Learning to penetrate the smoke screen that the Dow-Jones Industrial Average has become is, in my opinion, vital to the success of any investor or trader.

If you don't know what is going on inside the "Dow", you don't know anything worth knowing.

The complex formula used to compute this monstrosity, called price-weighting, goes far beyond simply adding up the individual prices and dividing the whole thing by thirty. It also employs a divisor designed to compensate for stock splits.

The effect of all this not only gives the higher priced issues more weight in the average but accounts for the incredibly high valuation of the average itself.

Confused? Good! You're supposed to be. You see, dividing a number by a value less than one actually turns it into a multiplier!

The current divisor, as of this writing, is approximately .2 which is the same thing as multiplying by 5!

That means a one point move in a stock is good for a five point move in the average.

It also allows a few higher priced issues to give the illusion that the average stock is moving up when, in fact, the other issues are moving down.

Here is why you absolutely should consider the almost certain weakening of the dollar in the future regarding your stock investments. It’s the reason Warren Buffet just consummated the largest foreign investment deal in Israels’ history a U.S. $4,000,000,000 purchase of 80% of Iscar. The real tension right now between the U.S. and Iran, I believe, has little to do with Iran's nuclear enrichment program. I believe that Iran is probably is still years away from the development of tactical nuclear weapons and this whole “nuclear crisis” is a smoke screen for tense economic negotiations happening behind the scenes.

If there is one thing I learned from attending one of the best public policy graduate programs in the U.S., where I had the chance to hear former Secretaries of Defense and former Presidents speak, is that politics and economics are forever intertwined, and that the politics of war is never what it appears to be as presented to the public masses. So that’s why I think the nuclear tensions between the U.S. and Iraq are for the most part largely fabricated beyond reality and any military tension that exists is more likely due to the IOB and not to Iran’s alleged uranium enrichment program. Don’t get me wrong, it’s not that I believe Iran doesn’t have an uranium enrichment program. I just believe that the stage they are at in their program is a far different reality than what is being presented to us through the media. The real military tensions that exists, those between Israel and Iran, are hardly even discussed. And just a couple of days ago, on June 4th, Iranian leader Ayatollah Ali Khamenei said that the U.S. could ``seriously endanger energy flow in the region,'' supplier of about a quarter of the world's oil, by acting against Iran.

Ah yes, oil. This is what I believe is the true cause of tension between Iran and the U.S.- the I.O.B. or the international Iranian Oil Bourse. It is the first oil bourse in the world that plans to trade in a currency other than U.S. dollars, electing to trade in Euros.

The IOB already has the support of China, as well as prominent Latin American trading partners that are anti-American such as Venezuela. The IOB in fact would like to trade exclusively in Euros, not U.S. dollars. If this situation materializes, this could potentially spell disaster for the U.S. dollar and send it into free fall. I think a dollar crash is unlikely, but it is still possible over the next couple of years. What is more likely is a gradual steady decline in the dollar. Why? Right now, one reason every central foreign bank holds U.S. dollars is because they must buy oil in dollars. Every country in the world has to pay for oil in U.S. dollars, no ifs ands or buts. The IOB will change all this. This is a real threat as already foreign central banks all over the world are taking note.

The Financial Times reported this month that for THE FIRST TIME IN SIX MONTHS, central banks all over the world were net sellers of U.S. treasuries instead of net buyers. In March, Japan, the world largest holder of U.S. dollars, sold $18.2 billion worth of Treasuries. Sweden's central bank cut its dollar holdings in half, also in March. South Korea has also moved away from the dollar, diversifying its assets in foreign currencies.

Some people say Iran is not that big of a player in oil, so even if this situation materializes, it will not weaken the U.S. dollar that much. Iran accounted for 15% of all oil exports from the Middle East in 2003. But that’s the small picture. And 15% is still a significant chunk of Middle East exports. The big picture is what kind of domino effect the IOB might trigger. If Iran takes this bold stance, who will follow? Hugo Chavez in Venezuela, Evo Morales in Bolivia, China’s Hu Jintao? And if all these events happen, then what happens to the value of the dollar? That’s the big picture that I believe the U.S. is considering in their negotatios with Iran over the IOB, I mean, nuclear enrichment program.

The IOB was supposed to open in March but its opening has been delayed. Then it was supposed to open last month, and it was delayed again. Most likely due to behind the scenes negotiations between the U.S. and Iranian governments about the effect the IOB will have on the U.S. dollar. Ironically, the Federal Reserve in the U.S. reported that it will no longer report M3 figures anymore. M3 measures U.S. dollar supply and this figure is necessary to know how much foreign government holdings of U.S. dollars are decreasing or increasing. The Fed has reported the M3 supply for a long, long time. The IOB was supposed to also open in March though it didn't. You can interepret this how you want.

Already following Iran’s lead is Russia, or vice versa (I’m not positive which country introduced the concept of an oil bourse trading in foreign currency other than U.S. dollars). Russia is one of the world’s largest players in oil and gas. Why do you think last year that the most of the new billionaires on Forbe’s wealthiest people in the world list came from Russia. While most of the world ignored Russian oil stocks, many Russian oil stocks returned 300%, 500%, 1000% over the past several years. Gazprom is the largest natural gas company in the world. Russia's Gazprom is warning Europe that it will divert natural gas exports elsewhere if European governments don't allow the company to establish significant outposts inside their respective countries. And guess what? Russian President Putin has announced that his country will create an oil and gas bourse that will trade solely in roubles. This development is even more significant the the IOB.

If you need further proof that the dollar has a high probability of moving further downward, and perhaps significantly, besides all the world's central banks moving out of the dollar, look to the actions of two of the greatest individual investors of all time, Warren Buffet, George Soros, and one businessman, Bill Gates. All have been tremendously short against the dollar (billions of dollar worth) this year and continue to be. Although Soros and Buffet have been spectacularly wrong at times in their bets, in this case you’d not only be betting against them, but you’d be betting against the smartest bankers in the world, those responsible for the decisions at the world’s central banks, and you’d be betting that the huge trillion dollar U.S. trade deficit would suddenly disappear, and you’d be betting that world political stability would suddenly happen.

The IOB and the Russian oil bourse would mean that the world's central banks would no longer have to hold as many U.S. dollars as they currently are. If they chose to sell off U.S. dollars in larger quantities than they already have, the dollar could weaken sharply. Then finally take into account the U.S. federal reserve’s position. First of all there’s so much speculation right now about whether the feds will raise interest rates or not. They will. At least I believe that they almost have to. Rising interest rates protect a weakening U.S. dollar. Only problem is that for the massive U.S. trade deficit to close at all, the dollar will have to weaken not just a little bit more, but considerably.

So if the dollar weakens considerably, the U.S. feds will continue to rise interest rates, inflation will increase sharply, the rest of the world will continues to lose what little confidence they still have in the U.S. dollar, and one of the wisest investors on this earth,Warren Buffet, will start investing heavily outside of the United States into foreign markets. Oh, sorry, this last event has already occured.

So what does all of this all mean? Number one, if you hold lots of dollars, buy euros and an asian currency basket sometime in the near future. It will serve as nice hedge and should provide some decent gains over the next year.

This article may be freely reprinted on another website as long as it is not modified, changed, or altered in any way and as long as the below author byline is included along with the active hyperlink exactly as is.

J.S. Kim is the Managing Director of SmartKnowledgeU™. He has over thirteen years of experience in finance and financial services, and has earned a BA in Neurobiology from the University of Pennsylvania, a Master in Public Affairs from the University of Texas at Austin, and an MBA with a concentration in finance from the McCombs Business School, University of Texas at Austin. He is the inventor of the revolutionary MoneyPing™ investment strategies, a novel approach to learn how to build wealth, not just dreams.

As I predicted, a rally. They're climbing a little today. But I was wrong about the depth. I thought they'd decrease a couple of clicks more before recouping losses. So, they didn't hit the depths of a few weeks ago.

I did think about buying yeterday but I waited. That's the way it is. It could have gone either way today.

But no problem. This is a volatile period. And we'll be back here again.

As usual, mining is leading the way. Which means there is more money to be made and more money to be lost trading them. The risk premium.

The ECB rate rise didn't seem to have an effect. But it means there are worries about inflation / overheating etc.

Now also....look what's happening in Tokyo...an early rally and then a drop...so I wouldn't be surprised if that is mirrored here today.

Today I'm looking at luxury goods and services...something that tends to hold during a bear and a bull....investigating a firm that seems to be doing will - share price risen dramatically - but also has plans for expansion in the right places...

Know the Rules

Employee stock options can provide you with a substantial source of deferred income and permit you to control the recognition of taxable income. You generally pay no tax when an option is granted because you are not receiving any shares of stock, only the option to purchase shares at a later date.

In general, holding an option to acquire stock may be better than holding the stock itself. The option provides protection against loss should the value of the stock decline below the exercise price. In addition, the option gives the holder equivalent ownership rights in the corporation, without requiring any immediate investment. Employee stock options offer the potential to have post-exercise stock growth taxed as capital gains rather than ordinary income. This provides an advantage for those who are in the top tax brackets

Know the Difference

Nonqualified Stock Options (NSOs) give an employee the option to buy corporate stock at a specified, fixed price (usually at fair market value at the time the option is granted). In general, you must exercise your option to buy within a specified time period--typically 10 years or less.

Upon exercising your rights, any gain realized from the spread (the difference between the exercise price and the fair market value) is taxed as ordinary income. However, any gain realized from the date the option exercised until the date the stock is sold is taxed as capital gain.

Incentive Stock Options (ISOs) also offer the option to purchase corporate stock at a set price, but ISOs cannot be issued with an exercise price below the current fair market value of the stock.

Generally, the spread on ISOs is not subject to ordinary income tax at the time you exercise the option. However, spreads may be subject to the alternative minimum tax (consult your GROCO financial adviser for more information). Gain realized upon the sale of the ISO stock may be taxed as capital gain. Provided you have held the ISO stock for at least one year from the date of exercise and at least two years from the date the option was granted, the entire gain recognized upon sale of the stock is taxed as a long-term capital gain.

When to Exercise Your Options

The decision of when to exercise your options depends on several factors as well as your particular situation:

Your Company's Plan

Generally, options become exercisable over a period of years. For example, options granted in the company plan vest 20 percent a year over five years. It's important to know the details of your firm's plan before you make a decision.

Your Company's Growth

Understanding how your company is poised for growth is another important factor in your decision making process. Issues to review and understand are:

* How your company makes money – understand the industry that their earnings are tied to.

* Evaluate sales – compare your company’s sales to the industry average of competitors.

* Industry trends – monitor the industry that your company operates in. Look for growth opportunities and understand your company’s strategy for capturing market share.

* Understand the factors that can affect the liquidity of the market – are lower interest rates and tax cuts freeing up resources for the company’s growth plans?

* How your company is financing growth – are they growing as expected?

* Know your leaders and their track record – a company’s strong executive team will likely yield continued success.

* Understand your company’s P/E (price to earnings) ratio – look for strong cash flow and well-managed costs.

Your Current Financial Needs

The decision to exercise should consider the need for cash, the proximity to the option's expiration and/or the current stock value as compared to its expected future value. With regard to ISOs, because of taxes, the required holding periods should be considered when determining when to exercise the options and/or sell the underlying stock.

Balancing Your Portfolio

You may also choose to exercise an option if your company's stock represents a large portion of your investment portfolio and you wish to diversify your holdings. Some professionals say to reduce investment risk, company stock should not represent more than 40 percent of your portfolio.

Market Conditions

Obviously, market conditions will play a large role in your decision to exercise your option. If the stock underlying the option appreciates, you may wish to hold on to options as long as possible in order to take advantage of future gains.

Tax Ramifications

In the case of NSOs, you may want to consider exercising your option over a few years to avoid being forced into a higher tax bracket. Remember, the spread on NSOs is subject to regular income tax at the time of exercise. Because appreciation occurring before exercise is taxed as ordinary income, it may be advantageous to exercise over time.

Your company's nonqualified stock options may be transferable to family members. If so, you may be able to trim your estate tax by giving options to your heirs. The transfer may be gift tax free if the value transferred is $11,000 or less ($22,000 if married). notwithstanding the transfer, upon exercise the executive will be responsible for any income taxes generated.

When stock prices start to move within a certain range, falling to established lows and then rebounding up to established highs, meet with resistance, and fall back again, the stocks are said to be in a consolidation or congested phase.

Most of the time, typical consolidation patterns can be seen, with the most common one being the rectangle pattern or sometimes called a price "corridor" or channel.

When prices start to drop, traders get nervous and weak holders will sell their stocks so that they will fall to a support level which other traders will consider a good price to buy. From that level, stock prices will then rebound, often with volume as support comes into the stock.

As the price of the stock improves and increases, it will reach a peak where traders who have purchased the stock at lower prices will sell. At the same time, weak holders who have purchased the stock at higher prices may wish to bail out as their losses are narrowed with the improved prices. At that point in time, resistance is encountered and the stock price then tops over to form a peak.

When you connect the support prices and the peak prices where the price tops over, you will find the pattern of a channel or a rectangle.

During consolidation phases, prices trade within a range formed by the bottom of the channel or rectangle and the top of the rectangle or channel.

Technically, the use of oscillators will be suitable for trading within congestion phases. The key is to identify the bottom of the channel and to buy closer to the bottom of the channel and to sell as prices reaches the top of the channel or rectangle.

A common mistake newer traders commit is to continue to use their trend following trading system during a congested phase and encounter a lot of whipsaws as prices oscillate between a small range.

When you transit from a bullish market and moves into a bearish market, be contented with smaller gains which come from trading the congested and consolidation phases. Identifying where the price is within the channel is a good way to help you trade during these consolidation and congested phases.