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Every once in a while, Nature intervenes on the existence of the forest.  Wind, heavy snow and ice snap tree branches and bring down entire trees (even very large ones).  The first to go are the sick branches and trees – the ones with the most rot in them.

This is Natures Great Pruning and it happens once in a great while.  It is necessary to keep the forest strong.  Anything left standing will thrive.  In the spaces left by fallen limbs and trees – New trees will grow.

In the Economy – Nature is the Market and the Trees are the Companies in the market.  Some companies are very sick and need to go away completely, others must lose a couple of branches to enable them to remain healthy.

Just as the fallen trees will fertilize the ground for the remaining healthy and new trees, so will the healthy and new companies take up the assets of the closed companies and use them to grow.

Propping up a rotten tree, may allow it to stand, but it will rot never the less.

As the new year progresses, get ready to see credit card rewards reduced (especially on brand new cards).

 As the financial crisis continues, profits continue to erode, so credit card companies have to look wherever they can to cut costs.  In this case, the costs are rewards.  Yearly caps on reward earnings will return.  They can also be forfeited if payments are continuosly late so make sure to pay on time.

 Airlines are also having financial troubles and may increase the amount of rewards points needed to get an airline ticket.  When they change the rules with the credit card companies, credit card companies will have no choice but to pass them down to the card holders (us).

 Anyone who has saved up large amounts of points at this time ought to use them or maybe lose them.  Think about trading points in for smaller reward items or even cash (to pay down the credit card balance).  Avoid trying to amass large amounts over long periods of time.

Once the credit crisis has passed, and all the banks (who own the cards) are in better shape, they will again vie for your favor by increasing rewards.

By the end of 2008 the DOW was down around 4500 points (about 34%) – the worst year since 1931.  The S&P 500 was down about 39% - the worst year since 1937.  The NASDAQ was down about 41% - which was worse than the year 2000 tech bubble.  US Stocks overall were down in the range of 8 to 9 Trillion Dollars.

Because of this long held beliefs about stocks are now questioned:

1-     The Buy and Hold strategy, which was a “no-brainer” - now doesn’t seem so.

2-     Stocks are now Down over 10 years – historically they were always up.

3-     Other investments have higher returns than stocks – Stocks were always the way to beat inflation.

The “average Joe” investors and the professional investors are now shying away from risky investments.  They are moving money out of stocks and into short term, less risky investments  - or Cash.  This is helping to keep stock prices down.

THE UGLY:

Large companies and agencies that dealt in credit went bankrupt (Like Lehman Bros), were bailed out (like AIG, Fannie Mae, & Freddie Mac), or (like Bear Stearns, Merrill Lynch) were bought out by more stable companies.  Government bailouts may not be enough depending on how long the economy stays weak.  More bankruptcies are sure to come.

Banks, companies and individuals are borrowing less because loans are not available to them.  This will hold down the credit markets, company growth, and the housing market.

THE GOOD:

In 2009 housing costs will fall enough to create demand, and along with the lower cost loans provided by banks, will help the housing market and the credit market.

The ever-increasing cash reserves held by companies and individuals are pent up future investment money.  With stocks at historic lows, this money will find its way into the market and help to push stocks higher.

Government tax cuts, government spending and the Central Bank together are creating a very large economic stimulus.  This is the grease that will allow the economic engine to turn with greater ease.

There are opportunities across the board to build wealth now.  Whether you are interested in stocks, real estate, the credit market or bonds – research and follow your favorite investment vehicle.  Create a decisive plan, which will allow you to invest before the massive up side is gone.

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Right now is a Great Time to invest in Banks.  Bank stock prices are much lower than they were earlier this year.  Citibank, for example, was at $20.60 in June of 2008 and as of December 5th 2008 it is at $7.71.  That is $12.89 lower !!  That is almost a 63% reduction in about six months!!  Bank of America was $30.50 in June and in early December it was $15.24.

The reasons why you should invest in banks now are numerous. 

All the banks have varying amounts of trouble with the sub-prime mortgage crisis, but the major players will not be allowed to get into irreversible trouble.  The Treasury Dept. and the Federal Reserve will put together plans and use policy to ensure it.

Many banks have been taking advantage of the depressed financial sector to increase market share and broaden the services they provide by buying other distressed banks.  Bank of America bought US Trust, Countrywide Financial Services (the largest US mortgage lender), and Merrill Lynch (Investing & Wealth Services).  Citibank bought JP Morgan Chase (JP Morgan had recently bought Wamu, Bear Stearns, and Washington Mutual).  Wells Fargo bought Wachovia.

This consolidation will result in increased value (read:  “increased stock price and dividends”) for investors as time goes on.  The banks will eliminate duplicate services and reduce costs through economies of scale to make this happen.

Future lending and the increased deposit base will become huge profit areas for these banks.  The Banks’ investment strategies will move away from riskier investments toward safer havens to help them increase profit and weather the current downturn.

The predicted lower mortgage rates (4.5%) that can be enabled by the Treasury buying Mortgage backed Securities from Fannie Mae and Freddie Mac would jump start the loan businesses for these banks.  There would be added benefits of allowing homeowners to refinance, allowing potential homeowners (with great credit) to buy, and stopping the fall of home prices (and maybe even partially reversing it).

The three large banks written about above can be invested in directly:  Bank of America and Citibank through Computershare , and Wells Fargo through Wells Fargo Investment Plan .

Invest wisely by investing over time so you can benefit from any short-term low stock prices.  Invest now so you do not miss out on this opportunity to create more wealth.

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A credit card is a good tool to have in your financial tool box.  But, like any tool, you have to use it properly.  Just as you are not supposed to use a screwdriver as a chisel, you should not use a credit card to buy things you can not afford.  (Guess how the Banks got into their financial crisis!)

When you looking for a Credit Card to carry, make sure it has the features that work best for you financially.  It should have no annual fee, it should have a payment grace period that is the same or longer than that of other credit cards.  And it should have a flexible Rewards Program that allows you to earn points, which you can trade for air miles and merchandise you consider useful.  Chase, Amex Blue, and Citibank all have rewards programs.

Once you have the right card, you should use it to pay as many household bills as you can.  The electric, gas, phone, Internet, mortgage (or rent), food, etc. all have to be paid every month, so you might as well earn points while you pay.

After that, use your credit card wisely to pay for vacations and any other things you can afford to pay for in full when you receive your monthly statement.  By paying off the entire balance each month you will not be subject to paying additional money in the form of interest (typically 10-12%).  Otherwise, that item you bought on sale will end up costing you more than if you bought it when it was not on sale.

You will also earn interest on the extra money that stays in the bank during the credit card’s grace period (the time between when you buy something and when you pay for it – usually 20-25 days).  The interest you earn during this “Float” time will compound over the years, putting you in a better financial position.

One of the best ways to earn good “interest” is by keeping your money in a Money Market Fund.  The payout is called a “Dividend” and accumulates just as interest would.  The rates paid by money market funds closely follow the interest rate in the market.  As interest rates in the market go up, so do money market fund rates.  Not all money market funds pay the same rates, so choose carefully (Vanguard Prime Money Market Fund is one of the good ones).

Banks, on the other hand, tend not to follow the market so closely, and pay you less interest.  So keep your “Float Earnings” in a place where they will do you the most good.

Many money market funds have a minimum amount that you can write a check for.  One such fund has a $250 minimum – but your monthly spending will easily be more than that.  An additional benefit of using your credit card is that you will write one check to pay many bills – what a great time savings !

Remember to Never Carry a Balance !  If you miss a payment once every other year, call your credit card company, they will be happy to remove the late fee because you are such a good customer !