How to tap into future opportunities today

PUBLISHED : Sunday, 29 August, 1993, 12:00am
UPDATED : Sunday, 29 August, 1993, 12:00am

THE investment most likely to be the least risky and the one that can create considerable wealth in a few years is the futures market. I am not saying the futures market does not carry any risk because it does, but the risk involved is not as great as a bank savings account, a unit trust, purchase of property, or most other speculations.

Most investments offer great risk with minimum opportunity; futures offer manageable risk with enormous profit opportunity.

About all other investments move horizontally, and money moves mainly side-ways. Futures move vertically.

An investment in the futures market is an investment at today's prices in something which you will deliver later at prevailing prices.

Futures contracts are available in financial products such as bonds, Euro currencies, interest rates, currencies of most countries, stocks, stock indices.

To explain how it functions let us over simplify, and use a commodity everyone knows: heating oil.

A contract is 42,000 gallons for number 2 oil; the price is now about 5541 US cents per gallon for the December 1993 contract and 58 cents per gallon on the December 1994 contract. The September 1993 price is 5237 cents.

The next step is to analyse the US heating market. If you believe investors in August are not factoring in the cold winter ahead; if you believe oil now is cheaper than it has been in years; if you believe a possibility of war, strike, or disturbances exists in the Persian Gulf region and other oil producing areas; if you believe Russia, the world's largest oil producer, is now producing very little because of internal problems, you may be interested.

If you conclude that by December 1993, heating oil will be higher priced than 56 cents per gallon, you will buy a contract of December heating oil.

The US and Canada have central heating provided by heating oil. When it gets cold all houses must buy and use heating oil. Even if unoccupied, a house or building must be heated because otherwise the pipes will freeze and burst and then the cost is enormous.

The price of this contract is about $24,000. You can find a broker who will arrange the contract for about $1,500 margin.

Once you have found a broker, buy one contract of December Heating Oil at 56 cents or less per gallon with a $1,500 margin.

Using the Tier System is where big money can be made. One contract is Tier 1. The success of futures is based on momentum - not money. It is not necessary or practical to throw a lot of money at a speculation. What is important is opportunity.

When heating oil rises to where the $1,500 margin is now profit, you have made 100 per cent profit on money invested. However, you are riding a winner - stay aboard.

Tell the broker to use your original $1,500 margin (which has already paid itself off) to buy a second Tier, or another contract.

When oil rises to where the $1,500 has again been covered, move on to a Tier 3 contract using the original $1,500 margin. Then move to Tier 4 in due time, then Tier 5.

Eventually the opportunity is there to make 20,000 per cent profit on your $1,500 out of pocket money.

What happens if the market does not rise? Never meet a margin call. Take your $1,500 loss and go for the next opportunity.

Watch the daily momentum. As long as the daily line is moving north you have honey in the gourd. If the line starts heading south, cut your losses quickly or decide how much loss you will take and place a safety stop loss good-until-cancelled sell order which limits loss to an acceptable amount.

The reasons I like futures contracts is because you can handle it all yourself and not pay drones who hint at results they will not guarantee.

With futures, whether it be heating oil, Australian dollars, or coffee, you control the entire investment yourself and using margin, the opportunity for profit can run exceedingly high - often 2,000 per cent or more on your small margin (out of pocket) investment.

The rule of 10 is that by succeeding only once in 10 times the one success pays for the 9 losses and leaves a profit. Stay under the rule of 10.

US dollar in disarray THE US dollar has broken down in top formation against not only the soft European currencies but the hard currencies as well. Now the dollar will soon retrace and give back most of its June-July gains. A good bet is to sell the US dollar against the Swissfranc and the deutschemark. The dollar is showing an overall tendency to weaken.

Against the yen the greenback is strengthening and has bottomed and will now be retested but should not have difficulty in eventually gaining on the yen. The greenback has gained further against the Canadian dollar but the Australian dollar is now much stronger.

The British pound has not maintained the August downward break against the dollar, which indicates limited risk and a further gain is possible against the dollar.

While sterling has gained against European currencies it has little possibility of gaining against 2.55 marks and 2.27 Swiss francs and will fall against these currencies in due time. The pound has established a low of 147 yen and overhead supply should be further challenged.

The yen has now reached peaks against all currencies. It will now have to spend a few weeks consolidating before it can continue its strong advances upward against all currencies.

The French franc has lost downward momentum and is in a position to have a further technical rally above its mid-1992 trading range.

The German mark has endured a long period of stress. Its move above US$0.59 confirms a significant floor has been put into place. It now should not go lower against the US$ and will soon start advancing. It has now confirmed it has ended its long declineagainst the yen. The mark has eased against most European currencies but it appears these movements were short term and it will soon rally.

Bond to make profits US BONDS appear risky to me, but Canadian, Spanish, Italian, French, Belgian, Netherlands, German, Austrian, and Japanese look like real money makers.

I am steering clear of Australian bonds as they are loaded with risk.

Bonds are super today to anything else because inflation is low worldwide and almost all interest rates are falling. Most people do not realise the high capital appreciation that occurs with each interest rate drop. There is little risk if you adhere to AAA or at least AA, and especially Sovereign.

The extra high yielders such as Italian and Spanish pay high interest, and offer high capital appreciation; you may earn more than 25 per cent with these. Stick to five-year maximum - don't accept 10-year or over.

The South African Eskom Bonds are the highest interest paying sovereign bonds. These have continued to rise in value in South African rand terms, rising about three per cent in the last two months.

South Africa has completed its scheduled $1.6 billion debt repayment. More nations are abandoning their sanctions against South Africa.

Leon Richardson is a well-known businessman and investor.