A Small Asian Commodity Play Your Broker Won't Mention

[LaoPo]

I received an investment letter which might be of interest to some of you:

A Small Asian Commodity Play Your Broker Won't Mention

By Ian Davis; Stansberryresearch

It's good to be a commodity exporter these days.

Since 2003, the big "ABC" commodity producers* – Australia, Brazil, and Canada – have climbed 68%, 338%, and 106%, respectively. These three countries all have huge supplies of metals, energy, and agriculture.

* http://www.dailywealth.com/archive/2008/jun/2008_jun_24.asp

Today, though, I'm going to talk about another beneficiary of the commodity boom... one you've probably never considered a commodity play: Thailand.

For starters, Thailand has large reserves of iron ore and rubber. China's construction and automobile industry have driven the price of these two commodities through the roof in the past several years.

Thailand is also the world's largest exporter of rice, responsible for 26% of all rice exports. Rice has tripled in price in the last four years. It climbed 175% in the first five months of 2008.

This is part of the reason Thai stocks have done so well lately. The Datastream Thailand Index has climbed 23.7% in the last year.

However, despite their recent gains, Thai stocks are still well below the all-time high they reached in 1996, more than 12 years ago.

Out of all the countries effected by the 1997 Asian Financial Crisis, Thailand is the only one that hasn't fully recovered.

Take a look:

Thailand Peaked More Than 12 Years Ago

As you can see, Thai stocks soared in the '80s and early '90s. At the time, Thailand was a "tiger" economy, growing by more than 9% per year. However, by 1997, the economy became overheated, and the Asian Financial Crisis began...

So, is Thailand a good investment today?

From a trend standpoint, Thailand looks great. Thai stocks have steadily appreciated since 2002.

Thailand is also moderately free. It's the 54th freest country in the world (out of 157), according to the Heritage Foundation's Index of economic freedom. This is a measure of how much government control businesses face in a country.

However, Thailand has had some trouble lately...

Two and a half years ago, Thailand's president was ousted while addressing the U.N. in New York. Coups are never good for business, although this one was bloodless and generally supported by the people.

However, the new military-imposed government started off on the wrong foot. It installed controls on foreign capital, which immediately sent the Thai stock market into a tailspin. Fortunately, these restrictions were partially lifted, and the stock market has since recovered (aided by the commodity boom).

Finally, Thailand is relatively cheap. Its price-to-earnings ratio (P/E) is 11.4, 12.3% below its median level of 13 (the U.S. market carries a P/E of about 21).

You'll need specialized knowledge (and a specialized broker) if you want to buy individual Thai stocks. There are also three Thai ETFs. You can investigate them at

http://www.etfconnect.com/ Type "Thai" or "Thailand" into the search box on the top right-hand corner of the web page.

Asia's phenomenal growth will eventually produce a new bull market in the region's stocks. If you're looking for a unique way to play it, keep this commodity producer on your radar.

Good investing,

Ian Davis

************************************************

LaoPo

[AFKAFSinLOS]

So Lao Pao, you've found "your answer" to your question you keep asking me as to why I think the SET is undervalued... Do you believe it now you've read it somewhere and can quote it...?

I'd be interested in how you think this sits vs your own "view" of the SET heading towards 600?

I don't agree with everything in the article, but I do think the general themes makes sense - particularly the P/Es. Thailand also remains one of the cheapest in the region on that criteria. Many sectors will exceed their last year's historic P/Es, eg believe it or not banks, so looking forward vs future expected P/Es that's an even rosier picture.

Thailand is not for the fainthearted, but for the patient and those living here who want to reduce their currency risk vs THB and reduce risk of increasing wealth/prices in Thailand while their own western wealth moves with a different correlation, it's a great bet.

Another key point to remember is that the SET is somewhat of a baseline benchmark. It's easy to find stocks or fund houses that outperform it consistently...

[cynthialee]

commodity plays are for fools!

there are exceptions and most people dont fit into this category, especially ones who trying to impress on a public forum......lol.

[LivinLOS]

commodity plays are for fools!

there are exceptions and most people dont fit into this category, especially ones who trying to impress on a public forum......lol.

Yeah right.. They only have made a few 100 % for me in the last few years..

[cynthialee]

challenge sir.

give us yr day to day trades here with confirmation, if you produce like u say u can. millions will be offered to u by the like of citi, hsbc, merrill,etc.

warren buffet will answer yr calls!

[LivinLOS]

Search my posts dating back on here and phuket info.. All time stamped and are all listed clearly.

Bet the farm on gold at 360 - 380 and silver at 6.80.. Rest was in plays on the HUI, Zinc and uranium.. On Phuket info started a thread (popping bubbles if you need to find it) and called a short to homebuilders and lenders in april 06..

Same posts will list strongly short USD from about 02 until about 06 or 07.. Holding almost no currency now as I dislike the lot of them.

So you can call me a fool but I was the one making the money last year doing nothing but checking the beaches and playing.. Thanks to commodity's..

Gold still has legs and Silver is a possible big jump still.. Banks are about to start failing.. Fanny and Freddie may need to refi. Hurricane season is approaching..

[cynthialee]

lets see yr confirmations on all yr trades not just the ones you got right.

who knows you may be the exception but most lose sir, and thats a fact.

Edited July 8, 2008 by cynthialee

[LivinLOS]

I dont trade.. I invest..

Those were my buys.. No sales since then.. Well over 1000 ounces of gold and nearly 40k ounces of silver.. As I said I bet the farm.. I also have quite a chunk of HUI like ETF.. Thats my trades right there.

[cynthialee]

not trying to argue . you did what you did. good for you.

betting the farm is not investing.

[LivinLOS]

We are in a commodity cycle created by too much printing of fiat money.. This is the inflation effect of 'deficits dont matter' and its going to get really ugly..

Heres a play no ones doing..

The largest freezer in the world is in Le Mars, Iowa. The freezer is six stories high and shaped like a cube. The local newspaper calls it a "high rise freezer."

The freezer belongs to Wells' Dairy. Wells' Dairy is America's largest private producer of ice cream. It owns the Blue Bunny brand, but it also produces ice cream for Haagen-Dazs, Weight Watchers, and Walt Disney.

No other town in the world produces as much ice cream as they produce in Le Mars. Le Mars is the ice cream capital of the world.

Last week, I went to Iowa to research agriculture. While I was there, I passed through Le Mars and saw the Wells' dairy plant. One of the locals I talked to knows someone who works in the freezer. He says the ice cream freezer is full of frozen pork. I asked the local why. "The Wells brothers must be speculating on a rise in pork prices," he answered.

The Wells are making a smart move. I think we're approaching a major bull move in hogs and cattle (although there is probably a little more liquidation to come first).

You see, livestock farmers go broke when grain prices are high and meat prices are low. That's the way it is right now. Take a look at this chart my colleague Ian Davis put together...

Corn Prices

Two large hog farming concerns went bankrupt last week in Le Mars. Eric, a hog farmer I met, says hog producers are losing $40 on every pig they raise. I heard stories of farmers killing their cows and pigs at birth... They use females for breeding. They use the males for meat. Right now, it's cheaper to kill the males than it is to fatten them up and sell them as meat.

Smithfield Foods, the largest hog producer in the nation, is cutting its herd. Earlier this year, Smithfield announced it would reduce its output of hogs by 800,000 to 1 million heads.

Eric said he knew trouble was coming and sold his hogs last year. Now he uses his hog farm as a "hog hotel." He receives rent for taking care of another person's hogs, but takes no risk (except the credit risk of his customer). He has an option to buy a piece of these hogs later in the year if he wishes. He says he'll wait about six months to buy hogs... when the herd reductions start to bite.

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When the gold price rises, jewelry gets more expensive. It's the same way with farm animals. When the corn price rises, livestock must get more expensive. Corn has doubled in the past 18 months, but livestock prices are still in the same range they were six years ago. They will catch up with corn.

Here's how you play it: Buy a livestock ETF. Two trade in London under the symbols CATL.L and HOGS.L. They track the Dow Jones AIG sub-indexes for live cattle and hogs.

I just read the story of an anonymous hog farmer who spent 21 years accumulating land and paying off debt to create a dream farm for his wife and two sons.

A few years ago, the farmer decided to build a "contract facility" on his 378-acre property to increase the family income. A contract facility is like a hog hotel. You look after someone else's hogs and collect rent from the hogs' owner. Farmers run contract facilities when they can't afford their own hog operations... or they don't want exposure to hog prices. You won't make as much money this way, but it's much less risky.

Two years ago, the farmer and his wife paid off the debt on their hog hotel... and decided to enter the hog business for themselves. The plan was to build a farrowing operation. A farrowing operation is like a piglet factory. You buy a herd of female pigs and inseminate them every six months. You make money selling the piglets to a finishing farm. The finishers stuff the piglets with corn until they're heavy enough for the slaughterhouse.

So the farmer mortgaged his land again, bought 1,200 sows, and entered a contract to sell the piglets to a finishing farm at $50 per head.

Last week, the finishing farm told the farmer not to ship any more piglets. It had run out of money. Corn is the problem. The June floods in Iowa wiped out 2% of the U.S. corn crop, and corn prices spiked to more than $8 a bushel – four times the average corn price of the last 30 years. With corn at $8, it costs $150 to fatten a hog. But the meatpackers only pay $100 per hog. So the finishing farms lose $50 on every pig they raise.

Right now, finishing farms are liquidating their herds and going out of business.

So our farmer is stuck with the piglets. When I went to Iowa a few weeks ago, I heard of farmers throwing piglets in the trash... or using them as compost. For the first time in his life, the farmer doesn't have enough money to make his interest payments.

So the farmer contacted his lender and explained the situation. The loan officer advised him to sell all his land, liquidate the sows, and look for a job.

"My youngest son doesn't want to attend the fair next week because he is afraid the lender will repo his puppy," says the farmer.

When corn goes to record highs, pork must also go to record highs. That's because pork is corn refined. You could say a pig is just a sack of corn with four legs.

But there's a lag. Right now, everyone's selling hogs. The finishing operations are selling their herds, and the farrowing operations are dumping their sows. It is pushing down live hog prices.

But in nine months – when the market has worked through the excess – hogs will be in short supply. And that's when hog prices will start setting records. This shortage will last for two years, because that's how long it takes to bring a commercial hog operation from scratch to production.

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In 1998, the last time the hog business washed out like this, live hog futures jumped from 10¢ to 70¢ in two years. I expect we'll see something similar this time around...

The hog ETF is the easiest way to invest in hogs. It trades in London. The symbol in Yahoo Finance is HOGS.L. Experienced traders should look at the futures market. A lean hog contract trades in Chicago on the CME.

I am almost fully invested but I am debating 100k or so EUR into this play for a couple of year punt.. The logic strikes me as right..

[LivinLOS]

not trying to argue . you did what you did. good for you.

betting the farm is not investing.

Sure it is.. Its just higher risk / poor asset protection..

But your always long something.. I realized I didnt want to hold hardly any fiat currency any more..

[AFKAFSinLOS]

not trying to argue . you did what you did. good for you.

betting the farm is not investing.

Sure it is.. Its just higher risk / poor asset protection..

But your always long something.. I realized I didnt want to hold hardly any fiat currency any more..

Wouldn't waste your time arguing with "Mrs." Blizzard if I were you...

[AFKAFSinLOS]

....

A Small Asian Commodity Play Your Broker Won't Mention

By Ian Davis; Stansberryresearch

* http://www.dailywealth.com/archive/2008/jun/2008_jun_24.asp

BTW Daily Wealth: Ian David and Steven Sjugerr... (spelling!) write some interesting stuff occasionally. Very much geared to the US investor tho' and very much geared towards getting you to subscribe to their newsletter, and stopping short of anything specific...

As for the part about your broker not recommending these and these being difficult to buy... I think Steve and Ian need a trip to LOS... It's not difficult to deal here, and recommendations are even in the BKK Post here in addition to broker recommendations, eg read today very similar theme to the one you posted..

----------

STOCKS

Thai energy stocks still a bargain

DARANA CHUDASRI

Thai energy stocks remain relatively inexpensive compared with their regional peers, according to local analysts.

Tanaporn Visaruthaphong, who covers energy for Kasikorn Securities, said that based on closing prices of last Friday, the price-to-earnings ratio for the Thai energy sector compared favourably with their counterparts in the region.

Coal producer Banpu traded last Friday at 12 to 13 times earnings, compared with 18 times for regional peers. PTT Exploration and Production was also trading at 12 to 13 times earnings, in line with other regional energy firms.

Thailand's five listed refineries, however, were priced at five to seven times earnings, compared with nine times for the region. PTT Plc, the country's largest oil and gas company, was trading at eight times earnings, compared with regional valuations of 10 times.

Ms Tanaporn said KSEC currently favoured PTTEP and Banpu as outperformers. ''PTT is interesting, but has risk due to its price subsidies. It remains uncertain how long PTT will be required to subsidise LPG prices,'' she said.

PTT chief executive Prasert Bunsumpun last week said state-mandated price subsidies would cost the company 63 billion baht this year.

PTTEP, the exploration arm of PTT, continues to have upside potential from its Natuna field in Indonesia, Ms Tanaporn said. While exploration and production costs have risen sharply in recent months, the company's EBITDA (earnings before interest, taxes, depreciation and amortisation) remained high at 70%, with fair value for the company estimated at 216 baht per share, excluding potential gains from its new Indonesian field.

For Banpu, fair value was estimated at 590 baht per share at the end of the year, as demand for coal is expected to increase through mid-2010.

Chaipat Thanawattano, deputy head of research for Tisco Securities, said the company rated PTTEP, Banpu and Thai Oil as outperformers with dividend yields as high as 10%.

He said PTT also remained an interesting stock despite the cost of its gas subsidies, particularly as it stood to benefit from higher dividends from PTTEP.

PTTEP closed yesterday at 174 baht, down eight baht, and PTT lost eight to 290. Banpu fell eight baht at 472 and Thai Oil lost 50 satang to 50.50 baht.

Edited July 8, 2008 by AFKAFSinLOS

[london]

Interesting OP and subsequent posts.

Personally, I am a little uncomfortable in putting all my eggs in the one basket....be it gold, silver, rice, or other commodity plays....or for that matter real estate !

However, that said, it is a wise person who has some diversification in their portfolio.

There is little doubt that exposure to gold is a plus, however, whether one should actually hold large amounts of physical gold as against gold stocks tends to favour the return on the equities side.

There again, there are many other commodities that are out there and worth holding.

To declare my hand: I hold both physical gold AND gold stocks, equities both in Thailand and internationally, real estate both in Thailand and internationally.

I am bearish (as I have been for over 2 years) on the $US...(see previous posts). However, this wont last forever.

I am bullish on many Asian currencies and markets, not necessarily China as I feel this has already been factored in to the currency...and I am concerned that a slump will occur there after the Games are over.

Thailand, in a basket of S E Asian markets, is a medium risk...in my opinion.

But its fun being an investor......better than sitting on the fence!!

[LaoPo]

So Lao Pao, you've found "your answer" to your question you keep asking me as to why I think the SET is undervalued... Do you believe it now you've read it somewhere and can quote it...?

I never said it was overvalued; that's one.

Two: I wouldn't bet so much at these so called (in comparison with US values) undervalued SET stocks at the moment...watch your steps.

There are SO many HIGH QUALITY stocks in the Western markets with a value below 10, 8 or even 7 or 6, you wouldn't believe.

I even know of a company which is running BELOW 1.....0,98 to be exact.

Now, don't fool yourself with these so called low P/E's on the SET.

I better invest on world markets rather than mickey mouse markets where, if the <deleted> hits the fan, there will be no buyers....

You're warned now.

LaoPo

[AFKAFSinLOS]

So Lao Pao, you've found "your answer" to your question you keep asking me as to why I think the SET is undervalued... Do you believe it now you've read it somewhere and can quote it...?

I never said it was overvalued; that's one.

Two: I wouldn't bet so much at these so called (in comparison with US values) undervalued SET stocks at the moment...watch your steps.

There are SO many HIGH QUALITY stocks in the Western markets with a value below 10, 8 or even 7 or 6, you wouldn't believe.

I even know of a company which is running BELOW 1.....0,98 to be exact.

Now, don't fool yourself with these so called low P/E's on the SET.

I better invest on world markets rather than mickey mouse markets where, if the <deleted> hits the fan, there will be no buyers....

You're warned now.

LaoPo

Fair comment. I also know you're not based in Thailand, which would be another factor of where you invest.

Personally I believe in investing in equity based products as part of a diversified portfolio when investing mid-long term. I also believe in investing some part of those equity based products in the country you live most of your time in, from several reasons which include reducing currency risk and outperforming inflation and general wealth increases where you are living.

eg no point having all your money in the UK and beating UK inflation with say 6% returns in GBP terms, if THB strengthens and Thai inflation is say 9%.

For some people planning to live here long term, but not investing here at all, is actually a risk they overlook in my view.

Sure there's plenty of other markets, and some are perhaps better value. But return is just one factor among many to appraise, as are P/E's, liquidity etc. With that in mind I usually watch my step, and am prepared to fall from time to time...

Having had an interest in Thai equity based products for a decade or so, I've been happy with my lot. They are also at a great level to buy now (in my view) as part of a diversified portfolio, with a mid-long term view, for someone living in Thailand...

Edited July 8, 2008 by AFKAFSinLOS