How to Play Middle East Unrest
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Once again, China has raised reserve requirements for banks to slow down lending and, hopefully, slow inflation, too. China reports that inflation accelerated to 4.9% in January. Part of the reason is that drought has damaged China's grain production and food prices are up.


Chinese banks lent $158 billion in January. That was more than double the rate of lending in December. Apparently, lending typically surges in the early months of the year in China.


It's no secret that Chinese stocks are out of favor right now. Fraudulent accounting and a general sense that the numbers for Chinese companies aren't reliable has contributed to the bear market for shares.


It's likely that the numbers from the Chinese government aren't reliable, either. If I had to guess, I'd say that inflation is probably hotter than what's being reported. But the one thing that is clear is that China will need to do more to combat inflation.


Reserve requirements for banks now stands above 19%. That's much more than in the U.S., and we might conclude that Chinese banks are healthier than U.S. banks. But again, with the legitimate concerns about official numbers, there's no real way to gauge the health of Chinese banks.


*****It seems inevitable to me that China will have to let the yuan rise in value against the U.S. dollar. It's also easy to understand why China is resisting. The relatively cheap yuan keeps Chinese goods competitive. Letting the yuan rise would slow foreign investment in China, which would, in turn, affect employment and wages.


*****I'm not sure anyone would have predicted that Facebook could take down a government. But we are definitely seeing the free flow if information on the Internet empower people to oppose repressive governments in the Middle East.


It's absolutely fascinating, and there's no way you can't cheer for the people of these countries as they put their lives on the line for a better way of life. The truth is setting them free.


Now, I understand the concern that fundamentalist religious groups with anti-American sentiment could step into a power vacuum and take control, like what happened in Iran after the Shah was ousted. But I would point out that even Iran's government is under extreme pressure. I'm not sure the general populace in the Middle East wants religiously oriented governments.


On the contrary, the people seem to want governments that represent their economic interests. They want to make more money and they want access to information. Basically, they want freedom. And ironically, that means technology and the Internet. It means iPods and iPhones, not imams. Mustangs, not mullahs.


*****When people talk about black swans, which are basically unforeseen catalysts that have profound economic impacts, we often think of something negative. But the unrest in the Middle East has the potential for a very positive outcome.


Just imagine of these countries became true end markets, fully participating in the global economy? American companies would be huge beneficiaries.


Of course, such change won't happen overnight. And it won't come easy. So far, I think it's no coincidence that strongest resistance has come in countries that don't have a lot of oil. But resistance is there in Iran, and it would be a mistake to think that it simply won't come to Saudi Arabia.


If you don’t own oil stocks already, you absolutely must when there's unrest in the Middle East. I think we've only seen the beginning of oil prices reacting to the unrest in the Middle East. There is a very real possibility that oil prices will move significantly higher before this whole scenario plays out.


I would also recommend that you seek out oil stocks in politically stable countries, like the U.S. or Canada. Canada has oil sands, and the U.S. has the Gulf of Mexico and the Bakken oil pool.


Energy World Profits readers have made some outstanding gains from Bakken oil producers. And I just recommended an emerging Bakken player on Monday. Shares are already up 12% and I think there's at least 25% more gains coming as this stock reaches a fair valuation. But if oil prices spike higher, shares could move much higher. For more, click HERE.

Posted 02-22-2011 3:46 PM by Ian Wyatt