Commodities That Move The Markets

The daily movements in the world's equity markets are influenced by a multitude of factors ranging from large institutional block trades and program trading to earnings and economic reports. However, one factor that is frequently overlooked is the influence of commodity prices. In fact, fluctuating commodity prices can have a tremendous impact on the earnings of public companies and, by extension, the markets. Read on to learn more about this relationship and why it matters to investors.

Lumber Prices
The average person would probably never ponder the cost of lumber unless he or she was in the process of building a house. However, the pricing of this commodity is closely watched and can affect many companies, such as homebuilders.

However, it's also important to note that many other types of companies pay close attention to lumber prices as well. For example, companies that are looking to expand and build out new locations, such as restaurants, retail chains and even pharmaceutical companies looking to build new manufacturing facilities would naturally be interested in the cost of lumber. After all, even a small tick up in prices can materially affect the cost of a structure.

Random length lumber futures and options trade daily on the Chicago Mercantile Exchange (CME) . Quotes and information may also be published in the Wall Street Journal or Investor's Business Daily and is often noted on major business channels, such as CNBC.

Oil Prices
Many consumers only think about oil prices in the context of how it directly impacts their wallets. In other words, how much they will end up paying at the pump as the result of price fluctuations. However, oil is one of the cornerstones of the North American economy and its price is highly important to companies of all stripes.

The price of oil can affect a variety of companies ranging from retailers to manufacturers of plastics (oil byproducts are a big component in plastic). Just think about how all of the products that are on the shelves at your local Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are shipped.

By extension, this means that these companies either have to eat the rising cost of fuel or try to pass some of it along to consumers in the form of higher prices. Unfortunately however, if they aren't able to pass along the cost increase, it can have an adverse impact on margins and net income, which can put downward pressure on stock prices and hurt investor returns.

The price of crude can be tracked on the New York Mercantile Exchange (NYMEX).

Cotton Prices
Cotton is used in a wide variety of pruducts. For example, many types of clothes contain large amounts of cotton; therefore, rising prices can have an adverse impact on an apparel retailer's cost of goods sold and declining prices can have a positive impact.

Of course those in the apparel industry aren't the only parties that can be impacted by changing cotton prices. In fact, it's also a key component in things like furniture, coffee filters and a variety of other materials that we all have come to depend on.

As such, companies that sell these items have only a couple of choices when dealing with rising cotton prices. They can raise the price of the product, and/or eat the rising cost. Again either or both of these choices can have an effect on income and by extension stock prices.

Wheat
Wheat is the primary ingredient in many popular cereals and foods. While cereal and other food producers may be able to pass along some of these costs, they may have to absorb some as well. This can impact their margins and, by extension, their profits.

Of course makers of such products aren't the only ones affected. Grocery and convenience stores must purchase the items to keep shelves stocked. Also don't forget about the impact on distributors and any middlemen. Fluctuating wheat prices can have a far-reaching impact on a variety of companies and on consumers.

Corn
Corn in one form or another is used in a variety of products ranging from cereals, building materials, alcohols and even tires.

It's also worth noting that the price of corn is impacted by the demand and production of ethanol, which is an increasingly popular corn based fuel. As the demand for alternative fuels ramps up, corn prices could go even higher. Food manufacturers, retailers, consumers and, by extension, stock prices can be affected by fluctuating corn prices.

Coffee
Rising or declining coffee prices can certainly have an impact on consumers that enjoy drinking it in the morning. It can also have an affect on companies that do a brisk breakfast business, such as diners and fast food chains like McDonalds (NYSE:MCD) or Burger King (NYSE:BKC). Also, companies like Starbucks (NYSE:SBUX), which derives the lion's share of its revenue from coffee or coffee related products, can be dramatically impacted as well.

Gold
The price of gold can have an impact on jewelers as well as on retailers that sell or receive a portion of their sales from jewelry related items. For example, Macy's (NYSE:M) and many of the other well-known mall-based department stores generate a significant amount of revenue from their jewelry departments.

Gold can also be used in medical products, glass making, aerospace and a variety of other businesses. By extension, this means that fluctuations in gold prices can make the markets move.

In addition, because gold is found and valued all over the world, it is considered a universal currency. So, if the outlook for the U.S. equity markets and/or the economy is dim, it's likely that the demand for gold will increase as investors "flock to safety."

If it appears as though the economy is about to perk up, or that corporate earnings are going to be on the rise, investors tend to abandon gold in favor of equities.

Bottom Line
Although there are a variety of factors that can move markets, commodities can have a major influence on businesses, stocks and portfolios. When you're looking to invest in a particular sector or company, take a look at relevant commodity prices and what this might mean for your investments going forward.

by Glenn Curtis,
Glenn Curtis started his career as an equity analyst at Cantone Research, a New Jersey-based regional brokerage firm. He has since worked as an equity analyst and a financial writer at a number of print/web publications and brokerage firms including Registered Representative Magazine, Advanced Trading Magazine, Worldlyinvestor.com, RealMoney.com, TheStreet.com and Prudential Securities. Curtis has also held Series 6,7,24 and 63 securities licenses.

The Importance Of A Profit/Loss Plan

Who needs a profit/loss plan? Isn't investing only about buying low and selling high? It would be nice to always buy at the bottom and sell at the top, but it is nearly impossible to do so consistently. Furthermore, investors are only human: emotions sway our judgment and it is in our nature to hate losing. Taking a loss on a stock, therefore, is not only detrimental to our pocketbooks, but it also hurts our egos. Time and time again investors take profits by selling an investment that has appreciated, but hold onto declining stocks in the hope of a rebound; oftentimes these investments shrivels to a fraction of their previous worth. So how can an investor avoid this type of outcome? One solution is to learn to be a disciplined investor and to adopt a profit/loss plan. In this article, we'll go over this strategy and show you how to use it to stay in the black.

What Is a Profit/Loss Plan?
This plan is a step that many retail investors (and professionals) often overlook. The profit/loss plan is a set of limits that determines the maximum loss or gain an investor will take on a stock. Containing losses is a very important part of a investing, so the profit/loss plan is crucial to a sound strategy.

We all make stock-picking mistakes and most of us have lost money in the stock market - what sets the great investors apart is their ability to recognize their bad choices and use what they've learned to make up for them later. A profit/loss plan helps you recognize your mistakes by allowing you to separate your emotions from investing. If you aren't too zealous about your gains and you see them purely as a means of increasing your cash flows (rather than your ego), you will have a much easier time letting go of your losses and, therefore, controlling them.

Devising Your Plan
Devising a plan may be more difficult than you'd expect. First, you'll need to set the maximum gain you will accept and the maximum loss you will tolerate for your investments, but these maximums and minimums shouldn't necessarily be the same for every stock. For example, a blue chip stock is more unlikely to rise or fall by 10% within any given year as compared to a small-cap growth stock, which will exhibit more volatility. In other words, you must analyze each stock individually to estimate how much it is likely to move in either direction.

Some investors use technical or fundamental analysis or a combination of both to determine appropriate limits for gains and losses. Another way to devise your limits is by modeling your plan on the performance of a designated benchmark such as an index or even on the past performance of your own portfolio.

Another factor you must consider when devising your profit/loss plan is your risk tolerance, which depends on many factors such as your personality, your time frame and your available capital. Typically, people who are risk averse will have tighter boundaries than those of people who don't mind risk. Risk lovers will try to profit as much as possible from a rising stock, but a more conservative investor may sell the stock early on in its rise to eliminate the risk of losses, which would occur if the stock took a quick downward dive. If you prefer to shy away from risks, a profit/loss plan of 10% each way may not be suitable or even realistic for you. On the other hand, if you are willing to take on the added risks associated with potential profits, then a 10% profit/loss might be more appropriate.

Carrying Out Your Plan
Once you've decided on your numbers, whether conservative or aggressive, you have to put the plan into action with as few hitches as possible. Remember, this plan has a double requirement: you have to sell your stocks (1) if they fall to a certain level and (2) if they rise to a certain level.

Now, brokers will not let you enter two different sell orders for the same security so you need to figure out which one you'd rather enter first. It may be wisest to enter orders that first protect your downside: many wise investors use the stop-loss order, which instructs your broker to buy or sell a stock once it has reached a certain price. The stop loss ensures that you won't get burned on a down market, especially if you aren't able to watch it every second. When you enter in your order with your broker, set the stop price at your maximum loss percentage and then sit and wait. If the price ends up appreciating to your upper boundary, just change the price of your stop loss order, which will then activate the immediate sale of your stock.

Staying Disciplined
Once you have your profit/loss strategy in place, you will have to remember that the whole idea of the plan is to establish strict guidelines for when to sell. Sure, it hurts to see a stock continue to rise once you have sold it, but it is often better to sell on the way up than to wait until you have to dump the stock while the price is collapsing after its peak. Joseph P. Kennedy, Sr. once said, "Only a fool holds out for the top dollar."

Conclusion
Keep in mind that our example figures are generalizations. Devising your plan requires detailed research, analysis, self-assessment and a realistic outlook. Setting a profit limit at 100% (double your money) doesn't make sense if you invest in low-risk companies that grow steadily at 15% per year.

Here are some things to remember:

• A stock that declines 50% means you will need to double your money to get back to even. Controlling losses is the key to sound investing.
• Making mistakes is human nature. Once you realize this, you will find it easier to move on.
• Buying a stock and holding onto it for a very long time doesn't mean you will make money. A buy and hold strategy will work only if you pick the right companies.

The most important part of devising a profit/loss plan is sticking to it!

by Investopedia.com

Getting To Know The Money Market

Chances are you've heard the term before, but what exactly is the money market? It is the organized exchange on which participants can lend and borrow large sums of money for a period of one year or less. While it is an extremely efficient arena for businesses, governments, banks, and other large institutions to transact funds, the money market also provides an important service to individuals who want to invest smaller amounts while enjoying perhaps the best liquidity and safety found anywhere. Here we look at some of the most popular types of money market instruments and the benefits they offer to the individual investor.

Purposes of the Money Market
Individuals will invest in the money market for much the same reason that a business or government will lend or borrow funds in the money market: sometimes the need for funds does not coincide with having them. For example, if you find you have a certain sum of money that you do not immediately need (to pay down debt, for example), then you may choose to invest those funds temporarily, until you need them to make some other, longer-term investment, or a purchase. If you decide to hold these funds in cash, the opportunity cost that you incur is the interest that you could have received by investing your funds. If you do invest your funds in the money market, you can quickly and easily secure this interest.

The major attributes that will draw an investor to short-term money market instruments are superior safety and liquidity. Money market instruments have maturities that range from one day to one year, but they are most often three months or less. Because these investments are associated with massive and actively-traded secondary markets, you can almost always sell them prior to maturity, albeit at the price of forgoing the interest you would have gained by holding them until maturity.

The secondary money market has no centralized location. The closest thing the money market has to a physical presence is an arbitrary association with the city of New York; although, the money market is accessible from anywhere by telephone. Most individual investors participate in the money market with the assistance (and experience) of their financial advisor, accountant or banking institution.

Types of Money Market Instruments
A large number of financial instruments have been created for the purposes of short-term lending and borrowing. Many of these money market instruments are quite specialized, and they are typically traded only by those with intimate knowledge of the money market, such as banks and large financial institutions. Some examples of these specialized instruments are federal funds, discount window, negotiable certificates of deposit (NCDs), eurodollar time deposits, repurchase agreements, government-sponsored enterprise securities, shares in money market instruments, futures contracts, futures options, and swaps.

Aside from these specialized instruments on the money market are the investment vehicles with which individual investors will be more familiar, such as short-term investment pools (STIPs) and money market mutual funds, Treasury bills, short-term municipal securities, commercial paper, and bankers' acceptances. Here we take a closer look at STIPs, money market mutual funds, and Treasury bills.

Short-Term Investment Pools (STIPs) and Money Market Mutual Funds
Short-term investment pools (STIPs) include money market mutual funds, local government investment pools, and short-term investment funds of bank trust departments. All STIPs are sold as shares in very large pools of money market instruments, which may include any or all of the money market instruments mentioned above. In other words, STIPs are a convenient means of cumulating various money market products into one product, just as an equity or fixed income mutual fund brings together a variety of stocks, bonds, and so forth. STIPs make specialized money market instruments accessible to individual investors without requiring an intimate knowledge of the various instruments contained within the pool. STIPs also alleviate the large minimum investment amounts required to purchase most money market instruments, which generally equal or exceed $100,000.

Of the three main types of STIPs, money market mutual funds are the most accessible to individuals. These funds are offered by brokerage companies and mutual fund firms, which sell shares in these funds to their individual, corporate and institutional investors. Short-term investment funds are operated by bank trust departments for their various trust accounts. Local government investment pools are established by state governments on behalf of their local governments, allowing investors to purchase shares of local government investment funds.

Money market mutual funds are further divided into two categories: taxable funds and tax-exempt funds. Taxable funds place investments in securities such as Treasury bills and commercial papers that pay interest income that is subject to federal taxation once it is paid to the fund purchaser. Tax-exempt funds invest in securities issued by state and local governments that are exempt from federal taxation. These two categories of money market mutual funds provide different patterns of growth, each of which attracts different types of investors.

Treasury Bills (T-Bills)
Treasury bills, commonly known as "T-bills," are short-term securities issued by the U.S. Treasury on a regular basis to refinance earlier T-bill issues reaching maturity, and to help finance federal government deficits. Of all money market instruments, T-bills have the largest total dollar value outstanding--a sum that as of 2004 exceeded $650 billion. In addition to scheduling regular sales of T-Bills, the Treasury also sells instruments called cash management bills on an irregular basis, by re-opening the sales of bills that mature on the same date as an outstanding issue of bills.

When T-bills were initially conceived, they were given three-month maturities exclusively; but bills with six-month and one-year maturities were subsequently added. Three-month and six-month bills sell in the regular weekly auctions, and another bill auction takes place every four weeks for the sale of one-year bills.

T-bills are sold through the commercial book-entry system to large investors and institutions, which then distribute those bills to their own clients, which may include individual investors. An alternative is Treasury Direct, which is run as a non-competitive holding system designed for small investors who plan to hold their securities until maturity. Individual bidders on Treasury Direct have their ownership recorded directly in book-entry accounts at the Department of the Treasury. If an investor purchases T-bills through the Treasury Direct system and wishes to sell them prior to maturity, he or she must transfer them to the commercial book-entry system. The transfer can be arranged only through a depository institution that holds an account at a Federal Reserve Bank; the person making the transfer is required to pay applicable transfer fees.

Conclusion
When an individual investor builds a portfolio of financial instruments and securities, he or she typically allocates a certain percentage of funds towards the safest and most liquid vehicle available: cash. This cash component may sit in his or her investment account in purely liquid funds, just as it would if deposited into a bank savings or checking account. However, investors are much better off placing the cash component of their portfolios into the money market, which offers interest income while still retaining the safety and liquidity of cash. Many money market instruments are available to investors, most simply through well-diversified money market mutual funds. Should investors be willing to go it alone, there are other money market investment opportunities, most notably in purchasing T-bills through Treasury Direct.

by Jason Van Bergen, investopedia.com