Saudi drops WTI oil contract, use Argus Sour Crude Index instead.

From this FT article: "Saudi drops WTI oil contract", Saudi Arabia will use Argus Sour Crude Index instead.

What is this Argus Sour Crude Index ?
I did a search on Argus Media which created the index.
Found this PDF file: Argus Sour Crude Index.

We can see the methodology and specifications from this file (details and examples of calculations are illustrated).

This Argus Sour Crude Index (ASCI) calculation method has some interesting features..

Argus Sour Crude Index (ASCI): daily volume-weighted average of aggregate deals of components grades: Mars, Poseidon, Southern Green Canyon (SGC).
It claims to be "a pricing tool designed to serve primarily buyers and sellers of imported crude that need a broader index of US Gulf coast medium sour crude value for use in long-term contracts".

Argus Sour Crude Index Price = Argus Sour Crude Index Differential + same month WTI Formula Basis

WTI Formula Basis: pricing series by combining Nymex futures (before expiry) and WTI spot prices (after expiry), to represent mean of WTI Cushing spot assessment for 3 business days after expiry which precede pipeline scheduling.

This "normal" calculation method (daily volume-weighted average of aggregate deals of Mars, Poseidon, SGC) is to be used if combined volumes of all 3 grades reach "volume minimum" (6000 barrels per calendar day).

If volume minimum is not reached, then "Proportional Assessment" is to be used.

Proportional Assessment:
Beginning of every trade quarter, Argus will average volume of trade in each of last six trade months and assign each grade a % of traded volume (for example 71% Mars, 22% Poseidon, 7% SGC).
ASCI will be constructed using individual volume-weighted average prices for Mars, Poseidon and SGC using the % (for example 71% Mars, 22% Poseidon, 7% SGC).

To address difficulties associated with "stream disruptions" (output from pipeline ceases, market for that grade becomes illiquid), there is this "Intelligent Assessment".

Intelligent Assessment
If stream disruptions happen (1 grade becomes illiquid), Argus will assesses and decides whether to suspend daily price or continue with Intelligent Assessment.
If trade in remaining 2 grades > volume minimum, index will be calculated from the remaining 2 grades. If remaining 2 grades < volume minimum, then the "proportional assessment" will be applied in the same proportion, using Argus published prices for the grades (actual trade or intelligent assessment). If all streams are very disrupted until integrity of index damaged, Argus will consult with industry to form an alternative index (other sour grades, import values, intelligent assessments).

My summary:
1. ASCI uses both futures and spot price to try to arrive at a better price representation.
2. ASCI uses past volume% to calculate index if current trade volume is low (i.e. illiquid; demand low, supply intact).
3. ASCI calculation takes away grade with stream disrupted (i.e.: illiquid; demand intact, supply disrupted).
4. ASCI is still using WTI, Nymex to arrive at its data. It is still dollar-denominated.
5. ASCI is volume-weighted; uses deal volume when market is normal, uses past volumes when overall market is "illiquid" (volume low). Volume weighted "price" may be more representative than, say, closing price.

Basically, it’s trying to have a better price representation (against fluctuations, manipulations, distortions etc)... We can also guess this from its claim: "a pricing tool designed to serve primarily buyers and sellers of imported crude that need a broader index of US Gulf coast medium sour crude value for use in long-term contracts".

Hamburg Ship Evaluation Standard : a mark-to-model shipping evaluation

Saw this interesting article on Financial Times, titled:
Ship valuation method sparks inflation fears.

It was said that "German shipping banks are expected to follow the lead of HSH Nordbank, the world’s largest shipping bank, and Deutsche Schiffsbank, Germany’s second-largest, which have praised the Hamburg Ship Evaluation Standard and look set to start using it".

It was said that there is a report by PwC, the accountants, endorsing this new standard.
Let’s take a look at what the new evaluation standard is.

Hamburg Ship Evaluation Standard, is devised by Hamburg Shipbrokers’ Association (Vereinigung Hamburger Schiffsmakler und Schiffsagenten, VHSS).

From VHSS’s website, I found this insightful PDF file.

It claims that due to illiquidity in ship sale-and-purchase market, forced sales, charter rate at level of required operating expenses makes traditional method unusable as ship evaluation standard. Therefore, this new Hamburg Ship Evaluation Standard appears, as a tool for "value assessment (Long Term Asset Value, LTAV), beyond short term market fluctuations".

The LTAV is "determined on grounds of vessels long term earnings potential, using present value…. DCF method… incorporate volatility of shipping cycle… conservative, statistically proven… transparent…".

It defines when it is a dysfunctional/irregular market, when 2 of 5 scenarios apply (Refer to PDF for details). The formula to calculate LTAV is also given, basically it is using discounted cashflow, residual value analysis with inputs of charter incomes, operating costs, discount rate, residual value, 20-25 years.

Will other banks that loan to shipping companies, other shipping companies in the world going to change to this mark-to-model method to evaluate fair value of their shipping assets ?

Some more "philosophical" questions:

• We see that a switch from mark-to-market to mark-to-model method has happened on "financial toxic assets" and now on shipping assets, will this trend spreads to other assets ? Where to draw a line ?
• How should investment analysts or investors adjust their investment analysis ?

Investment Guru - Marc Faber

Marc Faber’s GloomBoomDoom website is insightful.

We can see his investment style and biography from the “About Marc Faber” section.

Some books authored or co-authored by Marc Faber: (I search in Amazon)

• Tomorrow’s Gold : Asia’s age of discovery
• Zukunftsmarkt Asien (in German)
• Riding the Millennial Storm: Marc Faber’s path to profit in the financial markets
• The Goldwatcher: demystifying gold investing (he wrote the Foreword)
• The Great Swindle: the story of the South Sea Bubble (he wrote the introduction)

Books on him, his investment, investment style etc :

• Riding the Millenial Storm
• Trading the World Markets

There is some old free sample in “GloomBoomDoom Report” and “Market Commentary” in the website. These are no longer free and require subscription. However, we can get a glimpse of how Marc Faber’s reports are like from these sample reports.

I would like to bring your attention to: the “Resources” section in his website. It is extremely useful, especially for peoples who wish to learn on investment analysis.

In the “Links” subsection, there are “Recommended websites” and “Recommended money managers”. A long list of websites are given, divided into many categories.

In “Investment wisdom” subsection, we can see some articles by him (I strongly think that these are articles by him that he thinks are the best of his ideas), Marc Faber’s top 6 investment books, recommended newsletter.

He recommends many books to understand economics and financial markets too: PDF

From the “Lifestyle” section, I saw these words:

“…..Investing has a lot to do with common sense and personal observations. The man on the street frequently knows far more about the state of the economy than politicians, university professors and financial analysts who seldom travel, or if they do so, only from one first class hotel to another first class hotel and from one golf course to another…..”

How true these words of wisdom !

An archive of his articles in Daily Reckoning.

There is a blog tracking Marc Faber’s ideas and I have put it in my investment bloglist. Though the blog may not be his but it is a good way to track Marc Faber’s ideas.

Effective real property gain tax of Malaysia Budget 2010

Proposal on real property gain tax on the Malaysia Budget 2010 can be seen in this Appendix of Budget 2010, at Appendix 15.

The Malaysia Budget 2010 speech can be seen here.

Did some calculation: data.

Taking into account of exemption “up to RM10,000 or 10% of the gains, which ever is higher be given to individuals”, it can be seen that there are 3 "regimes" of effective real property gain tax:

1. For real property gain from 0 to 10,000, effective real property gain tax is 0%.

2. For real property gain from 10,000 to 100,000, effective real property gain tax increases from 0% to 4.5%, with sharp initial increase. Rate of increase decreases with increase of real property gain.

3. For real property gain from 100,000 onwards, effective real property gain tax is 4.5%.

It seems the effective real property gain tax favoured smaller amount of real property gain.

This new flat-rate real property gain tax irregardless of holding period is less effective in curbing speculation in real estate compared to the older-version RPG tax which have progressive rates.