First quarter earnings are rolling out for all publicly traded firms, and with each significant increase in profits, anxiety heightens as to what the Federal Reserve will do at their next meeting in mid-May. We continually talk about the US Federal Reserve, its watchdog role over the stock market, the flow of cash, and its huge ability to use its resources to control the pace of the US economy.

Those economies closely (positively) correlated with the United States (that's us folks here in Bermuda) have reason to worry also, as so goes the United States economic environment, the ripples reach out to us. You may not wish to concede to this US influence over the Bermuda economy, but it is a fact of economic life. A few weeks ago, Patrice Horner, CFP (Anchor Investment Services) wrote an excellent article on positive and negative correlation with the US stock market.

Market conditions Last week in Personal Finance, and in a mid-week opinion piece, I talked about many of the factors that contribute to volatility and uncertainty in the stock markets. Another large factor that can depress stock prices and company earnings is a continued rise in inflation. Economists know that unchecked inflation can lead to an economy spiraling out of control. Many of you may have seen famous pictures of Germans between the First and Second World Wars paying for a loaf of bread with a wheelbarrow full of money! This type of runaway inflation and consequent devaluation of a country's currency has happened more recently in a couple of the Pacific Rim cultures and Brazil. A strong economy with a system of more checks and balances seeks always to avoid such inflation problems.

Controlling inflation If the US Federal Reserve feels that the US economy is growing at an explosive rate for the first quarter of 2000, it will put on the brakes again by raising interest rates. It accomplishes this by increasing their rate of lending money to all banks that borrow from the Reserve. Note that all financial institutions have no choice in this decision; they cannot shop around for a better rate the way we consumers would. You may have seen lending terms stated as prime rate plus 2 or 3 percent. This prime rate is that bank's borrowing rate from the Fed.'s.

Suddenly then, the use of and supply of money for everyone will become more expensive for the banks, the consumers, the corporations who manufacture and provide services, and all the businesses in between, including leisure delivery services. If the interest rate is pushed too high, consumers and businesses cut back on spending. What drives an economy? Production and consumption of goods and services, including folks, vacations, business trips, marketing, you name it. Naturally, no-one in his/her right mind wants this cutback situation to occur, so it is the Fed's job to try and contain inflation without stalling out the economy (including the global markets) in the process. This is without a doubt the toughest balancing act in the world! And that is why, Mr. Alan Greenspan, Chairman of the US Federal Reserve (while not exactly a poster model) is better known than most movie stars! The mock portfolio Warner Lambert continues to climb. Will the excessive profits of the drug companies (per President Clinton) continue? Not if the Democrats have their way. However, for now this is a keeper. Nokia still down slightly Wednesday, but by Thursday it released terrific first quarter earnings and the stock climbed $4.25 dollars. I could have manipulated (another word for cheating) Nokia data and put in Thursday's closing price and our pretend portfolio would have been in the black! But, we price Wednesday to Wednesday and will stick to correct disclosures.

The Gap is leaving a gap as consumers continue to cut back on clothing of this type. How many khakis can you own? I am leaning toward Victoria's Secret stock again after James Martin (James Martin Inc, an E-commerce cutting edge company and Government's e-ecommerce advisor) pointed out at the Chamber of Commerce AGM that VS has one of the most advanced distribution to consumer processes in the world. Faster sales and delivery means greater market exposure and quicker profits. Berkshire Hathaway is still a keeper -- the numbers are altered slightly as a reader pointed out that you can only buy BRK in one-thirtieth increments.

Puma may be lost forever! Part of your homework below is to find out if you think it will survive? Rambus is moving up as the week was ending, but is still at 55 percent of its high. Bargain hunters who bought at 52 should pat themselves on the back! Bank of Bermuda, with its announcement several days ago of a 45 percent profit margin increase over last year, generated nothing more than yawns, although the stock climbed slightly. Unsubstantiated rumors persist that BOB may still make the listing trip to the NASDAQ this year. What will happen to the value then? Of course, everyone points out to me that the same rumors abounded last year. Well, what do I know. Well, no question that all the Bermudian banks this quarter have achieved economies of scale, increased their investment expertise and pushed up their profit margins. This is always good news for Bermuda. Belco still producing, we will all quietly thank them when the air-conditioners crank up to top speed soon! Bloomberg and Homework There are six new stocks listed.

Homework.

1. Should we buy them? 2. Why? 3. How do the analysts rate them? 4. Are they too expensive? 5. What does each company do? (Don't tell me GE is just electric).

6. Have they made any money? How to find out.

Using Bloomberg in the Washington Mall: 1. Hit the F8 key (yes, it is F plus eight, not the plain 8 key!) 2. Type TK, then type in the symbol or name of the company 3. Hit the GO key 4. You will see lots of different menu choices, what are they To find out analysts' ratings, clear the menu by hitting the ESC key Type in the stock symbol Type ANR Hit the GO key Those Internet savvy types can visit any number of major Websites, Yahoo finance, MSN MoneyCentral, Smart Money, Money; where you can just type in the stock symbol and reach the stock research pages.

Controlling financial risk Spreading out your investments by type is one way to minimize risk. I find using the ladder scenario below helpful when working with clients. It is an easy to see the degrees of risk and how to allocate your investments.

Volatility becomes an everyday occurrence The rules of last week restated, a) learn to avoid risk, b) control risk, c) make a decision to accept a certain amount of risk or d) reject risk. The chart lists rates of expected return annually relative to the amount of risk assumed by the investor. It is important to point out that once you invest outside of fixed deposits you also run the risk of negative returns, which is not to say that a fixed deposit bank cannot fail, but the chances are far, far less.

MOST RISK Total bets Commodities, options and futures Total bets Hedge funds and currency trading 2-100%-plus Small capitalised company stock ($50m to under $1 billion) 10-45% Large capitalised company stock (over $1 billion) 6-25% Mutual funds 6-13% Triple rated bonds 6-13% mortgage backed securities 4.5-8% Ultra-short term bonds, Treasuries 2-10% Real estate property investments 4-7.5% Fixed deposits, Locked term deposits 3-5% Statement savings LEAST RISK When working with clients, we factor in all of their investments calculating the risk involved, the rate of return expected, the liquidity of cash readily available and many other factors (to be explored in further articles). Clients are often surprised that we count homeownership in the portfolio process, but it is, in many cases, the most significant investment that you will ever make.

If you are a conservative investor and depending upon your age, your beginning ladder might look like this. While many people may not have that amount saved, I have picked an arbitrary number of $50,000 in investments and $100,000 in the equity in your home...not the price you paid because the remaining value is tied up in the mortgage.

Total bets Commodities, options and futures Total bets Hedge funds and currency trading 2-100%-plus $5,000 Small cap stocks 10-45% $10,000 Large cap stocks 6-25% $15,000 Mutual funds 6-13% Triple rated bonds 6-13% Mortgage backed securities 4.5-8% $5,000 Ultra-short term bonds etc 2-10% $100,000 Real estate investments 4-7.5% $10,000 Fixed deposits etc.

3-5% $5,000 Statement savings Every single person is a unique individual, and this same principle is applied to a client investor. He/she may not be comfortable with owning any individual stocks at all and based upon the allocation above probably shouldn't because you need at least 30 to begin to diversify your portfolio.

See the accompanying stiory for a discussion of mutual funds as one investment alternative.

The information in this column does not represent a recommendation to buy or sell stocks or any other investments. Readers needing specific assistance should seek professional advice from their financial advisor.

Martha Myron CPA CA is a Bermudian, holds a Series 7 NASD license and is a United States federally authorised tax practitioner. She is Programming Chair for the International Association for Financial Planning/Bermuda. Questions regarding this article may be sent to her at 234-0290 or Email: marthamyron y northrock.bm CHART