The world fastest recession changed into a new bull market?
Original Member article posted for our members on September 8 '09
Allot of continued discussions in global finances/investing on the eventual demise of the US$, and its broad and likely serious implications in the future. Members know that up until mid year 2009, I did not agree with this premature pessimistic scenario, instead taking the stand in the middle. During the financial crisis the $ remained the safe heaven currency, even while the US instigated the global recession
Yet, a few months ago my mind changed noting here I too now feel this global currency has seen its glorious days past and likely to devalue far more in years to come. The Wegelin report reviewed for us clearly further dented me in the belief that the $ forward as a store of global value, is in deep trouble. How long it will take, how serious will it be and what will be the consequences? Nobody knows really.
Incredible while credible.
The Wegelin report and conclusion to exit all US securities is an master piece of work and one which comes from a credible source -not to be taken lightly! What it may well mean is that billions if not trillions of US$ divesting out of US -and into non-US securities. So, even if 1/10 of 1% flows into Thailand it could lift the SET to nearly 1000 which is one reason why I wrote this my SET target for year 2010. Dollar troubles and exit of US securties is bullish for developing Asia in the medium term.
The Aussi $ is ok, because their reserve bank is one of the very few which owns very little U$. When the US$ gets into trouble the US Fed will call on Australia to help it out, will they? The Aussie central bank has been long on the Chinese rmb since 2003 and on the euro since 2005.
Here is what one credible member just wrote me on the Thai Baht currency:
"the thai central bank has as well divested out of usd in 2006 and moved into euro, yen and rmb , by reducing the stake of the usd from around 80 % to under 50 % , this is one reason that the baht is up, this information was informed during the pad meetings( yellow shirts) of last year when the baht was around 31 - 32 against the dollar.
The central bank bought dollars around 37 - 38 baht and thus when they are forced to sell this stake sometime between 2010 - 2011 the bank stands to loose a large chunk , ( estimated at around 12 - 15 billion usd ) ,
moreover the thai central bank has also informed late last year that thai baht is also 70 - 80% backed by gold , which leaves only a few currencies that are backed that high by gold, namely aud, cad, swiss franc, indonesia rupiah, indian rupee, and to a certain extent the south african rand."
Earlier this year Morgan Stanley’s chief currency guru there kept calling for a gradual weakening of the Thai Baht, to around 38 per US$. They kept up this view, but it was wrong. Instead, so far in year 2009 the Thai Baht has been the second strongest currency in the region, just behind Indonesia's rupiah. Currency strength is always (overly so) adored by global portfolio managers -and this is likely one reason why the SET has been on such a bull run of late and there are continued capital inflows. The Thai political discount on equities here is also narrowing as I wrote to members it would in mid April '09.
A member askes jme about buying/owning Chinese ADR shares in New York in US$ and if this would hedge any $ currency drop. Its not that easy, here is how I answered and just revised a bit:
True, and I agree, that pure Chinese stocks listed on the NYSE in US$ should benefit from a potential serious devaluation of the $, assuming the underlying assets are in the Chinese currency. But its not that simple.
You must check carefully that they are truly Chinese companies, and that their business fundamentals will not greatly effected by a dropping US$, and that the balance sheet is not full of US$ or its equivalent in derivatives. It so can be tricky as other factors may come into play. (Like gold stocks dropping in value, even when the price of gold rises, only because later we find out the company shorted the gold metal.)
I would also worry that such in the US exchange listings are labelled "US securities"? and so global savers will increasingly not to want to own these, due to these potential nasty US tax laws levied even on non-US citizens and non-US residents. (See the Wegelin report).
US exchange listed foreign stocks are often no real “value investing” bargains as its just about always a huge company at an equally big p/e ratio, along with low dividends. Its very costly for a foreign company to list in the US, its far from being representative in Thailand and most other countries.
While there many different ways to hedge/protect/divest away from a dropping US$, beyond a review here: to me owning high yielding Thai value stocks, removed from US$ exposure remains a very viable core strategy. Owning and trading currencies alone provides very little yield and continued day trading on currencies is mostly a speculative activity. Stop losses are not often employed due to the risk on getting stopped out by the arbitrageurs and other market makers. Its more risky besides low/no yield.
Here is how I wrote a member whom recently asked me about this:
In the past couple of years currency traders have sprung-up and made headway convincing speculative trading capital to join them, due to stocks having been in such a rut. Forgetting along the way, that speculative trading in oil, US housing "ninja" bonds, derivatives and yes currency trading have combined contributed to the near total financial meltdown we just went through. Together they are part of the problem, not the solution. So its not just on moral grounds I depart, I realize that some highly respected people in the investment business believe the next global crisis may well come from massive trillion $/EU speculative frenzies in the currency markets.
For more on this see the link in our a member forum discussion:
When markets behave normally, one can post equally or even better returns with the strategy of owning and trading some of the small value cap.s., right here. They are often inefficiently priced and with above average information one can have the edge. Likely opposite to currency trading, which are mostly hugely efficently priced at any given moment, and there is always someone out in the big workd, who has superior information.
Surely last year was the exception with -40% returns for most stock investors, here as elswhere. But in year 2003, it was up nearly triple digit, beating just about any other strategy, and I would argue with less risk..as one always tries to own good fundemental stocks. Then there was Ticon, a selection which ended up quadruplling in value. Smaller cap Thai stocks, when they wake up, can easily make 40 to 60% moves, far beating the drudgery of 3-5% monthly returns the currency traders claim they do. Smaller cap MAI listed shares have hugely underperformed this year. At some point, and assuming the global recession has ended, there will be a huge catch-up in smaller good fundemental stocks. I want to be there, Don’t miss it.
Yet for just now there is so much SET big cap momentum, hard to stop the train with lots of foreign capital flowing in. The Thai market for now is all big cap deal driven, not really on fundementals, not yet. Significant improving fundamentals remain a bit illusive as many worry when the global stimulus runs out of gas, we will have the W recovery. This is why we see so many good fundamental stocks still lagging. My view is a solid market correction before the year end, but not a W revovery...as recent numbers are fairly convincing its for real. (W to me meaning yet another significant downturn).
Here are some specific stock comments so to be helpfull on my updated thinking, in addition to what has been posted on this already:
TTCL (5.20) has gone to a new high, so only hope all members at least got some. I should have listened to my tears in the meeting, instead of my intellect, and pounded on the table more on this. Buy this stock on any pull back, remains my view.
And with UKEM (0.76) just rocketing up 20% since mentioning it favorably here below 60. I would just ride it out and try to go for the warrants. UKEM could be a very good longer term holding as I like mgt. there. I agree with the price objective of nearly or 1 Baht into next year.
I also recently added QLT (4.20) as a small cap new selection, it just went XD for 0.12 Baht. I was likely premature in selling out SPALI (5.10) just below 5, but it has had such a run to date. That is what I get in being the early bird. I prefer TTCL.
LVT (2.34) is our “bete noire”. Everytime I suggest to them another view or approach to there, they view it as "an attack". They confuse good governance and listening to shareholders concern etc…with me “attacking them again”. The company leaders just want to run this firm as engineers and do their own, and not listen to any outsider. Sorry I wasted lots of time helping investors know LVT. The principals there, while running a good business, are completely unaware, naïve or plain silly on how to add shareholder value through an expanding p/e. Sorry, I misjudged them. LVT remains the lowest valued stock on the MAI and there is not much hope for this to change soon.
But this does not make it a bad medium term holding, as we got in while this stock was already the least valued MAI one; its up more then the MAI index year to date. The earnings fundamentals remain strong, with many new Chinese orders now coming, but don’t hope for them to change there in helping the market revalue the company more fairly. So I have been dishearted with LVT. My view would be lighten up on any strenght. I remain hopefull the company could come to its senses one day and give a press interview on how well they are doing around the world and in their business and explain their success. Its part of the job, but here too its been lame.
As you see post at the front page:
UEC (2.70) and TRC (2.46) are quality companies which while overemphasizing them is no longer so convincing, I remain of the view both have long term investment merit. A member has pointed out some insider selling on UEC of late, so I will try to ask them about this. There are many reasons why insiders may sell from time to time, but only one reason why they buy. UEC is a very high quality company as far as I can tell and after following them for some time.
Best Regards,
Paul Renaud.
