Oil, corn, pork bellies, soybeans, wheat, steel.  It’s all priced in dollars.

Every commodity you can think of trades on the world markets, but every single price you can find will be quoted in dollars.  The dollar is the universal standard of measure of value.  Each commodity can be traded in every country and every market but the universal standard is the US Dollar.

This means that for foreign consumers, the daily fluctuation in commodities is further multiplied by the foreign exchange markets.  While Oil makes record highs in US Dollars, for Europeans it’s looking pretty cheap at 66 Euros to the barrel.   If we were in 1998 eurodollar exchange rates, the price of a barrel of oil today would be 120 Euros.

Consumers wholesale prices rose by 7% year over year.  This basically outlines an increase in the price of metals, plastics, or in general a 7% increase in the cost of most commodities.  The basis of comparison is the US Dollar, so these increases are only seen by US consumers.

When the US Dollar falls against other currencies it means that the world can buy commodities at a lower price.  If the US Dollar falls 50% against the Euro, Europeans can purchase oil at half the old price.  It is likely that Europeans will make up for the discount by buying more.  When oil is cheaper for you, why not buy more?  If oil was $50 a barrel in the United States, chances are that people would consume more oil.

The most important thing in understanding the commodity boom is understanding how prices work.  All commodities are shown in dollars, thus the rapid boom in commodity prices is somewhat due to a weakening dollar.  The commodity bubble isn’t really much of a bubble, it’s just the difference in exchange rates.  Commodities are the best way to hedge a falling currency.

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 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 

As far as I know, there are but two ways to make money in investing; you either buy things and hope they appreciate, or you lend money and hope people pay you back and pay you interest for the trouble. In other words, all investments are either equities or debt.

It really does not matter what you want to invest in; stocks, real estate, mutual funds, insurance, gold… you pick it and it is either debt or equities. Why is this so important to understand? Because I sincerly believe that most people do not understand what they are investing in.

When you buy a stock, just what are you buying? What do buying growth mutual funds and flipping houses have in common? Why can you let your house (which you assured everyone was an “investment” when you bought it) sit for years and never check the value, yet you check the value of the mutual fund you put in your IRA every day on Yahoo Finance?

Most investors tend to develop a preference for one or the other; folks who would never touch a stock will own Treasury Bonds and hold them for years. Other folks (like me) are equities junkies and see no reason anyone would ever want to own a bond. Over the next few days, I will tackle the subjects of Equities and Debt, explaining the fundamental principles behind each and why you should care.

I have a confession: I am addicted to Google. It is true, I am afraid. I use Gmail, Google Reader, Google Documents and a lot more, every single day. As sad as it is, I can no longer imagine life without Google.

That being said, Google has a habit of throwing an offering out there just to be out there. They then tweak and adjust it over time. I have to hope this is what they are doing with Google Finance.
While everyone applauds Google for its focus on minimalism, this is NOT what I want in a financial information portal. The page is virtually empty and what content is there consists mainly of various news feeds from the wire services. In other words, it is basically a news aggregator that any 16 year old computer nerd could cobble together.

The only redeeming feature for Google Finance is the integration with your own Google account, so you can customize the page to get only the information you want. However, I see no advantage to this over your iGoogle page, where you can import the various news feeds from any category, not just finance.

I hate to say it, but I see no reason for this site to exist, as there is nothing here that Google does not do elsewhere much better.
Am I just missing the boat here? Do any of you use Google Finance as a research tool? If so, what do you like about it? Let me know in the comments.

Once upon a time, long long ago (Actually, it was only about 10 years ago) all the financial news was filtered through only a few sources. You either got your financial news from a broker, a newspaper or a subscription service such as Morningstar or Valueline.

These days, however, it is the wild wild west, with many sources of financial news. With all the options, the question has to be, “Just who do you use”?

Over the next few days I will give you a few of my thoughts on some of the various financial sites; your mileage may vary.If you have a favorite or want to disagree with me or my conclusions, let me know in the comments!

Yahoo Finance

For those of us who where on the web before Google instituted their plan of world domination, Yahoo holds a special place in our hearts. One of the first major finance portals, it is still one of the most highly trafficked pages on the internet.

The thing I like most about Yahoo is the breadth of coverage; everything from wire headlines to quotes to charts (but, I do not like the new java based charts as much as the old school charts they used to have). That being said, I do not know how much of this is habit and how much is due to their efforts. It is hard to change, and the older I get, the harder it is.

One huge advantage (for me) with Yahoo Finance is their homepage is easy on the eyes and well laid out, so I can see the “whole picture” at a glance.

In short, the main reasons I use Yahoo Finance is it is convenient, it is well done and it is trusted… what more can I ask for?

Pretty much everyone knows that the name of the game is to get a good rate of return on your money. After all, you do not have to be a genius to know that getting 8% on your money is a better thing than getting a 6% rate of return. But, just how much better is it?

How long until your money doubles?

If you have a 12% average rate of return on your money (say, in an index fund), then your money will, all things being equal, double in just six years. Drop your rate of return down to 10% (still respectable by anyone’s definition) and now it takes a bit over seven years to double. Bump your rate of return up a bit and get a 13% average and your money doubles in 5 and a half years.

If you do not happen to be a math super genius, you can calculate how long it will take your money to double at a given interst rate by useing the rule of 72.

Money invested at 1% interest will double every 72 years. If you get a higher rate of return, just divide 72 by the rate of return and the answer is the number of years until your investment fund doubles.

Example:

I have $1000 and will put it in the bank at 5% interest. How long until I have $2000?

72 divided by 5 = 14.4 years (better not need it soon!).

While not precise, it is accurate enough for quick calculation and quickly shows the value in getting the highest rate of return possible on your money.

If it were a perfect world, the sky would always be blue, everyone would be skinny and healthy and Warren Buffet would manage my stock portfolio.

It NOT being a perfect world, I guess I will have to put up with occasional thunderstorms and I will have to learn to stay on a diet; however, there IS a way to get investment returns like Warren Buffet. Two ways, actually.

The first, and most obvious thing you could do is buy shares of his company, Berkshire Hathaway. Since Warren is the chief stock picker for this company, literally he will be investing your money, along with his own and that of the other shareholders. Of course, their is a small problem… one share of this company is currently selling for about $140,000.00 (!).

Yeah, that stinks.

The other thing you could do is invest in a mutual fund that owns Berkshire, or buy shares in a mutual fund that holds the same stocks. A few such funds can be found in this post over at the Motley Fool.

In my post yesterday, I mentioned 529 Plans as a great tool to save for college.  I thought I would expound on them a bit today.

A 529 Plan is a investment account in the United States  that allows you to save for college in a tax-advantaged manner. You get to save money for the education expenses of a specific person, called the beneficiary. The plan is named after section 529 of the US Internal Revenue Code.

Each state has its own plan, with significant differences from state to state, but because of the underlying federal legislation, they all have quite a few things in common.

Two Plans

The first thing you should know is that there are actually two types of plans; a pre-paid one and an investment one.

• The pre-paid plan is basically what it sounds like; you pay the current tuition now, and when they go to school, the bill has been paid. In other words, you are paying future expenses with current dollars.  Generally, this is not a good idea. Besides, the problem for most people is they don’t have the money to pay for college; thus, they need to save for it.

• The investment plan is based on investment options in the account, usually mutual funds. Most plans offer quite a few options, both equity and debt based (stock funds and bond funds). You can typically move the money within the account from fund to fund as your needs change. The inner workings (as far as the owner are concerned ) are a lot like your 401K at work; there is the Growth fund, the Aggressive Growth fund, the Risk Free (savings) fund and so on.

The investment plan is best for most folks. While it is administered by the state, the day to day operation is typically out-sourced to a mutual fund company. You are not required to use the plan offered by the state you live in but there may be tax advantages to doing so; do your research or ask your adviser.

Pros and Cons

Pros:

• All growth is income tax free (both state and federal).
• Beneficiary can be changed to another family member.
• Most states do not tax withdrawals as long as they are used for education.
• Withdrawals can pay for tuition, fees, dorm expense, books and almost any educational expense.
• Very High Contribution Limits
• A very attractive estate planning vehicle for those who qualify.
• 529 Plans offer some bankruptcy protection.
• Very low minimum monthly contribution limits, putting it in the range of most budgets

Cons:

The only real con is that some states have outrageous fees. You can use this website to find out the details of your state’s plan and can use it to compare the fees. In fact, sometimes the excessive fees are a good enough reason to abandon your state’s plan in favor of another, even disregarding the tax benefits you get from staying in state.

Perhaps you are struggling to find that oh-so perfect Christmas present for your children or grandchildren. Well, join the club, because it seems like it gets harder and harder each year. You ask yourself if those kids really need another toy, another gadget or more clothes that will just be out of style next year or, much more likely, next month!

Every year, banks all over the US push savings bonds on ill informed grandparents and parents, urging them to buy these bonds to “help pay for college”. While it is no doubt better for their future than the latest ipod, there are much better ways to pay for college.

I suggest that you look into some sort of investment vehicle, such as the 529 plan. The 529 plan (the exact details vary from state to state) allows you to put after tax dollars into an account that grows tax deferred and can be withdrawn tax free for qualified educational expenses. The funds are invested in mutual funds that can be tracked and followed on the Internet or in the local paper and you are allowed to move the money between funds in the plan.

Even if you did not opt to use a 529 plan, or if you live outside the US, it is still a good idea to skip the savings bonds and buy your grandchild a stock or a mutual fund. After all, the sooner they learn about investing in equities, the more likely they are to be comfortable investing when they get older.