The Federal Reserve is under constant criticism of its actions on interest rates, money supply and other monetary policy issues.

Right now the Federal Reserve has a critical decision to make, should it continue to expand the money supply and risk hyperinflation, or should it let the money supply level out or even contract to keep inflation from running rampant.

Basic economics tells us that a short term cash infusion does spur the economy.  The addition of wealth comes from a public that can’t tell the difference between inflated money supplies or normal supplies.  When credit is added quickly, the price of goods has yet to reflect the new amount of money, creating instant wealth which then deteriorates over time.

The Federal Reserve should keep better tabs on the current state of inflation.  Some economic indicators came out just a few days ago pointing to an inflation rate much higher than expected, wholesale prices were reportedly up 7% across the board.  The current situation puts the fed chairman between a rock and a hard place.  Creating more credit would give a short term jump start to the economy while eventually raising prices all around, and cutting the money supply would mean an immediate recession.

The problem is that we try to bail ourselves out rather than go through the normal business cycle.  In business there is a normal credit cycle of a few years of prosperity followed by a small correction.  This cycle has been forever changed by the increased amount of credit in the system due to the Federal Reserve and the buildup over time.  We’ve evaded numerous recessions simply through inflation, as the numbers get bigger and the bottom gets lower a period of recession will be worse as time goes on.

The market has already priced in a half-point cut, which would mean 1.75% in rate cuts in just two months.  While this might make investors happy, this is not a good thing for the money supply.  $160Billion in fresh credit has been created since December, a 1.6% increase on the M3 money supply.  Annualized, that is a 6.4% inflation rate.  An inflation rate that high is simply financial stupidity.

The new commodity boom might just be in Gold.  Gold has moved from $660 last August to $950 today, nearly a 50% gain.  As worries of inflation grow, prices for gold and other commodities are likely to skyrocket.

There are many ways to invest in gold.  First is the physical ownership of gold bars.  These can usually be purchased at almost any coin shop or online at various gold reserves.  Physical gold is often the most expensive, ounces can be marked up nearly $20 per ounce just to cover the day to day changes in gold prices.  Of all the ways to purchase gold, direct ownership is the most expensive and illiquid of them all.  While you can trade physical gold for anything, it is unlikely that stores near you will be accepting gold in the near future.  Physical gold is the most safe, as it is in your own possession and not affected by the closure of banks or reserves that might otherwise hold your gold.

Next method of purchase is through a gold futures or commodities account.  These accounts usually require thousands of dollars to fund up then take more investment knowledge to trade.   You usually aren’t trading the actual physical gold, but the option to buy gold at a certain price.  Gold futures and options can be difficult to trade and understand and in some cases are not backed by physical gold.

The easiest method, and the preferred method is to purchase stocks that deal with gold in mining or refining for industrial use.  These companies own direct access to gold and have the metal as an asset to back them up.  While gold prices have risen 50%, most gold companies have seen their profits and market capitalization rise even more than 50%.   These positions are seen to be leveraged, a difference in $20 in gold can easily double the profitability of a company pushing the stock value higher and higher.  Gold miners also pay a dividend on their stock, which is another reason to buy the company rather than the gold.  The unfortunate disadvantage is that the value will be determined by the corporate news, if your investment starts going under it will be due to the market rather than the business.

All in all the best way to gain exposure to gold is an investment in the mining companies.  As gold prices rise, the value of gold miners and other companies in the industry will far outpace the rise in gold price.  Gold corporations will also pay dividends for your investment, something that physical possession and futures will not.  All in all, buying stocks in gold miners is the best bang for your money.

Some corporations give back to their investors in the form of dividends, or a small check as a share of the returns the business made in the last dividend period. Other corporations pay nothing, and some pay very high dividends to investors.

The best dividends usually come from companies that create their own product, make money through interest, or are growing rapidly.  Altria, formerly Phillip Morris, was known for its high dividend payments to investors through the 70s and 80s and is one of the fastest growing corporations ever.  In just 40 years, the stock has gone from 7 cents a share to $70, a huge return.

Financial stocks usually pay good dividends as well.  The constant interest income from their holdings such as mortgages, car loans or investments in other businesses has to be put somewhere.  Often financial companies pay dividends that are as high as some bonds.

The worst dividends usually come from tech and medical companies.  In order to protect their revenue stream, technology and medical fields have to keep producing better and better products.  For pharmaceuticals the rules on patents makes competition fierce.  Most pharmaceuticals companies only have 6-7 years before their top earners start fighting generic competition, dropping sales numbers almost instantly.   Tech companies also spend a lot on research and development in an attempt to create the next big thing.  You can’t sell the same computer for twenty years, people want updates.

Dividends can help you grow your investment much faster.  Some corporations offer dividend reinvestment plans, also known as DRIPs that allow you to automatically roll over your dividend payments into more stock.  Instead of getting a check for your dividend payment, the corporation pays you with more stock or ownership in the company.   It is easy to see how much dividends add up over time.  If a stock grows 10% per year in value and pays a dividend of 4% per year, you’re effectively growing your investment by 14% per year.

$1000 invested at 10% a year for 20 years makes you $6727 but by reinvesting the dividends and earning 14% per year you would have $13743 at the end of the 20 year period.  The difference is about twice the amount of money.

Companies that don’t pay dividends usually grow faster in value than those that do pay dividends because they reinvest back into the business.  If Microsoft paid a bigger dividend, they would have less money to invest in future products and lose future revenue.  Businesses that pay dividends usually grow slower but make up for it in the form of yearly dividend checks.

Dividends are a great way to make more money with your current investments.  Dividend payments may seem small, but when compounded they really add up.

There is an obvious division in trading styles.  Much like political parties, traders often come from various schools of thought about the core of investing.  Some investors look for the best and most profitable companies; claiming that profitable businesses always see higher stock prices.  The other school of thought believes that profitability is irrelevant and that the stock price is not the best indicator of financial success.

Fundamental analysis is the most basic of the ways to study investments.  Fundamental analysis looks at a company’s bottomline, how much they make and how fast the company is growing.  Famous fundamental investors include Benjamin Graham and Warren Buffett who have each made their fortunes buying solid businesses for the long term.  Fundamental investment neglects the price of the stock in favor of the financial wellbeing of the company.  Fundamentals are most often employed on long term trades to pick profitable businesses for the long run.

Technical analysis is the study of price points and at what price the market starts buying or selling.  Unlike fundamental analysis, the technical analysts believe that the price of stock moves independently of how well the company is doing.  Technical studies place more emphasis on the market than the businesses that are being traded.

There is reason behind both schools of thought.  Fundamentalists buy into strong companies with good outlook.  When businesses do well, the value of the business rises over long periods of time.  Technical analysis assumes that the market is only willing to pay so much or so little for a business and that the price of a corporation is set by the market rather than its earnings.

The decision is up to you.  Both strategies are profitable and have some merit.  Fundamental analysis is more often associated with long term investments while technical analysis is usually attached to short term trading.

The Federal Reserve Board has the power to manipulate the US money supply through the change of interest rates or by selling off large amounts of credit to member banks. By altering the money supply, the Federal Reserve Board can effectively thwart off recession, or a market contraction.

The Federal Reserve commonly raises and lowers the key interest rates at which it lends money to member banks, or banks that make up the Federal Reserve. Recently, the Federal Reserve lowered interest rates to spur borrowing, increasing the current money supply. Raising the money supply is the most commonly used tactic to offset a market recession or two consecutive quarters of negative GDP growth.

To the markets, the word recession is everything. When word of recession hits Wall Street, the market responds by massive sell offs, wiping off whole percentage points in a matter of minutes. For this reason, it is important to keep economic numbers high and promote GDP growth. 

Gross Domestic Product is equal to consumption + gross investment + government spending + (exports − imports), more simply, all money spent and invested plus all exports. The statistic is based on the dollar, thus an increase in money supply will bring up GDP.

To thwart off the risk of recession, the Federal Reserve Board acted to sell $60 Billion dollars in new credit in January and February. This added $120Billion to the money supply and sent Gross Domestic Product numbers back up, ending the recession by definition. By lowering interest rates, the Federal Reserve hopes to spur borrowing and further add more credit to the system.

For the time being, the Federal Reserve’s actions have put off an economic recession but the long term economics remain the same. The threat of recession is always here with a serious real estate crunch. As home prices deflate the market shrinks, this recession cannot be put off indefinitely by rate changes and market manipulation, investors must own up to economic nature.

Many of us have heard the term “making money on Forex”, and most affiliate sites say it’s easy as pie - just put in at least $500 (or $50 for micro-Forex) and you’ll be making thousands of dollars in no time. While that does have some truth, it’s not really that easy.

There’s this famous expression that came from a Poker guru:

“1 day in poker consists of 90% luck and 10% skill
1 year in poker consists of 90% skill and 10% luck”

This can also be applied to Forex. While I - as a newbie Forex player - have managed to make $4k in my first week, I eventually lost all that cash because I started thinking “well, hey, this is just TOO easy!” and just became too ignorant.

I’d say that the Poker expression is the number 2 rule of Forex, with the first being very simple:

DON’T PLAY IF YOU CAN’T AFFORD TO LOSE!

This is something the affiliates just don’t get - they promise you huge wealth with no risk, all you have to do is put your savings to great risk and presto. This is possible though, like 10% possible.

What you have to learn is that money makes money - and more money makes even more money. This is exactly why you shouldn’t get the impression that if you invest $500 you’ll be getting thousands in return. Why do you think banks offer you savings accounts at the rate of a max of 10%/year? If they were making 1,000% per year, that would be ripping off, wouldn’t it?

My personal goal was to establish a strategy that would work for me. For this I opened up a training account with $10k on it, flushed the balance down to $1k and set a target of 10%/week. The markets close every weekend, so setting weekly targets is a good idea. Also you can play at the longer-term exchange rate variations. Of course, there was this temptation once I got the 10% in day 1 to go “MO MONEY!!!!” - but that’s not how strategies work. Once you’ve reached your daily/weekly/monthly target - just sit back, relax and start reading forums/blogs (such as this one) about Forex strategies.

This is the first thing you must do - learn to be patient and not greedy. So for now, open up your first (or not) training account, flush it down to $1k and try to make 10% in a week from it.

Stocks climbed a bit on Monday and I don’t think that was a shock for most people. We knew that the change in the prime rate was going to impact the financial world across the board and that change did not disappoint. Adding another quarter point to the recent ‘emergency’ rate cut only a few weeks ago dropped the prime rate a full point in total and that rate ripples throughout the marketplace.

The housing industry is still not seeing any major changes, but with time, perhaps we will see stabilization and eventually a climb there as well. The interest rates dropping will eventually affect homebuyers in a positive way, after all. Does that mean that consumers are starting to have a more hopeful outlook?

From everything I can see, it really doesn’t look that way. Now that congress has passed the economic stimulus bill that included the so called “tax rebate” Americans can look forward to an early return on next years taxes. Come May married couples will be getting a check for $1200. Will that really make a big difference in the long term or is it just throwing money down the drain? Most folks I have talked to are planning on paying down bills, rather than spending on new items, so that really isn’t driving the economic engines.

The financial pundits are still uncertain about the eventual outcome and are unwilling to make predictions. President Bush has on the rose colored glasses and sees a sunny future, but I think we all know that his opinion isn’t going to hold much sway over the market.

The value of stocks right now are making them very appealing, and of course, using the dollar cost averaging method of investing, we know that right now is the time to invest. The most value for your dollar awaits you, so dive in and enjoy the potential gains that are in our futures.

The big news of the day is that Microsoft has made an unsolicited 44 billion dollar takeover bid for Yahoo in their quest to compete effectively with Google.

This is important to readers of this blog for several reasons:

• If the stats are reliable, the vast majority of you are reading this blog on machines running software made by Microsoft.
• Most of you use either Google Or Yahoo as your search engine of choice (I cannot know this, but statistically, this is the way to bet)
• All of them offer financial data: I have talked about Yahoo and Google at length.
• It is a perfect, high profile opportunity to explain some concepts regarding takeovers.

First, in the story mentioned above, note that the offer is unsolicited. This means simply that Yahoo did not seek a buyer, Microsoft merely offered it. This is very important, because Yahoo is not in enough trouble to actually need Microsoft at this time. Rather, Microsoft sees the value of Yahoo to be worth a premium (better than 60% over the closing price yesterday) to the listed price.

This is not (not yet, anyway) a takeover. If Microsoft put the word out that they were willing to buy any Yahoo shares from anybody at $31 a share (their offer to Yahoo), then that would be considered a takeover attempt. Right now, they are merely talking and an offer is on the table.

This is also interesting from a value investing perspective. The reason Microsoft is willing to offer a premium is they believe Yahoo is undervalued at the current price. At least, they believe it is for sale for much less than it is worth to them.

Also interesting is that most of the time, these sort of offers are done behind closed doors. The reason Microsoft made this offer public is that this way, it is much harder for Yahoo to say no without having to do serious explaining to the shareholders. After all, if you are holding Yahoo stock you bought several months ago at $34 and now it is at $22, you will want to know why the company refused an offer of $31 for it.

Will the purchase happen? So far, it is only talk. One thing is for certain however; if Microsoft buys Yahoo, it has the potential to change everything.

Current Quotes for Yahoo, Google and Microsoft