It is often stated in the financial world that all free markets are efficient, meaning that prices and values will seek appropriate levels at any one point in time based on pure supply and demand. The same forces come into play when projecting the future, which brings an element of shrewd analytical conjecture into the picture. The most common futures values, the S&P Futures Index, is often quoted on financial news media, but with the devastation of Katrina, the cost of gasoline at the pumps, and the impending winter for millions of families needing heating oil, crude oil futures will be far more closely watched.

Futures are contracts between two parties on an exchange specifying delivery of, or payment for, a commodity, an interest rate, an option, a security, a currency and so on at a specified price determined today. Futures and forwards (OTC) contribute tremendous liquidity to markets while allowing the counterparties to hedge their bets in a measured regulated market structure (for the most part).

All Eyes on oil: While market oil prices have tended to fluctuate (see ten-year chart), they have been particularly volatile since the beginning of this year with swing increases upward of 30-50 percent. As the leading US HSBC economist, Ian Morris recently stated while here in Bermuda, the more deliberate trend since the early 1980s no matter the short-term volatility, was for the long-term future rates to average out at $20 per barrel. In the last five years, oil prices have climbed steadily upwards to $60, and are fully reflected in futures prices in the same range out as far as 2011. The market has spoken; higher oil prices may be here to stay.

On global home fronts, increases in gas (and gas/oil fired electricity turbines) are impacting the family purse. Fifty-four percent of cars driven in the US today are gas guzzling SUVs; five years ago, that number was five percent. Ford and General Motors are scrambling (late to the game) to catch up with the innovative Hybrid models designed by Toyota Motors, some 350,000 of which are already in use. The waiting line for delivery these alternative energy cars is huge. Toyota predicts they will sell more than a million next year. What did their engineers know that allowed them to predict this insatiable demand, and when did they know it? Or did they simply have better investment analysts who looked at the long-term oil futures trends, had a chat with their associates in China, and pronounced, ?Energy efficient is the only way to go!?

The better question to ask is, why didn?t US car manufacturers see the future and take advantage, given the wealth of information available every day in every way on trend patterns in oil consumption? Did they simply miss the boat, or were they subject to much broader influences? Employee discount prices to the public, zero percent loans, huge pension and health benefits for workers, and far better than average shareholder dividends (year after year) eat up capital reserves. In spite of the economic pressures on shareholder performance at General Motors, the CEO was recently quoted that ?he was fully confident that their new line of SUV?s would appeal to the American consumer because we just love our big cars and comfort.? Maybe these guys just don?t get it, yet.

Is there a correlation between lagging the market and a high dividend payout ratio?

While investing in the futures market seems intimidating, many investors enjoy receiving those very nice yielding dividends. If you look at the track record of three car companies, you see disturbing trend. The auto manufacturer with the highest debt ratio and the highest dividend payout ratio is seriously lagging in sales performance. They paid out more than 30 percent of their retained earnings to their shareholders; I?ve seen payouts as high as 110 percent. What?s left for research and development? The more successful Japanese models reinvested almost all of their profits in renewable capital resources. Is this what happened here with one of our very well known companies? Did we subliminally dictate that we?d rather have higher dividends than allow the Board of Directors and management to invest in significant infrastructure? If so, who bears responsibility for failures down the road? The shareholders, or the management? Answers anyone? But there is a precendent here, when you pay out more of your capital than you should, consistently, the company is more vulnerable. Another thought, why do you think Microsoft has amassed such a war chest?

And what about us, what are we doing? Domestically, car drivers are also feeling the real pinch from increased oil prices. In some family households, these increases in cost will be tough to absorb. Yet, not too long ago, Bermuda had the opportunity to import and sell alternative energy cars, but the foresight (or the courage) to commit just was not there. Were we also ignoring the long-term trend in oil prices?

If this trend truly continues, driving a car on a routine basis (for the next generation) may be a luxury. The only places we will see large guzzling machines will be at the entry point of oil production, United Arab Emirates, Saudi Arabia, Bahrain and other oil-producing middle east countries. They will be the only ones who can afford to drive them!

Perhaps, in the end, we will all be healthier for it, however, as with any significant life changing event, we need to plan for it now. We need to understand, there is no such thing as a free lunch.

@EDITRULE:

Martha Harris Myron CPA/PFS CFP? is a VP and Senior Private Banker, Private Client Services, Bank of Bermuda Member HSBC Group. She specialises in providing comprehensive financial solutions for individuals and their families. If you?d like a review of your overall investment strategy, please call 299-5578. Confidential email can be directed to marthamyronnorthrock.bm

The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy/sell any investment product. The Editor of The Royal Gazette has final right of approval over headlines, content, and length/brevity of article.