it's people.

Asia/Pacific: The horrific cyclone that struck Burma may have caused up to 100,000 deaths and left up to one million people homeless. This natural disaster is resulting in human suffering on a scale that's almost unimaginable.

I urge readers to donate to the Red Cross to help with their relief efforts in the region, as I will. Our thoughts are with the survivors.

The Americas: Another strike by Argentina farmers threatens to throw fuel on the regions already difficult food shortages (primarily soybeans -- the country's major export -- and also wheat) and inflationary spiral (as discussed above).

This creates risk in the region but also potential profit if we pick and choose our plays carefully and hone in on companies that either are not adversely affected by these clear inflationary factors - or perhaps can even profit from them...

Investment Outlook

Like I discussed last week, we will continue to invest in the growth and strength of the middle class in countries across the world. This trend will remain one of the biggest investment themes of our time, as emerging markets like Central Europe, Russia and Brazil are becoming powerful economic forces as their middle class grows.

This trend presents excellent investment opportunities for us, especially during a time of economic slowdown here in the U.S. Central Europe, Russia and Brazil are somewhat insulated from the sluggish economy in the U.S. in part because of their strong and growing middle class that is allow "growth from within", making them smart investments at this time.

Outside of that core focus, I'm continuing to consider trades in Australia, Norway, India, Peru, Chile, the Middle East and Malaysia/Indonesia. Right now, there aren't any companies that are ripe for investment in these emerging countries. But I am keeping a close eye on them, and I will let you know if any profitable opportunities arise.

Position Update

Posco (PKX) is our most recently added position. Its shares have been buffeted around like a young duck in a windstorm, first spiking immediately after my recommendation, then selling off nearly $3 the next day, and now shares are trying to recover. It's enough to make you seasick! This share bouncing wasn't driven by any particular news or event, it's just that these shares can have a mind of their own at times and have a tendency to be volatile in the short-term.

Our specific Posco options position, the August 130 call, is up from near $8 when I recommended it to about $12 now -- that's a 30% gain in just three days. Continue to hold PKX.

Suntech Power (STP) shares continued to consolidate this week. If we don't see some firming in the shares soon, I may recommend that you take partial profits before long, so stay tuned. For now, continue to hold STP.

LDK Solar (LDK), our other solar holding, has been performing better, making a nice run up this week of almost 10%. The multi-year silicon supply contract that LDK wisely locked-in earlier this year should keep this company at a competitive advantage for some time. Continue to hold H1 (half of your shares) of LDK Solar.

H2 Trading Advice: 1) Take H2 profits (half of your position) at $38.
2) Stop H2 (sell if it falls below) < $33.

Wyeth (WYE) shares continue to act in a ho-hum to slightly bearish fashion this past week.

We're still awaiting any release of data from Wyeth's Phase III trials of its potentially breakthrough Alzheimer's drug, Bapineuzuma, sometime this month. As I've detailed in previous issues, this amazing drug works -- at least early results strongly hint that it works -- by actually clearing away the toxic protein that clogs Alzheimer's patients' brains. The way Bapineuzuma treats the disease is definitely what sets it apart from the other Alzheimer drugs in the works.

However, we must consider that this new drug may have disappointing results as that's a chance we always take with a drug in clinical trials. If there are disappointing results, we could see the shares take a hit. So make sure you haven't overloaded your portfolio with this position -- as always, you should never concentrate your holdings into one or a few holdings. I advise no more than 10% of your investment funds in any one position, and less than that if you're using the leverage of options.

So, continue to hold WYE in anticipation of clinical trial results. I expect we'll hear some updates on the drug in near mid-May.

New Oriental Education (EDU) shares took a modest dip this week, but they have almost fully recovered (shares are now near $75 -- down about $1 from the end of last week) and remain firmly in rally mode and above their key moving averages. I expect that EDU should continue profiting from its captive audience as more and more Chinese learn English. Hold EDU.

China Finance Online (JRJC) shares also dipped early this week, but quickly recovered and continued to rally in stair-step fashion, tacking on another $2 or so since last week's update to reach about $22 now (vs. our entry price of $16.60). Looking forward, I continue to expect more upside. The shares' technical momentum is giving us a green arrow, and as Internet usage grows in China, it should benefit this online seller of financial services.

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) shares declined this week, following its earnings release that was slightly below analysts' expectations. I think the sell-off was overdone, especially because earnings were still up a very respectable 79% over this quarter last year.

I expect we'll see that changeas Turkey enters the global spotlight more, and we see more positive developments and smart acquisitions by Turkcell. HoldTKC.

Baidu.com (BIDU) shares continue to rudely defy my bearish predictions. However, the chart is showing a rounded top with decreasing momentum -- plus a candlestick doji (hesitation) and bearish engulfing patterns. The odds are looking better that we will see the shares tick lower going forward, which will improve our position's value. But our time is running thin on these options, so if you haven't heard from me and the shares sell down to 348 or lower close this out with a partial recovery. If they start to rally again and go over 355 or so, also close the position.

Best wishes,

Jeff Manera
G3 Global Options,
Emerging Markets Insider
Email: Jmanera@EmergingMarketsInsider.net