Open letter from a subscriber

Dear Mr. Renaud:

In regard to your question you ask on 9/1/98 in your article concerning thai export companies, "why not then accumulate lowest valued stock in SE Asia which export to the booming West?" the answer could lie in the question "What will happen when the booming West is no longer booming?" If these companies are selling at these levels now when the West isbooming, why have you never addressed the issue as what will happen tothese companies and the value of their stock when the boom in the Westceases? Is this not a valid issue? Do you really expect the export levels [and alleged profits] of thesecompanies to grow as the west plunges into a deep recession [the thoughtof a deep long lasting depression does not seem in the current world viewhere in the U.S. or in your newsletter] What will occur when newtariffs are placed on such products when such crash, recession,depression or whatever you want to call it occurs.

You news letter seem to avoid such thoughts. It sort of says the U.S. stock market is too high [no kidding] and it will go down and thus thestocks in Thailand are a better deal currently. You seem to take theposition that the eventual lowering of the U.S. market however will notbe dramatic enough to affect the export companies you suggest yoursubscribers invest. I hope you are correct but is this not wishfulthinking and failure to address the possible if not probable reality ofthe current situation.This is why you view regarding such company's debt that post on 6/10/98 could prove to be misguided if things decline in the West.Finally, the message posted by K on 8/31/98 that if a Thai company owns less than 50% of a subsidiary it is next to impossible to figure outwhat is going on. Thus all of your current recommendations could have asimilar situation to KCE in that they could guarantee loans onsubsidiaries in which they own just below the 50% level to avoid suchinformation being included on their consolidated financial statements.Given your views on optimum debt, possible unknown loans to subsidiariesand a possible or probably dramtic decline in the "booming West" does itnot seem prudent to at least address these issues in your newsletter.

I think you newsletter's philosophy is basically correct but you seem to avoid these issues in some sort of unbridled optimism that is notjustified by current economic reality that is facing all of us.

Sincerely,

Second message I received after sending him the first part of my more complete answer:

Dear Mr. Renaud:

Thank you for responding to my e-mail. I really appreciate the time and effor that you took. You are correct in that in my view we areheading for a worldwide depression and massive deflation. Certainlyreasonable people can differ on such views. I certainly respect yourview points, news letter and what you are trying to do. I do believethe arguements you make are correct. Nevertheless, I do think for allconcerned it is prudent to think about what will occur to various stocksthat are being recommended and how they will fair in a world widedepressiona and massive deflation. Certainly, I hope you are correct insuggesting that I am being overly negative. Yet I believe you do havespecial knowledge regarding Thai stocks and your perspectives on howthese stocks would perform [and hopefully survive] if your expectationsof the world economy is in error and things get dramaticaly worse. Sucha analysis would be helpful to all concerned. You can certainly explainthat you do not expect such a negative future but if one does occur itmight be helpful to know which stocks might survive and even prosperunder such conditions and why.

Thanks again for your response.Sincerely,

Thank you for your comment.

Essentially, I think you are too negative on the US and global economy. You assume that there will be a worldwide recession in 1999. Maybe? But I am not so sure as you are. Recessionary growth of 0.5 - 2 % yes, maybe -but not an outright US/global recession.

The mostly export Thai firms I advocate should prove to be relativelyinelastic as compared to global mild fluctuations in economic activity. They are rather defensive type of firms which produce basic and stable products.A fim like Bat-3K (33) could even benefit as people would then keep their cars and only buy the new batteries. Here is the most defensive perhaps.

If the US economy weakens more than a touch, surely they as a group will feel some impact but since they are already horribly undervalued, I feel they are the more conservative asset allocation in Thailand. Also maybe you do not consider interest rates will drop. This will make such double-digit dividend yields even more attractive. Falling interest rates have always proven to be an immediate and powerful stimulant! (Since this was written, the US Federal Reserve has indicated it will now reduce interest rates.) In general, the US market has held fairly well in the recent volatile US correction. Things could have collapsed too much lower levels. I have written elsewhere that assuming no major catastrophe; I do not expect a more significant US drop. Below 7,400 I would be actively buying. While in the US many analysts are now calling for a 7000 Dow, I think this is not likely.

The SET is at bottoming levels, refusing to go much lower despite the Dow's current troubles. (This was written before the current SET bounce).

We all must decide for ourselves how much cash to have at hand, what Year 2000 means to the computers and if China can pick up the slack where Japan has left SE Asia much disappointed for now. Will do US economy hold up? But if you are going to be in the Thai shares for longer term, I stand to my investment recommendations of mostly CM, PR, CAPE, S & J, TUF, BAt-3K, STA. I recognize that in the initial bounces of the SET, bigger cap.s may appear more alive. For this pure trading opportunity you do not need Thaistocks.com. But I much caution you all to position the bulk of capital in solid & undervalued good fundementals. Regardless of missed trading appeal.

The first 6 being my top picks as of this moment. STA has disappointed us to date as the price of rubber is cheap (like most other commodities). Maybe STA's time will come when inflation picks up again.

I truly do believe that Thailand will be the first to recover from the Asian crisis. And at p/e's of 1 to 5 it's worth grabbing some good Thai shares.

I think KCE was much the exception. As everywhere this can happen. No doubt it will also be that one of them has a highly succesfull subsidary, like President Rice with it's "Farmhouse Breads". Remember I advocate a *portfolio* approach.... of course there may be a disaster occasionally but they have been very rare. There will also be big winners like TUF. When the stock dropped below 100 I strongly advocated buying more. This will from now on be easier avoided as we have an autotext feature which will allow me to make more frequant and quick updates. Check us more frequantly. Unfortunately by the time my last updates were posted TUF was back to around 110. I expect that by the time the SET is back to more reasonable levels huge gains will be made in some of my picks.

As for "unbridled optimism"... I am just pounding on the table on thesefavorite shares. Some day when I am right, I dot' want to be told I was talking "bear" but saying, "bull". I will have to live by this statement.

Please add this to further my comments send earlier.

I just wanted to elaborate a bit further as you may perceive me not fully answering your legitimate observations:

• I simply do not view a world recession or depression or massivedeflation in 1999, like some of the Bears. Some sort of coordination by G7 will bring about new measures... this together with powerful tools at hand by the US Fed, should work. I also sense that Clinton is far moreconcerned about all this now than a year ago, when the US reaction to Asia's crisis was complacent. We may have to wait a few weeks before this is at hand. I do realize/agree things do appear gloomy right now.

   

• As far as optimum debt; for sure, if you assume the worst you would not want to have any debt at all. Only cash or better even -high yielding safe paper. But the reality is, one can hardly operate like this in a fast growing business. Growth simply requires financing. To insist on this parameter of no debt when choosing Thai shares is far just too restrictive. Throwing out some real good with all the bad. On caution, some prominent companies like the Mutual Fund Company (MFC) show "cash at hand", when in fact this "cash" is tied up in now defunct Finco's. While these PN's will one day be redeemed it may be years. I rather own operating business than such promissory notes.
• Please note I have one position in Gold and am still short the Dow.My call is simply that relative to alternatives, thaistocks.com's thinking should deliver globally impressive investment performance. Yet, Goldman Sachs, one of Wall Street top firms to my knowledge still sees the Dow at 10,000 by the end of the year. Still they just now delayed their plans to go public. Some partners are reportedly furious as they waited too long and so missed the US Market top. But we did not.
• As stated already, my export companies are mostly in favorablecore & stable businesses. Not the super cyclical's like tourism or luxuries.(Safari not withstanding but Phuket is in a gradual boom). The expected dividend yields on my picks in 1999 will increasingly look attractive in a world (and Thailand) were interest rates are still dropping. I think US investors are now realizing they must start bottom pick around Asiarather than just keep riding the now fallen bull market in USA.

Best Regards to all our valued Subscribers,

Paul Renaudwww.thaistocks.com

I had a brief visit with the M.D. of this company last week.The news appears good. S & J's core business will definitely remain profitable this year and the firm got two new major world class customers. Besides, Colgate Palmolive may soon initiate some new products. Their biggest customer is Betterway and Mistine; this S & J client will sell the same amount as last year. This is rather impressive considering the enormous droop in Thai economic activity.

Most important good news however is their new electric utility business. The largest Utility company in France (and one of the largest in the World) is just now negotiating to buy part of this venture. S & J plans to sell a substantial portion of this at a good profit. After concerns it was too risky and at the wrong time, it appears that this venture will now be attractive.

While I realize S & J has a small market cap. and even smaller trading volume. I keep encourage longer-term investors to keep accumulating these shares at currently below 15 Baht.