Thai Fiasco: The Downside of Emerging Markets

by: Philip Davis

We were so close!

Oh well, what does a responsible pilot and crew do when the ship fails to respond? Safety checks! It's time to step back, take a look at our levels, and assess the situation before we decide to either continue the mission or abort.

As always safety is key, so let's keep the protection of our precious assets foremost in our minds as it would be a terrible shame if a sudden depressurization blew them all out into space!

Thailand threw the Asian markets into chaos in an attempt to put the brakes in their run-away currency as they announced a "clamp down on speculative inflows." The Bank of Thailand, the country's central bank, said that from today all banks would be required to hold in reserve for one year 30% of capital inflows that aren't trade- or services-related or repatriation of Thai residents' investments abroad.

The net effect of this is to make it MUCH less attractive for foreign investors to put money into Thai banks, and the Thai markets dropped 15% in one day! This had a bit of a domino effect as investors realized emerging markets (surprise) aren't as stable as the majors. What? Your broker never told you that? Your mutual fund manager didn't mention that they were taking a huge risk with an emerging market portfolio in order to achieve those gains? Oh well, live and learn...

The drop is not reflected in this chart but the Set Index closed at 622 so imagine the horror of the graph on your own!

Thailand Seti Index Chasrt 19 12 06

The rest of Asia suffered from the disruption as many financial stocks were hammered by losses in Thailand (expect Goldman to have known this was going to happen and somehow benefit from it!). The Hang Seng and the Nikkei lost a point, while India, Indonesia, Pakistan and Singapore dropped about 2.5% each.

China announced that they plan to keep an "absolute ability to control... critical areas: military industry, power and the power grid, petrochemicals and oil, telecommunications, coal, civil aviation and shipping." Sounds like Dick Cheney's letter to Santa!

The BOJ left rates steady, giving the dollar some breathing room which was nice (although based on continued weak consumer spending), and U.S. regulators returned the favor by issuing enforcement actions against Mitsubishi UFJ Financial Group Inc. (NYSE:MTU) just because they look the other way while people are laundering a little money!

With all this scary stuff going on, let's see if our markets can stand the heat today!

  • The Dow looks pretty happy above 12,400 but let's see them prove it!
  • This is it for the Transports -- can they hold the 200 DMA at 2,580 ahead of potential savior FDX's earnings tomorrow?
  • The S&P will either hold 1,420 or is very likely to retest 1,410, a level we must not fail!
  • The NYSE is already a comatose canary at 9,100 and below 9,050 makes this dead canary #2
  • The Nasdaq is a canary with pneumonia above 2,425 and slips into a coma below that with a projected line of death at 2,400
  • I don't know how many times I told them not to rally without their SOX, which need to be pulled up over the 480 mark while 470 just leaves us barefoot in the snow.
  • The Russell needs to pull out of its power dive before it hits the 50 DMA at 775.

Options Trader 12-19-2006

Circuit City Stores Inc. (NYSE:CC) came out with earnings and they were terrible. People are buying stuff but CC (like Best Buy Co. Inc. (NYSE:BBY)) isn't making any money selling it! Bad, bad, bad and we need to take a big step back and think about what's going on here...

The PPI is up 2% in November and the core rate is up 1.3% -- very big numbers! Also very bad! Housing starts made a 6.7% recovery but permits are down, a mixed bag...

If the economy isn't as hot as we think it is then oil is in big trouble. OPEC has already told us we are oversupplied with oil, but if the rosy demand outlook falls below the 1.3Mbd growth they are still projecting -- Uh oh! I promised a myth-busting article on Chinese oil demand, and I will get to that soon, but others are already doing my work for me:

It always pays to keep things in perspective -- that's one of the reasons I started keeping a Blog!

9:15 UPDATE: Thai government to markets: Never mind! Just 18 hours after wiping out 12% of their nation's GDP in market losses the Thai government is lifting controls on foreign -- way to look stable boys!

This is the same Thailand that had a military coup in September and, at the time, I marvelled that people would keep throwing money into a market where all the government officials were new at their jobs (not to mention unelected). "But it was such a nice, peaceful coup" -- investors said.

My thanks to Kustomz for keeping on top of this story!

Read all of Phil Davis's articles on Seeking Alpha