I have an idea in mind with regards to optionality trading. But besides oil, I can't seem to find similar products that work in the same way.
The criteria are as follows
The physical commodity prices off a transparent exchange on a regular basis (i.e the price of the commodity can fluctuate everyday but there should be a fixed/closing price at regular intervals that is recognised by market players)
There is a paper market that follows this price movement
Preferably, this commodity can be stored
Preferably this commodity's absolute value is low (to make financing the purchase easier)
Thanks in advance. You can comment on this post or drop me an email at ntuchartist@hotmail.com
I must say that it has been a very long time since I actually looked at my own blog and did a post. So today, I will just like to share a few things that I have gathered over the past 10 months or so.
1. Seems like many of my business ideas that I actually penned down in this blog has materialised.
a. Coupon dispensing idea has been implemented, though still at the infancy stage
b. Nandos is taking off
c. Teaching financial education to students is getting more popular now
Only the last idea of a landlord agency has not been implemented/taken off yet.
2. The current market correction seems to be a good time to start picking up long term stocks. Look for high dividen yielding stocks to invest in! I would think that REITs with low gearing would be a good choice once their dividen yield goes up to 8+ %.
3. My Job.
I am currently working in a rotational program in one of the top few private oil trading companies. My rotations will bring me through shipping/cargo operations, risk management and corporate finance. So far, I have completed my operations rotation and am currently in risk management.
Being in a physical oil trading industry is more like doing a business as compared to what speculative trading that banks do. The part that most resembles a financial institution is where we use derivatives like swaps and futures to hedge our physical underlying position.
Just a brief summary of what I have done/learned over the last 10 months.
Operations:
I did shipping and cargo operations for the following products: gasoil/jet/fuel oil. This involves getting vessels to bring the products from one country to another, while watching the quantity and quality of every loading and discharge. Quantity ranges ranging up to a million barrels per vessel. I estimated that the value of products that I personally shipped, is worth more than USD 1 billion during my time as an operator.
I would say that this is really a big responsibility, considering how new I am in the industry. But the responsibility also came due to certain shifts on my desk whereby I became the most senior far east operator on my desk after only a few months. Hence I had to quickly pick up the skills and knowledge on blending, terminal operations on top of the regular cargo and shipping operation.
The main take away that I had from this rotation is that everything in the world is flexible. People are the ones who make things happen. Most often, problems are solved by being creative, flexible and having good relationships with people all over the region.
Risk Management:
This is currently where I am at the moment, working on Naphtha risk management. Essentially in a physically trading house, we minimize the speculative positions by hedging almost 100% of our cargoes. Knowledge of the different exposures in the book is crucial to knowing where the PnL (profit and loss) is coming from.
Exposures can come about from a variety of reasons. The different hedging instruments that are used, or simply different pricing terms that are used on the buy and sell side. Some exposures are like the Front-to-Back exposure, crack position, east/east position etc. Hence my job is to find out these exposures and see how they affect the book, though some exposures are almost impossible to hedge fully. The ultimate decision on whether to flatten these positions will be determined by the trader.
To end off:
Lastly, physical trading talks about optionality in doing a business. This is the fundamental concept on how to make money in trading and can be applied to any products, any where in the world. The basic concept is simple but it is up to the trader to decide on how to leverage on this and make money. Thus, if any of you out there who are running a simple import/export company and would like to see if this optionality ideal can be used in your business, feel free to drop me an email and we can discuss the possible of applying this concept.
Dear readers, the lack of updates recently is because of my commitment at my work place. Though the hours at my trading house are rather long, but I actually enjoy what I am doing now and am learning lots of stuff with regards to physical oil trading.
Also because of work,I have also turned down an offer from Mr Tan Kin Lian's (ex CEO of NTUC income) offer to help set up and teach a financial course, but I feel honoured to have been approached by him too.
In other news, currently I am not really actively trading the markets for 2 main reasons,
1. Work makes it hard for me to monitor the markets as actively as in the past
2. Just by looking at the charts, I feel that the market is going to correct soon. All the RSIs are above 70!!
However, I do check my watchlists daily..which comprises of commodity stocks and REITS.
Finally, I believe that I will be updating this blog much less frequently in the future and I thank everyone for the support over the years.
I was in China for my graduation trip when I saw this particular machine dispensing deals via coupons on food/clothes/products etc. It has taken off in China but somehow no one has brought it into Singapore yet. Personally I find the idea very lucrative as I did a mini business plan with a few friends including asking around for potential investors. However I regret to say that nothing has been done as everyone that I talked too would like to concentrate on their jobs.
Nonetheless, here is the idea that I would like to share and maybe someone will actually do it? All the best to the person!
Sample picture of the machines (from english.sina.com)
Concept
Build a machine that dispenses vouchers from merchants in the proximity to passersby, so that they will be enticed to visit these shops.
Charged the merchants for advertising on your machine
Over time, create a profile list of the users of these machines and more revenue can be gained for being able to target specific groups of people
Why I think it will work
At least for people my age group, we tend to meet at a certain MRT station first before actually deciding what to eat. Because some people in a group will definitely be earlier than the rest, he can go take a look at the machine and decide what's having a promotion and propose to the group.
Singaporeans are price conscious
Putting these machines at MRTs is essentially targeting the middle/lower class people who will be more likely to be price conscious
Even if people do not use the vouchers, by having people looking at the machine and the respective merchants on it, advertising is essentially done already
It has been proven that coupons dispensed on these machines have a higher conversion rate as to those given by via pamphlets. (source from the China company)
Rough costing
1 x MRT panel in City hall per month is approx SGD400
15 merchants per machine, each paying SGD500/mth (Presently in China, some merchants pay up to SGD800) = SGD7,500
So as in you can see, even with other costs, the potential returns are huge! If you put it at the major heartland malls where aunties/students are..it should be a hit!
Potential problems/Solution
Low barrier of entry. Essentially a big company like JCDecaux can just come in and build a similar machine beside yours and outlast you as they have more capital. Hence I propose teaming up with another big player in order to allow the company to be sustainable in the long term.
Looking for merchants to partner up with will be a problem. But I propose that we can team up with 'The passion card'. Personally I do not think their card is as widely used as expected (I might be wrong), but essentially partnering with them would give a greater backing and also a list of their existing client. This is also good for them, as it will help promote the use of their card. (The china company actually issues membership card that can be used with the machine. Passion card can be promoted via this means too)
Here is the link to an online article too. Click here
Feel free to comment/email me to exchange ideas and views.
Recently, I attended a seminar (speakers were from Aberdeen asset management and BCM) on the outlook of the Asian / US Economy and here are some takeaways from the seminar:
The economy of Asia ex Japan can be growing, but the market (i.e stock market) might not truly reflect that in the short term. This is because though the Asian ex Japan economy has more or less decoupled from the western economies, the fact remains that our stock market is still coupled. Just look at the impact of a drop of the DJIA has on the subsequent day in the Asian markets!
But this can prove to be a good buying opportunities for the long term. However the speaker from Aberdeen said that they are currently underweight in China but are overweight in Singapore and Thailand
If you want exposure to the China market, do it via the China companies listed on the Hong Kong Stock Exchange as opposed to those listed in the Shanghai Stock Exchange. This is due to various issues like accounting methods, transparency etc.
Singapore has been trading at a long term average of 1.8x PTB(price to book ratio), though he did not mention how long the average was taken and also that presently, we are just slightly above average.
As for the US market, apparently the stimulus of around USD 787 billion has not been fully utilized yet. Only about 60%. Hence the remaining money can still be used to push up the economy.
Currently the S&P 500 companies rake in around 37% of their revenue from non US markets. This means that even if the US economygoes into recession, US companies that actually do well overseas due to the growing world economy, they will still make money. He cited an example of MacDonald. It doesn't take a rocket scientist to predict the MacDonald will have an increase in worldwide revenue over the years.
Overweight on technology stocks. They do not pick it because of the sector, but rather because they see many companies that have big potential coming from that sector. The speaker being based in San Francisco (not too far away from Silicon Valley) says that he has seen many exceptional talents who are setting up their companies, especially in the renewable energy sector, which he feels will do very well in the years to come.
On the topic about price to book ratios, here are some clippings I gotten from The Business Times on 20 Aug 2010.
Looking at the STI graph above, our PTB ratio and dividend yield are almost going back to the pre-recession's value. This signify that the economy might be slightly overvalued now, as per during 2008. But as I mentioned earlier, according to the speaker, we are at a long term average of around 1.8x PTB now, whereas historical high is around 3x PTB, signifying potential upside.
Together with my confidence in the Singapore economy, I am actually looking to buy into the STI ETF next month as a means to invest in the Singapore economy.
Even though the speaker was underweight on China's economy. Looking at the Shanghai Composite graph aboce, you can see that China's PTB ratio is now at a historical low point of around 2.5x, as compared to the peak at 7x. I am looking to put some money into China, but have not really done my home work as to what exactly to buy yet.
In other news, I'm also overweight in commodities myself. The biggest recent event involves Wilmar International, with their entry into the Sugar market. I see big potential in this and will definitely pick up Wilmar stocks in the midst of the currently decline in their stock price. This is because the whole world is heavily dependent on Sugar, Asians being big consumers of it too. The other company is Noble Group.
Looking at the graph above (source from Phillip Securities Research), Noble's main business is in energy and I foresee that the energy market will definitely rise in the long term due to greater consumption. Only thing I worry about Noble Group is the relatively thin margin of 2.1%. But if I am not wrong, I would believe a large chuck of the profits are actually paid to the traders as bonuses. Hence in a bad market, traders will be paid less, thus preserving the company’s margin.
Just in case most of you do not know, commodities traders are paid crazy amount of bonus because of the profit sharing policy in which their remuneration package is defined.
Lastly, I believe that I will be updating this blog much less frequently as I embark on a new journey in my life. I aim to be an oil trader and will defintely strive hard to acheive my goals. Meanwhile, I will still actively search the markets for good investment opportunities in order to create a reliable stream of passive income.
Recently, I came across an article in 'The Wall Street Journal' that I found interesting.
A report done by four academics and accepted for publications in the Journal of FInancial Economics, tracks the trading of 105 U.S. companies that borrowed money from hedge funds between Jan 2005 and July 2007.
Key information:
Average company that receive a new loan from hedge funds saw a 75% spike in volume of short sales during the five days preceding announcement of the loan, as compared with the volume of short selling 60days before the deal
However, 255 similar companies which turn to banks for loans saw little change in short selling volume
Short selling also jumped 28.4% before any changes in existing loans from hedge funds as compared to a droped in 17.4% in short selling if the changes of loans was done with a bank
Reasons(according to the report):
Short selling after a loan is announced is actually expected as investors and lenders hedge their exposure against the company who will be taking on a debt at a higher rate. (After reading the article, I believe hedge funds charge a higher interest rate as compared to banks)
Hedge funds know that this 'shorting' will happen and thus do the shorting in advance before the public does it. ( Hence the article starts talking about insider trading and the fact that hedge funds are less regulated than banks)
My opinions:
I feel that in order for hedge funds to be willing to lend money to companies, it means that they have already scrutinized the companies. ( From my knowledge, I believe that the really smart people work in hedge funds instead of banks, as remuneration is much better, thus I choose to believe that hedge funds do make better decisions that banks) Hence it actually makes sense to buy up these companies' shares when the public are shorting it.
In other news, I attended the Asian Investment Banking Conference 2010 just a few weeks ago. The main thing I got out of the event is that for those people who are thinking of going into investment banking, just stay in Asia. There is no need to go to USA/Europe. This is because, Asia is now the focus for investment banking. The number of cases that you will get to work on is much much more plentiful in Asia (though it might not be bigger), but it does give you more exposure, which is much more important.
Also, for those who would like to get into the front office of a bank, it is better to work in a front office role in a small bank and learn the essential skills which are transferable, than a back office position in a large reputable bank. This is because it is almost virtually impossible to jump from back office to front office.
Potential appreciation has little impact on Singapore banks
Table below explains some of the exposure of the Singapore banks
DBS's wholly owned DBS Bank (HK) has 50 braches and a market share of 5% in Hong Kong. Hence they will benefit if the RMB appreciates.
OCBC owns a stake in Bank on Ningbo, which is worth around SGD661.9 million (about 2.3% of OCBC's current market capital) and hence with an appreciation of RMB, this will mean that the investment in Bank of Ningbo is worth more.
Branch Network
Investments in China
Estimated % of Total Loans
DBS
Eight main branches and seven sub-branches in China
n.a.
2.5
OCBC
Five main branches and four sub-branches in China
10% stake in Bank of Ningbo
2.5
UOB
Eight branches in China
15.4% stake in Evergrowing Bank
2.0
* Table courtesy of UOB KH
In my view, I would think that if the RMB were to appreciate, the banks will actually stand to benefit much much more .This is because I believe that the banks would have also made other kinds of mini investments that are yet to be reported. (We all know that Singapore is heavily invested in China) Hence in general their total assets in China will appreciate!
But then again, though the RMB is expected to appreciate in the long term. We are still unsure about the short term direction!
