Translate This Page

Saturday, November 29, 2014

How Low Can Oil Prices Go?

It may be difficult to believe but as mentioned in my previous post, this is a new era for oil.

And the next question to ask is how low can oil prices go? 



Well, if the analysts were correct, the oil can still go lower...and it might fall a lot more.

OPEC's decision not to cut production was obvious: to put and cause pain to US shale drillers, but it's providing holiday gift for consumers. OPEC members Thursday followed the lead of Saudi Arabia, which has said it did not want to cut production and has made it clear it will defend its market share against other producers.

Those producers include the U.S. shale industry, which has helped boost U.S. production by a million barrels a day in just a year. OPEC member Venezuela sees the world oversupplied by 2 million barrels a day.

And if the US oil production were to continue to increase, the oil prices will definitely fall even lower. This is very likely to happen especially over the next three to four months as shale oil and Gulf of Mexico projects that are underway get completed.

The increase in production is likely to happen because of the investment that has already been made in the Gulf of Mexico. The OPEC's decision will definitely impact the US industry and while US will cut back on existing wells, even then, it will continue to see production growth over the next couple of months even with low prices.

It will no longer be about $70 or $60? Or is it $50? 

New era for Oil

It was difficult to imagine that the oil price will be at 70 per barrel 6 months ago but today, the oil price has plunged to $70.15 per barrel. 




OPEC's decision not to cut production is indirectly a declaration of price war in the crude market and the challenge to US shale drillers. 



Here is a look at why the sharp drop in the oil price.

First, US production has nearly doubled in recent years to 9 million barrels a day and analysts expect the production to rise by more than 1 million next year. And like all commodities and trades, an oversupply will drive the prices down. With this supply, Saudi Arabia and OPEC have essentially surrender to the inevitability of the lower prices from the exploding improvement in the US energy production.

As OPEC maintained their output target, the oil price plunged to a point where some of the shale projects may lose money.

This is a new era, where the market itself will manage supply. Saudi Arabia and OPEC knew it and their decision is a sign of surrender. The markets have changed for many years to come.

To a certain extend, this is a victory to the US energy independence. It is also a victory for the workings of the free market. Greater supply and not government cartel that drives the price down.

The next question that comes into mind is this: HOW LOW CAN THE OIL PRICE GO?

Weekly Investment Term #6

If you have been mixing with people who are into investment, you will probably heard some people talking about buying stocks with good fundamentals or good prospects etc. There are also others who are looking into the technical chart to try and predict the market movement. 




Well, there is a way for you to answer some of the questions like:

a) How is the company being run?

b) Is it generating profits?

c) Is there a growth in the performance?

d) How does the company fare in comparison to the peers?

That way is what some people called: Profitability ratios


Profitability ratios measures the ability of a company to generate profits relative to sales, assets and equity. These ratios are useful to to measure a company's performance over the years and also in comparison to the peers. 

Here are 5 ratios that I would love to share with you today:

1) Gross Profit Margin (GPM) 


Gross Profit Margin (GPM) is calculated with the formula as shown with COGS equal to "Cost of Goods Sold". The GPM is not exactly a good indicator on the price of a stock but it's useful for one to analyze the financial health of the company. With a healthy gross margin, the company will be able to consider the operational cost, other expenses and also the ability to plan for the future. This ratio could be used to compare with other companies. Generally, a company with higher profit margins are viewed as being more efficient.

2) Net Profit Margin (NPM)

As for Net Profit Margin (NPM), one will take the net profit divide by the revenue. One can define this by saying NPM shows how much each dollar earned by a company is being converted into profit.

Generally, net profit = Revenue - COGS - Operating Expenses - Interest & Taxes.

Net profit margin varies from one company to the other but are generally at a certain range for different industry. With this knowledge, one will be able to recognize if a company's revenue is registering a healthy profit to the company or not.

3) Return On Equity (ROE)

Return On Equity (ROE) is defined as the amount of net income returned as a percentage of shareholders' equity.

Mathematically, this is the formula: Net Income/Shareholders' Equity.

ROE is quite an important indicator of a company's financial standing. The ROE is extremely useful especially in comparing other companies in the same industry. 

4) Return On Investment (ROI)

ROI is an important indicator on how efficient an investment is.

A simple calculation would be suffice to get the ROI.


Gain from investment generally refers to the proceeds obtained from selling the investment of interest. ROI is a very popular ratio being used because it's easy to understand and compute. Theoretically, the ROI that is negative are investments that should not be consider. 

5) Return on Assets (ROA)

This ratio is to show how is profitable a company in comparison to the assets of the company. This ratio helps investors to see how well are the assets being utilize to generate profit. 


Friday, November 28, 2014

Market Daily Report (28 Nov 2014)

As mentioned in the morning post on the oil prices plunge, the FBM KLCI continue the downtrend.

The downtrend continues
 
Most shares traded lower at the end of today, as the poor sentiments surrounding around the O&G counter spread to other sectors as well. OPEC's decision not to cut output to stem the falling crude oil prices crushes any hope of a quick rebound for the crude oil prices.

In fact, it's hard to even try to predict the bottom of it at this point of time. 

The FBM KLCI fell 0.5% today, to close the week at 1,820.89 points at market close. However on a week-on-week basis, the KLCI ended the week 11.76 points or 0.65% higher, compared to last Friday’s closing of 1,809.13 points. 

The OPEC's decision might just force the downtrend to continue for a while....as Reuters reported that oil prices, oil-related shares and oil-linked currencies all tumbled in Asia on Friday. 

The huge supply of oil could hurt country like Malaysia and Russia. 

Regionally though, markets were mixed with Hong Kong's Hap Seng and South Korea's Kospi both ending lower while Japan's Nikkei rose 1.23%.

You may check out the fundamentals of some of these stocks that are under the TOP 10 GAINERS and TOP 10 LOSERS today:

Top 10 GAINERS

TOP 10 LOSERS




Oil prices plunge

It's not a good news for the energy shares as they led losses after oil prices plunged. 

Not looking good for oil


After OPEC decides against the cut, Brent crude oil plunged as much as $6.50 a barrel on Thursday, and U.S. crude fell by nearly as much, posting the steepest one-day falls since 2011.

Benchmark Brent futures settled at $72.58 a barrel, down $5.17, after hitting a four-year low of $71.25 earlier in the session. The contract was on track for its biggest monthly fall since 2008.

U.S. crude was last down $4.64 at $69.05 a barrel. 

This is definitely not a good news for oil producing countries like Russia and even Malaysia.

PRICE WAR?

It is going to be a price war. The US crude may even slide to below $65 a barrel in coming weeks and this could be a factor against the economy of the Northern American shale oil production. 

While many were saying the oil price may have hit a bottom, some analysts have a differing point of view.

If it's going into price war, any bottom may just be difficult to predict.

Expect the O&G sector in Malaysia to be affected when the trade starts today.

Market Daily Report (27 Nov 2014)

Just yesterday, we were talking about a good day for FBM KLCI, where the index rose 3.61 points to close at 1842.17.

Well, some analyst will look at the drop for today to 1829.91 (a drop of 12 pts) is a technical correction after consecutive gains for the past 3 days. 



But with the anticipation that Organisation of Petroleum Exporting Countries (OPEC) member nations would not cut output to support prices, it's best that investors be careful in their trade in FBM KLCI. There are some who expect the rebound in oil price in December because of the winter in the northern hemisphere. 

The decline today was mainly due to the blue chips counter like Tenaga, Telekom etc.

Regionally, the markets were mixed with Japan's Nikkei and and Hong Kong's Hang Seng decline while South Korea's Rospi rose for about 0.06%. 

Here are some of the concerns that investors should take note of:

1) How the oil prices will move in the coming months with the OPEC not cutting output to support prices??

2) More stimulus in China and Europe? And how this will affect the market moving forward.


Wednesday, November 26, 2014

Market Daily Report (26 Nov 2014)

It's a good day for FBM KLCI, as it closed higher for its third consecutive day, after the US revised higher its third quarter economic growth. Malaysian shares rose in line with most Asian markets.

Positive for FBM KLCI

At 5pm today, KLCI rose 3.61 points to close at 1842.17. (it's 0.2% increase), thanks to gain from stocks such as Maybank, Tenaga as well as British American Tobacco (BAT). The KLCI is supported by the regional positive sentiment especially after Reuters reported the US government upgraded its reading on third quarter gross domestic product (GDP) growth to 3.9 percent on Tuesday, from 3.5 percent reported last month. 

BAT is the top gainer while Dutch Lady Milk Industries Bhd is a top loser. 

In the region, the markets were mostly up, while Hong Kong’s Hang Seng rose 1.12%, while South Korea’s Kospi gained 0.03%.

Friday, November 21, 2014

Compare the "mddle class" today and 10 years ago

The term "middle class" was a word that signifies progress, and it also mean stability. The "middle class" used to mean a family with a nice place call Home, drives a Volvo or vehicle of that class, goes on yearly vacation and send their kids to college. 

But those were the days. Because the middle class today varies so much in comparison to 10 years ago.

In Malaysia, the "middle class" group generally includes people who earn RM3,000 above. Between RM3,000 to RM4,999 a month, it's normally the lower middle income while the upper income earns RM5,000 above. In our country, our government data in 2012 shows that 27.8% household income was at the lower middle income while 33.6% household earn RM5,000 and above. 

Even though there is a stead increase in income in the country, the increase barely offset the country's soaring inflation rate....the rising living cost. 

Here are some of the significant items that one should compare between now and 10 years ago to gauge how the "middle class" looks like today:

A) FUEL PRICES

Petrol increase is one of the biggest burden to the "middle class"

We all know that the fuel price dropped recently in the world market but Malaysians are paying RM2.30 per litre for RON95. In 2004, it was only RM1.38 per litre (RON92). Diesel was RM0.83 per litre but today, it's at RM2.20 per litre. 

Chart showing a big jump in price from 2004 to 2014

A simple calculation will let you know that you are paying 60% more for petrol while about 165% for diesel. 

This become worse when more people are staying far away from their work place. The jam is not helping the middle income either. Of course, for those who are staying near to the LRT (which is not many at the moment), there is an option to consider the public transport. But on average, most middle income earners will have to fork out 60% more for fuel alone.

B) PROPERTY PRICE

This is also another important factor to consider....the property price today is no longer affordable. Middle income earners will definitely notice the drastic jump in the price.



Taking Klang Valley alone, you will notice this trend: 15% to 18% increase per annum. 

Today, a condominium of 1000 sqft at RM500k and above is considered reasonable. Back in 2004, for the same amount of money, you could probably get a 2,500 sqft double storey terrace. That's about RM2,100 a month for installment. If you are the lower middle income group, that's already about half of your salary. 

C) ELECTRICITY TARIFFS

Another important part of our lives....electricity...but now we have to save. That's what middle class means today. Savings, managing our increase of living cost. 

Power tariffs rose by an average of 15% effective January 1 this year, after Putrajaya announced in December 2013 that it had approved the increase by utility firm Tenaga Nasional Berhad (TNB).

The rates were purportedly raised as a measure to reduce Government subsidy and to boost development spending.



Consequently, the average electricity tariff in Peninsular Malaysia went up by 4.99% per kWh or 14.89% from the 2011 average rate of 33.54 sen/kwH.


UP NEXT: FOOD? Alright...I'm not going to talk about that....because this is already depressing enough. What I can conclude from these simple examples is this: a middle-class family today may be spending well over RM3,065 a month just on these basic essential items...these days, it's no longer about stability for middle income...it's more like sufficient for a day to day survival. 

Welcome to the middle income family!!

Sunday, November 16, 2014

Credit Card Mistakes That One Should Avoid (Part 1)

Credit card can be friend as well as foe, as mentioned previously in Credit Card - Friend or Foe (Part 1), Credit Card - Friend or Foe (Part 2), Credit Card - Friend or Foe (Part 3) and Credit Card - Friend or Foe (Part 4) and while a credit card comes with numerous benefits and flexibility to one provided that the user uses it well; can be rewarding to him or her as well. Having said so, there are several costly mistakes that one should avoid at all cost - as those mistakes will eventually lead one deeper into the debt pit.



1. Avoid Paying Only the Minimum Payment
Typically on a credit card statement, one will see two type of balance due; total balance due or some known as the statement balance as well as minimum payment due. The minimum payment due is usually RM50 or 5% of the outstanding balance. Imagine only paying 5%, with 95% of the outstanding will be charged a hefty interest rate. Piling up debt in this way shows the incapable to repay the debt thus hurting the credit score and eventually when one want to take up new loan, the application might be rejected or, even if approved, the interest rate definitely will be higher.

2. Maxing Out Credit Limit
Another mistake that most credit card users have in common is to max out the credit limit given by the financial institution. As we all observed, credit limit given by the financial institution is usually twice the salary or some can go up to his or her annual pay. By maxing out the credit limit, one will have no choice but to pay only the minimum payment which eventually lead to mistake number 1.

Of course, there are times where we max out the credit limit for emergency purposes or planned spending after several years of savings, but most of the time, it is not encourage for us to max out the credit limit.

Besides that, imagine the embarrassment one might face when you go to checkout only to realized the credit card limit already max out and there is a long line and everyone else behind you is waiting for you to pay and worse still; there is not enough cash for you to top up the balance.

Finally, there are penalty charged by the financial institution for over-limit spending, although you can eventually get them to waive but you have to be a good pay master in the first place, meaning never to commit mistake 1.

As per mentioned previously in Credit Card - Friend or Foe (Part 3), credit card can be friend, and at the same time it can turn against us. Use it wisely, you will find that there are more benefit in swiping credit cards. There is no bad credit card or financial institution issuing the credit card, just bad credit card users