The Bull Hunters Guide

Welcome back to our ongoing discussion of some of the most common mistakes that investors tend to make when Stock Market Investing. If you missed it, be sure to take a look at stock market investing mistakes Part 4.

These aren’t the usual obvious errors that you might have heard of, but they still hold disastrous consequences, so it pays to educate yourself about them and to diligently avoid them.

Predicting Spikes And Lulls

There’s hardly an industry out there that doesn’t fluctuate at least some with the seasons. Everyone knows that retailers, for instance, tend to see a major spike around the Christmas season, and then a lull immediately following that, in the spring.

The same can be said of many other businesses, and the better you’re able to predict when these kinds of lulls and spikes will happen, the better your investment decisions will end up being.

Also note that the decisions made by the federal reserve in regards to setting interest rates tends to directly coincide with the fluctuating seasonal movements of the country’s industries. So, that’s even more incentive to keep this in mind when you’re looking for a company to invest in.

Research 5 Year Data

The best thing you can do to educate yourself about an industry or company’s typical schedule of spikes and lulls is to look at a monthly five year record of the company’s performance. You should see some semblance of a pattern emerging from the shifting data, and from that it ought to be quite easy to extrapolate the knowledge of when it would be best to invest in this company (if at all).

This concept is incredibly important to making wise investment decisions, because the movements of the market and the federal reserve will nearly always outshine any other consideration that can be made about an investment.

In other words, even if everything else looks great, and a company is still being traded at a high volume with a lot of excitement, you can’t count on it unless the seasonal history indicates that you can.

See you next week for part 6 of Stock Market Investing mistakes.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2009

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Today I’m posting from Hong Kong. I’ll keep this one short and to the point.

Lately, we’ve been talking about the Federal Reserve. We mentioned how the group is structured, and what their primary responsibility is, as well as their inherent similarities to a bank. You might be asking, however, just why this information is useful to an investor. The reason is simple. It’s because, eight times a year, the Federal Reserve holds a meeting that is the primary motive force in determining financial policy, and thus the movements of the market.

Federal Open Market Commission

The Federal Open Market Commission holds their meeting as we said, eight times a year for the purpose of decided whether to increase or lower the federal funds rate. This isn’t an arbitrary decision though; they are greatly influenced by the market forces. Of course, it’s in their long term best interest to set rates that reflect the reality of the market, and this is exactly why it’s useful to pay attention.

The Federal Reserve has at their disposal a colossal amount of information relating to the market; far more than the average investor has at his or her disposal. While they don’t necessarily share this information itself, the way that they react to it can give one a really good idea of what’s going on behind the scenes and what is about to happen in the near future.

Increase Economic Growth

For example, if the Federal Reserve is trying to increase economic growth, it will reduce the overall funds rate, which may be a sign of an impending downturn that they’re trying to forestall. Likewise, if they need to stabilize too-rapid growth, they’ll increase the rate. In that instance, it might be a good time to put an eye towards selling as growth begins to level off.

Whatever the case, the Federal Reserve is something that is very much worth paying attention to for any serious investor. It’s not exactly necessary to understand each and every little detail of how they operate, but it will likely be of immense help to you if you can at least learn to monitor their policy decisions and know what those decisions predict for the movement of the market at large. It’s like having a team of committed professional analysts at your disposal, if you only know where to look!

As I’ll be away in Hong Kong all this week, I’ll do my best to post next weeks article on time. Bear with me as I might still be in holiday mode.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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If we view interest rates as being the cost of credit (which is for all intents and purposes the truth), then it’s easier to understand just what the Federal Reserve’s role is in setting United States monetary policy. As the governing body for affiliated banks, they help to determine what consumer credit policies should be, and the ensuing effect that that action is likely to have upon the economy.

In order to regulate things thusly, the Federal Reserve makes use of three main principles.

Open Market Operations

The first is open market operations. The Fed handles the transfer (buying and selling) of government securities, which of course directly affects the level of reserves that they have in the banking system at any given moment. This has a direct effect upon the price of credit (interest rates), so it’s a very effective means of monetary control.

Discount Rate

Next is the discount rate. We spoke already about how banks use the Federal Reserve as their own bank. The discount rate is simply the interest rate that the Federal Reserve sets on their short term loans to these banks. This is important because it’s a good indicator of what the Fed is thinking about the state of the economy and allows for insight into their plans for the future.

Reserve Requirement

Lastly, we have reserve requirements. As we all know, banks are only required to physically hold a percentage of the money that they actually have on deposit with customers. Which percentage they have to have is a matter that is closely regulated by the Fed. This fluctuates with how likely it is that customers will be making major withdrawals, and also with the cost of credit itself (and consequently how much physical banks need to have on hand).

Next time, we’re going to take a look at how all of these principles come together in the Federal Open Market Committee’s periodic meetings and directly determine the overall state of the economy as well as which monetary policies the Fed is going to enact next. This is the aspect of the Reserve that should be of most interest to investors, so we hope to see you then!

See you next week for part 5 of The Federal Reserve.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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Lately, we’ve been talking about the Federal Reserve. In particular, we’ve discussed how it’s set up as a governing body, and why knowing about them should be of real interest to each conscientious investor out there. In this entry, however, we’re going to begin to discuss the particular actions that are said to be the duties and obligations of the Federal Reserve. In other words, their very reason for existence.

Balancing the Economy

In the Federal Reserve’s own words, their job is to “promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long term interest rates”. What this means, essentially, is that their main mission is to regulate the banking system itself in order to ensure that the economy remains fair, balanced, and healthy. They prevent interest rates from climbing too quickly or moving too far out of accordance with how much people are actually earning.

( And during a Global Economic Meltdown, they seem to be running for the hills! )

The Federal Reserve also acts as a bank that other banks can make the use of. Just as you make use of your local bank, odds are that your local bank then makes use of the Federal Reserve in order to conduct the exact same type of business: making withdrawals, making deposits, and sometimes even taking out loans.

United States Treasury Account

Another distinguishing feature is that they also act as a bank to the government itself. The United States Treasury has an account with the Federal Reserve for the business of handling money transfers such as income from taxes, or making necessary government payments. In addition, the Federal Reserve also handles the issuing and redemption of government securities such as savings bonds and other such securities that you might be familiar with as an investor.

In addition, they issue all of the paper and coin currency that most of us make use of every single day. As you can see, if it’s related to the management and transfer of money, the Federal Reserve has their hand in it at some point along the process.

Next time, we’re going to discuss one of the Federal Reserve’s most important functions: the regulation of monetary policy.

See you next week for part 4 of Federal Reserve.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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Over the next few entries in this article, we’re going to be discussing the Federal Reserve and the role that it plays in the market. When we’re done, you’ll have a more thorough knowledge of the American economy and thus will be better prepared as an investor to make smart decisions about your money.

Federal Reserve Purpose

Simply put, the Federal Reserve was created in 1913 as a means to keep an eye on the United States’ official monetary policies and ensure that they were in keeping with the country’s best interest. In addition, before the Federal Reserve was instituted, people were reluctant to make use of the banking system due to having no real guarantee that their money would be there when they went to withdraw it.

The Federal Reserve is led by a board of government appointed individuals, seven of them to be precise. They act as the governing head of the whole institution and are centrally located in Washington. Below them are twelve Federal Reserve Banks, which are spread out across the United States and located in some of the country’s most populous cities. These individual branch banks accomplish much of the work of the Federal Reserve by analyzing local markets. They also generate income themselves by acting as traditional banks.

Federal Open Market Committee

The Federal Reserve also operates a board known as the Federal Open Market Committee, which is the branch of the Reserve that makes policies based on the research and findings of the other branches. National interest rates and other monetary policies of similar scope are decided upon at meetings of the Federal Open Market Committee, in order to establish a balance between taxation and inflation that is beneficial to all parties involved.

Of course, these are just the big parts of the Federal Reserve. If we want to be totally accurate, we should also say that each of the individual banks you are likely to do business with are also allied to the Federal Reserve, making it a truly nationally operating institution.

Next time, we’ll discuss some of the particular obligations of the Federal Reserve.

See you next week for part 3 of the Federal Reserve.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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