Emerging Market Hedge

This morning I'm reporting on Thai economic growth over at TheStreet.com, and how amazingly, in the global liquidity crunch, it's managed to trend upwards -- and fairly fast, too:

In August, year-over-year exports in Thailand rose 17.9% vs. a rise of 5.9% in July, while the country's trade surplus rose to $770 million from $211 million. And at the end of September, the Ministry of Finance revised economic growth for the year up 50 basis points to 4.5%, and at 31.64 vs. the dollar, the baht is climbing its way back up to its July levels.

The scenario is a far cry from 1997, when the baht dropped 30% overnight vs. the dollar and Thailand was thrown into a cash crisis.

Now, contrast this scenario with the U.S. economic outlook:

As of Friday, Thomson Financial pegged overall third-quarter earnings growth for the S&P 500 at an anemic 1.4% rate. Should that come to pass, it would be the worst performance since the second quarter of 2002, when earnings rose by the same amount.

Analysts note that a weaker U.S. dollar, which continually set record lows against the euro during the third quarter, undoubtedly aided some export-heavy sectors. Unfortunately, the belief is that housing woes and a slowdown to the U.S. economy will sabotage profit growth for many.

"Downward estimate revisions have already come in from the banking sector, consumer finance, and mortgage companies," notes John Butters, research analyst with Thomson Financial.

And -- most fascinating -- on a rate cut conspiracy theory in Thailand:

The argument goes that consumer price inflation was down on the year to 1.1% in August from 1.7% in July, creating the right conditions for a rate cut alongside relative weakness in Thai securities, which have yet to feel the effects of positive economic growth in the country.

The rate cut would most positively impact home builders and financial stocks, giving what many say is a long-overdue boost to the Thai stock exchange (SET) in general. In the last year, the SET has advanced 37% to 847.93, much less than other regional stock exchanges: in the same period, the Hang Seng has gained 65% to 27,066, the Korean Kopsi is up 54% to 2003.60 and the Shanghai Composite Index has soared 217% to 5552.3

It's going to be an interesting week. I have a feeling that you'll see the SET take off amid all the positive spin on the Thai economy after the BoT meets on Wednesday -- even if it doesn't cut rates (great time to get some exotic SET index futures right now). Wednesday also happens to be the day the official transcripts of the Fed Reserve meting last week is out, which is not going to be as pretty, unfortunately. After last week's uptrend in the Dow, expect some mild nausea from the prop desks in NY. This could be a good time to purchase some put options on the Dow, alongside those SET index futures, and create almost a mirror-image opposite hedge of the one many were playing with back in July 1997.

It's a good emerging market hedge for the following reasons: it concerns two rate-slashing, tame  inflation markets (unlike, say, China or Brazil), one is an export-led economy and the other is an import-led economy, and it takes advantage of all the emerging market growth around. Let's see if you would have been in the green on Friday.