Oil Prices

I come from an Oil background and the recent drop in oil prices globally has indeed affected quite a lot of players.

Brent and WTI and dropped by almost half in the last 6 months. Personally I feel that this is overdone, as fundamentally there is not THAT much of change from 6 months ago but instead a huge change in sentiments.

To start off, maybe I should explain what are these futures about. Brent and WTI and both forward contracts of oil that are deliverable at a certain place and point in time. They are typically monthly contracts, for eg. Jan 15 Brent, Mar 15 WTI etc. When people talk about oil prices, they typically refer to the nearest month's contract price.

As for bench marks, Brent is typically used as a global bench march, meaning all other oil in the rest of the world uses this as a fundamental price and start to build on it to arrive at a price where they will be consumed. For example, in Asia, crude prices are traded using a bench mark called 'Dubai', which is benchmarked against Brent. Essentially, when you are trying to value a particular crude at a certain point in time, you use the most liquid quote (Brent) and and add/subtract known differentials to arrive at the price of the actual product that you are looking to buy/sell.

WTI is rarely used as a bench mark outside of USA because the price is greatly affected by the pipelines in USA and also because WTI cannot be exported out of America. It is somewhat correlated to the crude prices outside USA, but because brent is a better correlation, WTI is seldom used.

So now back to the actual topic, these contacts are for oil prices somewhere in the future. Hence prices are a reflection of market sentiments and not actual supply/demand. The recent drop in prices have a thousand and one explanations, the favorite being the OPEC countries not wanting to budge on reducing their output so as to maintain their market share. If you think about it, I don't think such a move will justify a drop of 50% in oil prices. And if you notice how all those market reports on predicting oil prices, the analysts just keep on changing their target as the prices change. All these reports are always a look back on what has happend! and are not giving a netural and forward looking view.

Anyway, at this price level (Brent at $60), they is probably still room for the oil prices to drop. However, similar to the stock market, it is very hard to pick the bottom. I would say that it make senses to start accumulating. You can do so by buying further out oil futures (like brent Dec 15) or like United States Oil ETF in the US. One good pick I think people should look out for are oil related companies who have been hit as hard as the underlying oil price itself. I might be wrong, but I feel that oil rig builders/maintenance, will still be in business, albeit slower. If you have the patience, I think it is a good time to accumulate these companies for the dividend and capital growth.

Franchise

I was recently looking to buy into an F&B franchise. From what I have learned so far, this is the rough break down of a typical successful outlet.

Rent: 20%
Manpower: 20%
Food: 30%
15%: Depriciation + Utilites.
Profits: 15%

The break down above really varies from the kind of F&B that you are doing.

If we start looking at an F&B objectively and try to optimise it, there are a lot of ways where the F&B business can be made much more competitive than others.

1. Rent
Essentially when you run an F&B, it is a brick and motar business. You are trying to captilise as much profits per square feet of rent that you are paying. If you are able to generate the same kind profits by doing other kind of businesses, there is really not much point in trying an F&B business. Another way to look at it is, finding a location where you are able to generate similar kind of revenue, but at a much cheaper rent. Much easier said than done. But if you can find such a location, it gives you a chance to 'capitalise' on this cheap rent, regardless if you are doing an F&B business, retail etc.

2. Manpower
How do you optimise the business that is naturally capital intensive? Either you automate more of the process, or pay your staff lesser. Automation can be done to a certain extent, like automatic ordering system etc. As for labour costs, it is know a fact that foreginers are much cheaper than locals and are generally more willing to do such labour. I was previously thinking, what if we can staff more foreigner talents into such industry, but yet still meet the local to foreigner ratio required by the goverment? I have thought of some ways about this before. What if a stall only hires 1 local manager and the rest of the 5 foreigner staff are sub contracted from an employment agency? Such agencies can be used as a holding company that have access to lots of Singaporean workers. Hence there is really no violation of the law.

3. Food
I don't have much comment about this because essentially I think it entails going further upstream to the source and buying more in bulk.

4. Deprication / utilities
Based purely on number, a smaller deprecation means greater profits. Essentially the lower the onset of start up cost, the smaller depreciation. If you can find an outlet that is fully renovated but is distressed, due to various reasons, you have an upper hand when starting the business. You are essentially starting a business with subsidized costs.

The points I mentioend above are easier said than that. However it is always good to keep in mind the above points.

CPF optimisation

I know that a lot of Singaporeans complain about our CPF system but personally I think it is a really good one. After speaking to many of my foreign friends, they are all very envious of this retirement scheme that the Singaporean government has in place for its people.

Here is an overview of the Singapore CPF system and how best to optimise your returns, assuming that you have more than sufficient cash for your day to day necessities.

Basis CPF overview:


The Contribution Rates

If your income is above SGD 5,000/mth, there is no contribution from the SGD 5,000 upwards.

Employee Age (Years)	Contribution Rate (for monthly wages ≥ $750)			Credited to
	Contribution by Employer (% of wage)	Contribution by Employee (% of wage)	Total Contribution (% of wage)	Ordinary Account (% of wage)	Special Account (% of wage)	Medisave Account (% of wage)
35 & below	16	20	36	23	6	7
Above 35-45	16	20	36	21	7	8
Above 45-50	16	20	36	19	8	9
Above 50-55	14	18.5	32.5	13.5	9.5	9.5
Above 55-60	10.5	13	23.5	12	2	9.5
Above 60-65	7	7.5	14.5	3.5	1.5	9.5
Above 65	6.5	5	11.5	1	1	9.5

 Table from : CPF

Interest rates earned:

Ordinary Account: 2.5% p.a.

• What is this? This contribution is for housing, insurance, investment and education
• How is this calculated:3 month average of major local bank's 12 month fixed deposit or 2.5% p.a., which ever higher
• What can you use this for? :  Investments that are allowed by the government under this account, subject to a min of SGD 40,000 in the account

Special and Medisave account 4.0% p.a.

• What is this? Special account is  for old age and investment in retirement-related financial products. Medisave account is for hospitalization expenses and approved medical insurance.
• How is this calculated: 12 month average yield of 10 year Singapore Government securities plus 1% or 4% p.a., which ever higher
• What can you use this for? :  Investments that are allowed by the government under this account, subject to a min of SGD 20,000 in the account

Retirement Account  4.0% p.a.

•  This account is created by transferring the saving from the special account and ordinary account on your 55th birthday.
• How is this calculated: 12 month average yield of 10 year Singapore Government securities plus 1% or 4% p.a., which ever higher
• The minimum sum will be SGD 155,000 where at least SGD 43,500 needs to be in your medi safe.

 Special additional 1% : Government shall pay additonal 1% pa.a for first 60k of a member's combined balances, with up to 20k from the ordinary account. This additional interest will go either into the SA or RA

How to optimise your CPF

• Try to put contribute more CPF per year. From 2015, max you can contribute is SGD 31,350 per year or  addition SGD 9750, over your mandatory contributions (assuming you earn more than SGD 5,000 / mth)
• Try to hit a min of SGD 60,000 as soon as possible, so that you can earn the extra special 1% interest rate on your money.
• If this money is purely for retirement and you do not need it till you retired, try to max out your special account as soon as possible. The max is the current CPF minimum sum, which is about SGD 155,000.

Summary
The above advice is for those who are not so investment savvy, or maybe others who just want some investments in low risk portfolios. I personally think that a stable 4% p.a. interest in the special account is a good low risk investment for the long term. And with the additional 1% special interest for the first SGD 60,000, I would say that this investment is as good as it gets, based on its risk/reward.

Rent at Paya Lebar Mall

Rental at Paya Lebar New Mall

Have a friend who is running a small business over there. Heard that rental is about 5plus k/month. And that have to pay 3 months deposit plus current month's rental upfront, every month.

They were initially asked to sign a director's personal liability letter with a 2 month rent deposit but eventually they negotiated to have a 3rd month additional rental deposit and to waive the liability letter.

The rent has 2 structures and they pay whichever is higher.
1. The fix monthly rental of about 5k plus a small commission of all sales (yes the point of sales system is linked to the mall)
2. 12% of the revenue of the shop

Sales has been brisk so far as the mall had just opened. I wish them all the best in this venture!

Brick and Mortar Businesses - Box Rental

I am always fascinated by brick and mortar businesses. To be honest I have never worked in a retail outlet where your customers are the everyday people who are shopping. It is only untill recently did I find out about the basic idea of how such businesses are carried out and the kind of economics that you can expect.

It all started when I tried renting a box in those outlets like toy outpost, box king, go to my box etc.

It was my first try at such a 'retail' business. I admit it is not even a decent representation of a retail business but nonetheless it made me look more closely on how retail businesses operate and how profitable these toy box rental businesses are.

To summarize roughly how I fared, it was almost a break even deal. My rental was $180/mth but I was not selling enough of my charm bracelets to cover my costs. And to add on, the only reason that I broke even, was because there was a Vietnamese client who wanted to do mass orders that I happened to meet when I was at the shop. This particular Vietnamese deal was done outside of the shop, hence I did not have to pay an 8% sales commission to the shop.

Below is a summary of such a business

Box Rental Business Model

Revenue
This particular box rental shop has about 292 boxes, and I am guessing an average rental price of $150. Assuming 85% of the boxes are leased out, the revenue is about $35k

Rental
Rental of the shop was about $22.5k. ( I was told about 20-25k)

Manpower
I am estimating that they have about 2 full time staff at any one time and 1 manager So assuming a salary of 1.8k a month for the staff and 2.5k for the manager This equates to about 6.1k/mth.

Misc
Give and take 2k a month.

Profits
I would estimate their profits to be about 4.4k/mth. And this excludes the additional commision that they charge the box owners on every sale.

Conclusion / Caveat
All in all, the business model is sustainable for the box shop concept owner, provided they can rent out as much of their space as possible. But one has to consider the return on invest (ROI) as a whole for the business owners.
This type of retail place will typically require at least a 1+2. Meaning paying 3 months of rent upfront at any one time.  So in this, the cash tied up is about 22.5 x 3=67.5k ( I have assumed this to be the investment and have ignored other costs like renovation etc.)
 If you make 4.4k/mth, your yearly profits are about 53k, a ROI of almost 80%. This is potentially much higher if the box take up rate is higher and having strong sales, which leads to higher commission.

In one of my flea market experience, I met a few people who mentioned that they have tried to sell their products through these means previously but have failed miserably, i.e a total loss of 2k. In fact, I hear from box leasers and even the box shop assistants that most box leasers do not make money.

I wonder how much longer can this concept of business last? If you noticed, now a days, some of these shops are increasing having more empty shelves. I personally think that this business model will not be sustainable in the years to come. This is because I believe the novelty of these shops will die out and 'new entrepreneurs' realized that it is not profitable to hawk their products at such places.

Private Equity Investing

In my previous job, I was previously tasked to look into working together with a domestic oil distribution business in a neighboring country. The deal looked fantastic but due to the nature of such a business, it was hard to legally protect oneself when investing privately in an overseas company. The counterparty was more than willing to help keep me comfortable by even having a joint payment receivables account, but contractually it was tough to structure it such that I am able to enforce his customers to pay into such a joint account.

However in the process, I realised that investing in private businesses can yield phenomenal returns if the risks are managed properly. On top of that, having small stakes in various companies will enable to create some form of synergy between controlled businesses.

On the large scale, this would be big private equity funds like BlackRock Inc, a mulit billion dollar fund that buy huge companies. But as an individual, I realised that there was actually still room for smaller investors like myself.

My personal goal is to look out for small sustainable business that needs cash to grow or even an active investor to push the business to a new leve, with the capital required being about SGD 50k.

I have, in the past 1 year, been trying to find such opportunities. In the midst, I have made many new friends and learned about various business models. One business that I was very close to investing was a toy/game store retail business.

This business has a healthy cash flow and business model. They had about a net profit of 30% with a yearly revenue of 300k. There were looking for an investor due to a mishap in one of the purchases of supplies and needed cash to place a reorder. The deal did not go through as it was a sole proprietor company and the owners were unwilling to fully disclose their books prior to me investing 50k. I might be willing to take high risks for high returns, but without doing my own due diligence, this would have been a reckless investment decision.

You may call this angel investing, private equiting investment, venture capitalist, money lending etc. But principally, what I am trying to do is to play a part in multiple small sustainable business with great potential. By having various small controlling stakes in various companies, I believe synegies can be built where resources are shared, thus benefiting the bottom line.

Going forward, I will likely be penning down my thoughts on various business model to serve as a reminder for myself.

Commodity Trader Singapore

I have recently started conducting sharing sessions for individuals who are interested in the commodity industry.

For more information, please visit the following website:

http://commoditytradersingapore.weebly.com/

A new perspective

It's been a really long time since my last post. Life has changed by quite a bit since a year back. I'm now based in Singapore and have moved into a commercial role dealing in physical oil and base metals.

The new role is tough but I'm enjoying it!

However, at the back of my head, all the different ideas on how to build a business and grow passive income has still been bugging me non stop. I realized that this blog is a good way for me to pen down ideas that I had from a certain point in my life and so I might actually re start this again.

Passive Income
For now, I'm stuck on property investment. I have bought a BTO years ago before I graduated so I'm now unable to buy any other properties! Might not be a bad thing as I'm currently bearish the property market in the medium term (3-5 years). But I still envy people making hundreds of thousands on their property investments

On equities, I'm also bearish, in the medium term. But there might still be room for some upside in the next 1-2 years. I'm looking into this at the moment but am still thinking twice as I might need the cash for the BTO and possibly a small business.

Business
A lot of ideas has been through my head the last 1 year. Below are some of them.

1. Online Specs Shop in Singapore. But you will need a physical base to start this business from. I was thinking of buying into a local spec shop and building from there.

2. Online free lottery. Using ads to fund a lottery. => Any internet marketer/web site expert who is interested in helping me develop this. Do let me know. I'm willing to fund this.

3. Vending machines. Bring this one level higher in terms of product types and advertising

4. Local food franchises.

Anyone who is interested in building any of this together, do drop me an email.

Corporate finance

Just some updates. I finished my risk management rotation at the end of Dec 2011. However prior to finishing, I moved from the Naphtha desk to the Gasoline desk (early September), where I became the lead. Life wasn't easy but I learned much and had greater responsibilities.

Now, I am currently based in Geneva, Switzerland, doing my final rotation in Corporate Finance. Essentially this is where all the corporate financing for the company is done. I am involved in bond issuance, launching of revolving credit facilities, selling asset backed securities etc. In this role, I also get to monitor all the availability liquidity in the company and the expected Capex of the company.

This role has also given me great insights on the group level business strategy (bulk & non ferrous metals, oil, industrial and asset management) of not only my own company, but also my competitors in similar industries. I also get to meet really senior bankers from various banks as my company has over 100+ banking relationships worldwide.

One interesting thing is that I get to see all the bankers who are in the investment banking division of the various banks! I am essentially their clients as they often come over to pitch their bank in order to secure the deal. And seriously, it is easy to see a bank trying to smoke their way through a pitch!

Halve way though now and 4 more months to the end!

Searching for a commodity

 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

Updates after 10 months! - Business ideas / stock market / oil trading

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.


Cheers!