Seasons In The Sun

The stock market has them and - guess what? - they can be timed!

Random-walk theorists tell us the market meanders randomly and therefore cannot be timed. Efficient-market theorists claim that all the information that will affect the market is instantly in stock prices. And even Wall Street warns investors not to try to time the market. So if all these naysayers are correct, the only alternative, other than avoiding the stock market altogether, is to buy and hold. But, for the buy-and-hold theory to work, two things must happen.

First, the investor's specific holdings - not the major indexes - must do well over the long haul, bouncing back from any bear markets. However, many stocks popular in one bull market turn out to be pariahs in the next.

Second, for the buy-and-hold theory to work, investors also must emerge from the other side of bear markets still holding the stocks they entered them with. There's no evidence of that ever happening on a wide scale in the past, and it's not likely to occur today.

It's worth noting that the issues in the very indexes used to gauge the market's performance are constantly changing. For example, 30% of the stocks that were in the Dow Jones Industrials when they topped out in 1987 are no longer in that average. They were replaced, a few at a time, by stocks of newer, stronger companies more attuned to the changing economy. And about 60% of the companies that were in the S&P 500 around 25 years ago are gone, because they were bought by, or merged into others, or because they failed or their stocks fell dismally out of favor.

If even blue chips in the indexes can't always be depended upon to recover, is the idea that "the market always comes back" really meaningful to individual investors?

A buy-and-hold strategy guarantees that a person will suffer not only the next bear market, but every bear market in his investing lifetime... Not much fun, considering that over the past 100 years, there have been 22 bear markets, each lasting, on average, 15 months and bringing declines of 36.3%.

But there IS another way to play the game: Timing the market through a simple strategy that has produced sparkling results. And two simple factors underpin this concept:

First, the market tends to make most of its gains between November and May each year, and then usually enters the doldrums between May and November. Why? Because investors receive extra cash between November and May - from sources such as year-end bonuses and distributions, corporate contributions to profit-sharing plans, and income-tax refunds. Much of this flows into stocks, driving prices higher. When the extra dollars stop pouring in, Wall Street slows down until the following October, when the cycle begins again.

Secondly, there appears to be a period of time each month when the markets are especially active, from the last trading day of each month through the fourth trading day of the following month. And this also seems to be linked to cash-flow bulges, as many high-income folks receive their paychecks monthly, rather than weekly.

Therefore when we combine these two patterns, they seem to be telling us: "Enter the market on the next-to-last trading day of every October, and exit to cash on the fourth trading day each May."

Since 1964, had an investor followed this simple mechanical procedure, his performance almost would have doubled the Dow's. Furthermore, the seasonal investor would have done this with half the risk, since he would be exposed to the market only six months each year.

But this is only part of the story.

Obviously, rallies aren't going to begin on the next-to-the-last trading day of every October, and they won't all end on the fourth trading day of every May. So to better pinpoint profitable entry and exit points as the respective calendar dates approach, one must add a simple short-term indicator called MACD.

MACD, better known as Moving Average Convergence/Divergence, signals when market momentum has reversed direction. It is calculated by subtracting a 26-day exponential moving average of the Dow's daily closes from a 12-day exponential moving average. The result is then plotted against a 9-day moving average of the two closes.

A buy signal is triggered when the main MACD indicator line breaks UP through the 9-day moving average. And a sell signal occurs when the indicator line breaks DOWN through the 9-day line.

The addition of that simple technical indicator, frequently found in investment software packages, enhanced the Seasonal Timing Strategy significantly. Its performance tripled that of the Dow!

The way this works: the idea is to simply ignore all MACD signals through the year except when close to a planned calendar entry or exit date. Then, if it triggers a buy signal two or three weeks prior to the calendar entry date, enter immediately rather than waiting. However, if it's still on a short-term sell signal when the calendar entry date arrives, wait until it reverses to a buy signal before entering.

The Seasonal Timing Strategy has worked very, very well in recent years. It easily outpaced buy-and-hold, in part by avoiding the minor corrections of 1997 and 1998. And following this strategy also allows an investor to collect cash for six months every year via interest and dividends. The only downside: It can subject investors to short-term capital-gains taxes.

Will this strategy continue to work? It certainly should. And with the current state of the market, it just might be more important now to be a Seasonal Investor than ever before!

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Be Your Own Bond Fund Manager

If you're about to make a sizeable commitment to bonds, think twice before dialing your favorite mutual-fund company. When it comes to high-quality bonds such as Treasuries and AAA-rated corporates, there's little aside from convenience a fund can give you that you can't get on your own. In fact, if you have $50,000 or more to invest and plan to buy and hold, picking your own bonds can be a cheaper, more profitable way to go.

According to a study taken by the Charles Schwab Center for Investment Research, an investor with $50,000 can build a diversified portfolio of high-grade bonds for no more, and often less money, than a comparable low-cost mutual fund. And do-it-yourself investing looks even better when you consider the typical bond fund's expenses. Treasury funds for instance charge an average of 0.77% of assets each year.

Another reason to go it alone is that pros have little edge when picking Treasury, AAA-corporate, and insured municipal bonds. Such bonds stand virtually no chance of defaulting, and trade frequently enough to give individuals price data to secure good deals. So, investors face only one risk - that rising interest rates will punish bond prices. Since the pros have proved no better than others at forecasting rates, it makes no sense to pay one to do so!

If the direct route appeals to you, buy at least five high-quality bonds maturing at different times. One method is to put at least $10,000 each into 2-, 4-, 6-, 8-, and 10-year bonds. When the two-year bonds mature, reinvest the proceeds in new 10-year bonds. This laddering reduces the risk of losses that result from rising interest rates - which punish short-term securities less than long-term ones.

Bond funds still have a place in many portfolios. If you can only part with a little money, funds are the best route. And if your idea is a short stay in bonds, funds are the best solution because transaction costs can sink do-it-yourselfers who trade.

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Some News You Can Use

The Utility Sector has been one of the top sectors this year producing steady earnings growth and high dividend yields. And there appears to be a smart way to profit from this utility stock boom. Do this by paying attention to companies that are acquisition targets - but more specifically, those companies that are takeover targets and are likely to be acquired at premiums of 15% to 20% over their current share prices.

Two such likely targets are:

1. PPL Corp (NYSE: PPL) now yielding about 3.1%

2. SCANA Corp (NYSE: SCG) now yielding about 3.6%

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The Treasury will resume selling the 30-year bond in early 2006, but it should be avoided because in this present shaky interest rate environment, it simply does not make good sense to tie up money in such a long-term security because of the potential long-term risks that may be involved.

The way that interest rates affect long-term bond prices, if you did purchase the new 30-year bond, and if interest rates rise by one percentage point during the next year, that 30-year bond would lose roughly 10%. And a 10-year Treasury bond under the same circumstances would suffer only a 3% decline.

Of course, the good thing about bonds is that if you hold your Treasury bond until it matures, you are certain to get your money back. The rise or the fall in interest rates only becomes a problem if you are forced to sell before the bond matures!

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Over the past 15 years, stocks that paid dividends have produced higher annual returns with far less risk than have those that didn't pay dividends. And the reason for that is the fact that many dividend-paying stocks are mature companies that have predictable earnings streams, and thus they are able to be steady dividend payers.

When seeking out good dividend paying stocks, you should do so by picking companies that regularly raise their dividends. Two companies in particular that have raised their dividend annually for at least 30 years are Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG).

If you had read Professor Jeremy J. Siegel's new book, The Future for Investors, you may have been surprised to learn that from a list of the 20 companies with the best annual stock returns during the period from 1957 - 2003, the company which tops that listing - with an annual return of 19.75%; an earnings per share growth rate of 14.75%; an average P/E ratio of 13.13; and a dividend yield of 4.07% - is none other than Altria Group (formerly Philip Morris) (NYSE: MO).

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In case you haven't noticed, the S&P 500 Index has changed. Where previously, a company's Index representation was based on its total shares outstanding; now, each company is weighted in the Index based on its "float" - which is how many shares trade freely in the marketplace.

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For those of you who follow Bob Brinker's Moneytalk program each Saturday and Sunday, you may have noticed that the football season appears to be playing havoc with the program - especially on Saturdays. So what to do about it? The show is available on the Internet by going to either www.kabc.com or www.kgo.com - however station kgo also appears to be covering football during the Bob Brinker time period, so KABC will be your best choice.

Also, you can listen to previous editions of Moneytalk, which are available for download from Bob Brinker's own website at www.bobbrinker.com.

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Common Sense

A best-seller in 1776 was Tom Paine's "Common Sense." Maybe someone should do a 2005 update!

You have many decisions to make every day. Just weigh your answer against the simple question, "Does it make good, common sense?" If it does, do it. If it doesn't, don't.

Common sense says: Don't smoke when you're filling your gas tank.

Don't run through red lights.

Don't overeat.

Don't spend more than you make.

Common sense is sometimes called horse sense, and for good reason. Have you ever seen a horse at the $2 window betting on how fast a person can run?

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Deconstructing The Paper Wall

Painstakingly sifting through a company's SEC filings is almost nobody's idea of a good time. But understanding the prospects for a company's stock begins with knowing your way around its balance sheet, as well as its income and cash-flow statements. There are valuable warning signals flashing in the accompanying narrative information, like the auditor's report, the management discussion and analysis, and even the humble footnotes. Reports to the SEC can be seen on the Web at Edgar and also at 10Kwizard.com.

Anything out of the ordinary about the auditor's report may be cause for alarm. A straightforward audit is about one page long and indicates that an outside review of the company's financials has been performed and the information presented by management is in accordance with generally accepted accounting principles (GAAP). If the auditors are concerned, they will include a "subject to" paragraph in the middle of this statement, as in: subject to the resolution of certain problems, the company looks okay. That's serious, but even worse is an opinion that questions the company's status as a "going concern."

Next, review the narrative statements in 10-K and 10-Q reports under Management Discussion and Analysis. This is packed with good information because it's where they tell you why revenue wasn't as good this year as last year. SEC rules require company executives to highlight and explain business changes that occurred in the past year, including sharp drops in revenue, acquisitions, and divestitures.

Pay special attention to the section labeled Liquidity and Capital Resources. A company must have enough current or liquid assets as collateral in order to borrow money to pay short-term debts. Otherwise, the company may not be able to distribute dividends, pay suppliers and creditors, or, if money is really tight, meet its own payroll.

The footnotes are another treasure trove of potential red flags. Footnotes are most often found at the end of a 10-K or an annual report. One kind refers to accounting methods and may reveal questionable or aggressive practices or that the company has changed methods, usually a warning sign. But most investors will have an easier time deciphering the other footnotes, which offer disclosures not found in the main body of the financial statements.

For example, the cost of stock options issued to employees is excluded from income statements. Yet when employees exercise those options, their gains are taxable salary on which the companies owe Social Security tax. Companies often subtract this liability from net income as a special item because it's based on unknowns such as market fluctuations and employee decisions to exercise. But investors shouldn't be quick to dismiss that amount. It's a real cash expense, however, the income statement will show a hypothetical, or "pro forma" income, with a reference to the footnotes, explaining that the options expense has been excluded.

Pro forma income can be a red flag in itself. It refers to how much a company earned after excluding onetime events such as a big restructuring charge or a large gain due to the sale of a division, or stock option liabilities. Therefore, you should be skeptical about what items companies put in and take out to arrive at that pro forma figure.

Other one time occurrences often detailed in the footnotes, frequently inflate earnings. The sale of an asset may prop up income, but it can't be relied on for future gains. If a company touts profits based on anything other than its main business, that's a major red flag. Then at that point you have to ask, "Where do revenues and earnings come from, and are they of quality?" Onetime events can also pump up cash positions.

Serious legal problems may also surface in the footnotes. But investors have to realize that many lawsuits are expected in certain businesses. Tobacco companies, for example, have been disclosing lawsuits for years - most of which, until recently, didn't have much impact on the tobacco industry.

Finally, check out a much neglected footnote called Subsequent Events. This is where auditors insert anything important that happens in the period between the close of a given quarter and the date that the report is actually filed. The subsequent events section is often one of the last footnotes in a filing, and unfortunately, many people don't bother to read the footnotes.

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Chicago Chapter News

You can really widen your investing horizon by taking in any meeting of the A.A.I.I. Chicago Chapter. These meetings are held eight (8) times per year on Saturday mornings, and the meeting location is very convenient to reach, being held at The University Club which is located at 76 East Monroe St. in downtown Chicago.

The first meeting of the 2005-2006 season will be held on this coming Saturday morning, September 17, 2005 - meeting time starts at 10:00 A.M. and ends at 11:30 A.M..

Featured speaker: Mr. Henry A. Feldman, Jr., President of Concord Asset Management.

Topic: "How To Beat The S&P 500 Index - By Avoiding Major Mistakes"

Meeting Fee: $25/person (at the door).

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Thoughts of Warren Buffett

"Any investor, unaware of the fool in the market, probably is the fool in the market!"

Investing For Winners

So what is it that the starting quarterback of a championship football team does to win games? And more importantly for our purposes, what is it that we can take from him to become better investors?

The answer is simple: the starting quarterback on any championship team doesn't make mistakes. That's it!

When you're playing at the professional level, where the competition is extraordinarily high, all it takes to be a loser is just one big mistake. And when it comes to investing, the difference between professionals and amateurs is also not making big mistakes. But there is one key difference between winners and losers when it comes to investing...

Losers ask: "How much can I potentially make?"
Winners ask: "How much will I have at risk?"

Losing investors are wowed by returns. Winners already know that the returns will come. So they concentrate on minimizing the risks. Winning investors never talk more about returns than they do about risks. Winning investors think in these terms: for a given level of return, how much will I have to risk? It's the REWARD-TO-RISK ratio. And here's what the ratios look like over the past 50 years or so:

Stocks (including dividends):
15% a year REWARD
16% a year RISK (volatility)
0.9 REWARD-TO-RISK RATIO

Government Bonds:
6% a year REWARD
10% a year RISK (volatility)
0.6 REWARD-TO-RISK RATIO

One thing the reward-to-risk ratio ultimately tells us is that in any given year, we do have a risk of losing money. For example, in any given year, we might make a total return of 6% on government bonds. But in any given year, the likely return ranges 10% on either side of 6% - from a high of +16% down to a low of -4% return.

But the ratios above are based on putting all our eggs in the stock market or all our eggs in the bond market. However, if you take the time to crunch the numbers, you'll find that a portfolio with 50% stocks and 50% bonds, improves the reward-to-risk outlook dramatically:

50/50 Stock/Bond Mix:
10% a year REWARD
10% a year RISK (volatility)
1.0 REWARD-TO-RISK RATIO

By having 50% in stocks and 50% in bonds, your portfolio would be no more volatile than an all bond portfolio. Yet your returns would increase dramatically over that of just bonds, from 6% to 10% (a 66% increase). So by adjusting our mix, we maximize our potential returns, and yet keep our risk at a minimum. No mistakes.

In this case, with the likelihood of 10% a year in returns, and a likely range of returns between 20% and 0%, you've greatly reduced your chances of having a losing year.

So even if you lack the natural skills of the so-called professional investors, you still can succeed at the highest levels by just keeping yourself from making the big mistakes!

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18 Common Mistakes Most Investors Make

Knute Rockne, the famous Notre Dame football coach, used to say, "The way to succeed is to build up your weaknesses until they become your strengths." The reason most investors either lose money or achieve embarassing results is because they make too many mistakes. Here now is a list of mistakes made most frequently by individual investors who are not very successful:

1. Most investors are relatively poor at stock selection because they do not use good selection criteria. They do not know what to really look for to find a successful stock. Therefore, they buy laggard, "nothing-to-write-home-about" stocks that are not acting particularly well in the marketplace and are not real market leaders.

2. Investors with poor results usually buy on the way down in price; a declining stock seems to be a real bargain because it's cheaper than it was a few months earlier. This is a classic mistake. The weakness in the stock could be because the company in question is in serious trouble and may even be headed for bankruptcy.

3. An even worse habit is to average down in your buying, rather than up. If you buy a stock at $40 and then buy more at $30, and average out your cost at $35, you are following up your losses and mistakes by putting good money after bad. This is a terrible strategy and one that will, if persisted in, result in serious losses and in your being weighed down with a few big losers.

4. The public loves to buy cheap stocks, those selling at low prices per share. They incorrectly feel you can buy more shares of stock in round lots of 100 or 1,000 shares and this makes them feel better and perhaps more important. You would be better off buying 30 or 50 shares of higher priced, sounder companies. You should think in terms of the number of dollars you are investing, not the number of shares you can buy. Always purchase the best merchandise available, not the poorest.

The appeal of a $5 or $10 stock seems irresistible to many people, their hope being the stock will take off and provide huge returns. Most stocks selling for $5 or $10 are there because the companies have either been inferior in the past or have something wrong with them recently. Stocks are like anything else. You can't buy the best quality at the cheapest price. It usually costs more in commissions and markups to buy lower priced stock, and your risk is greater since cheap stocks can drop 15% to 20% faster than most higher priced issues. Professionals and institutions will not normally buy the $5 and $10 stocks, so you have a much poorer grade following and support for these low quality securities.

5. Amateur investors want to make "a killing" (a big hit) in the market. They want too much, too fast; without doing the necessary study and preparation, or acquiring the necessary methods and skills. They are looking for an easy way to make money without being willing to devote any time to really learning what they are doing.

6. Public investors love to buy on tips, rumors, and advisory service recommendations. In other words, they are willing to risk their hard earned money on what someone else says, rather than knowing for sure what they are doing themselves. Most rumors are false, and even if a tip is correct, the stock ironically will, in many cases, go down in price.

7. Investors buy second-rate stocks because of dividends or low Price/Earnings ratios. Dividends are not as important as earnings per share; in fact, the more dividends a company pays, the weaker the company might be because it may have to pay high interest rates to replenish internally needed funds that were paid out in the form of dividends. An investor can lose the amount of a dividend in one or two days' fluctuation in the price of a stock. A low P/E, of course, is probably low because the company's record is inferior.

8. People buy company names they are familiar with; names they know. Just because you used to work for General Motors doesn't necessarily make General Motors a good stock to buy. Many of the best investments will be names you won't know very well, but could and should if you would only do a little studying and research.

9. Most investors are not able to find good information and advice. Many, if they had sound advice, might not recognize or follow it. The average friend, stock broker, or advisory service could be a source of losing advice. It is always an exceedingly small minority that are successful enough in the market themselves to merit your consideration. Outstanding stock brokers or advisory services are no more frequent than outstanding doctors, lawyers, or baseball players. Only one out of nine baseball players that sign professional contracts ever make it to the big leagues.

10. Over 90% of investors are afraid to buy a stock that is beginning to go into new high ground price-wise. It just seems too high to them. Personal feelings and opinions are far less accurate than markets.

11. The majority of investors will not sell and take their losses quickly when the losses are small and reasonable. They could get out cheaply but, being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.

12. In a similar vein, investors take small, easy-to-take profits and hold their losers until they become larger losses. Investors will sell a stock with a profit before they will sell one with a loss. This tactic is exactly the opposite of correct investment procedure.

13. Individual investors worry too much about taxes and commissions. Your key objective should be to first make a net profit. Excessive worrying about taxes usually leads to making unsound investments in the hope of achieving a tax shelter. Some investors even erroneously convince themselves they can't sell because of taxes. Strong ego...weak judgment!

Commission costs of buying or selling stock (particularly if the investor is dealing with a discount broker) are a relatively minor factor compared to the most important aspects such as making the right decisions in the first place and taking action when needed. The great advantages of owning stock over real estate are the substantially lower commissions, instant marketability, and higher liquidity. This enables investors to protect themselves quickly at a low cost or take advantage of highly profitable new trends as they continually evolve.

14. Many investors overspeculate in options because they think it is a way to get rich quick. When they buy options, they incorrectly concentrate solely on shorter-term, lower priced options that involve greater volatility and risk, rather than longer-term options. The limited time period works against short term option holders. Many options speculators also write what are referred to as 'naked options', which is nothing but taking a great risk for a potentially small reward and, therefore, a relatively unsound investment procedure.

15. Amateur investors like to place price limits on their buy and sell orders. They rarely place market orders. This procedure is poor because the investor is quibbling for fractions of a point, rather than emphasizing the more important and larger overall movement. Limit orders can potentially result in an investor completely missing his mark and not getting out of stocks that should be sold to avoid substantial losses.

16. Some inevstors have trouble making decisions to buy or sell. In other words, they are indecisive, they hesitate, they vacillate, and they can't make up their mind. Investors are unsure because they really don't know what they are doing. They do not have a plan, a set of principles or rules to guide them and, therefore, are unsure of what they should be doing.

17. Many investors cannot look at stocks objectively. They are always hoping, trusting in their old favorites, and relying on their hopes and personal opinions, rather than paying attention to the opinion of the marketplace, which is almost always right.

18. Investors are frequently influenced by things that are not the most important factors, such as stock splits, increased dividends, news announcements and brokerage firm or advisory recommendations.

So, if you want to become a winning investor, then read the above items over carefully several times, and be totally honest with yourself. How many of the habits mentioned above describe your investment beliefs and practices?... As Rockne would say, "These are the weaknesses which you must systematically work on until you can change and build them up into your strong points."

Poor principles and poor methods will beget poor results. Sound principles and sound methods will produce sound results!

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The Economic Consequences of Manipulating the CPI

The blatantly false official consumer price index has many harmful consequences for both individuals and our economy as a whole - like the recent collapse of the U.S. dollar - which is down by almost 40% in just over three years, and has been caused by the inflation lie.

As Americans, we might believe the government's lie about inflation, but the rest of the world doesn't. The oversupply of dollars - which is what inflation is - becomes apparent to the rest of the world, and so the value of our dollar declines.

There is evidence that inflation statistics have been manipulated for about ten years. If the government understates inflation by just two percentage points a year, the effect cumulative over ten years, is about 22% in extra inflation - almost doubling the "official" rate over the same period.

It's easy to lie about inflation until the government gets caught. And our government gets caught when the U.S. buys commodities from the rest of the world. Commodity sellers realize the dollar is worth less. Commodity prices in turn rise dramatically. Interestingly, this is exactly what is happening with commodity prices these days across the board.

This phenomenon of phony inflation provides an illusion for Fed policymakers, who can claim that inflation is low. And they in turn keep interest rates low. Then, low rates cause everyone - from individuals to corporations to government - to overspend, thanks to artificially low and unsustainable interest rates, plus easy credit.

You can see this everywhere in our society today from home buyers "qualifying" for loans they really can't afford - thanks to artificially low interest rates, to homeowners who use their artificially inflated home equity as an ATM, and to the federal government's current binge of deficit financing.

It's no surprise then that this past February, Australia's Treasury Secretary said publicly that "the U.S. is heading for a devastating financial crash, that could ravage Australia's economic growth." He also warned that so few people in the world want worthless dollars, and only the intervention of Asian central banks, such as Japan, China, and South Korea, have staved off a complete dollar collapse.

With foreign central banks buying less and less U.S. debt - while complaining about low interest payments, the bust is not far off and could begin by the end of this year - potentially devastating stocks, bonds, businesses, real estate, and jobs.

Fed Chairman Alan Greenspan is in a terrible bind. He must raise interest rates to attract foreign buyers of our debt. Otherwise, the dollar will most assuredly collapse. But the U.S. economy is not as strong as it should be after years of the lowest rates in history. And as Greenspan raises rates, it will choke the one sector that has fueled the U.S. economy for the past four years: the housing market.

Once the housing market begins to crash, the other dominoes could all begin to fall as well. But, not to worry. No matter how high interest rates go, and no matter how many people lose their jobs, the "official government inflation rate" will still probably be well under 3%. So don't worry - be happy!

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How the Official Inflation Rate Is Manipulated

The government has many ways to manipulate economic information in order to keep the CPI artificially low. Here are a few:

1. Geometric weighting by elimination of goods and services that are going up rapidly in the CPI.

Goods and services that are increasing the fastest such as housing and energy costs are given a lower weight in calculating the CPI - or they are even eliminated entirely. The public rationale for this blatant sleight of hand is that such goods and services are "too volatile" to be included, or that increases are "temporary" or atypical. However, with such manipulation, the CPI ceases to have any connection to reality.

2. Explaining away price increases by calling them quality improvements.

For instance, if the cost of a computer goes up by $100, this price increase will not be included in the CPI if there is also some improvement in the computer's capabilities. Using this type of fake adjustment, it's clear that cars have not "really" increased in price at all from the days when Henry Ford sold the Model T for $300.

3. Ignoring quality decreases.

If we need to adjust the inflation rate for quality increases, don't we also need to modify it for quality decreases?

The post office provides a good example. Sixty years ago, first-class postage was just three cents - and the post office made four deliveries each day. Also sixty years ago, gas stations had attendants who pumped your gas for you, while they also checked your oil and cleaned your windshield at no additional charge. And the price of gas was less than thirty cents per gallon.

4. Assuming consumers will simply turn to less expensive alternatives.

Thus if the price of your steak dinner goes from $19.95 to $24.95, the Department of Commerce simply believes that diners will go to a less expensive restaurant in order to keep their meal costs the same.

Like other CPI "adjustments," such assumptions have little to do with reality and are merely an excuse for manipulating official inflation figures.

5. Exclusion of goods and services if their price is reduced by government subsidies.

For instance, the actual cost of a subway ride in New York City is anywhere from $3.50 to $6.00, but riders only pay $1.25. The rest is subsidized by taxes. But since only the price of a subway ride and not its actual cost appears in official reports, the CPI again appears much lower than it actually is.

Thousands of goods and services in the United States are now subsidized by government, including airport security, public schools, medical care, housing for the poor, the interstate highway system and much of what we eat.

Considering the above list, 7% might be much too low an estimate for the present real U.S. inflation rate!


Next time: we'll discuss the economic consequences resulting from the manipulation of the CPI.

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The Great Inflation Lie

According to official government statistics, the core Consumer Price Index (CPI), the most widely used measure of inflation, is running a very low 2.4% per year. In fact, during the past 13 years, inflation has maintained this same unusually low rate - even though the CPI itself since the start of 1993 has ranged from as high as 3.6% to as low as 1.1%.

This phenomenon is quite unusual considering the fact that since 2001, actions taken by the Federal Reserve to increase the money supply have caused interest rates to drop to 40 year lows. Such a move is usually inflationary, but the Fed's actions have barely registered on the overall economy.

And if inflation really is so low, then why is the price of everything you buy going up so fast?

The simple answer is that the official inflation rate is virtually pure fiction, and it has been for at least a decade!

For a very long time, the accuracy of government economic figures has been going straight downhill. And here are some examples to explain this situation:

1. During the Kennedy administration, unemployment was redefined with the concept of 'discouraged workers' to reduce the unemployment rate.

2. When Lyndon Johnson didn't like the growth that was going to be reported in the GNP, he sent it back to the Commerce Department, and he kept doing so until Commerce "got it right."

3. The Carter administration was caught deliberately understating inflation.

4. The first Bush administration began efforts at the systematic reduction of the reported rate of CPI inflation.

5. The current Bush administration has expanded upon the Clinton era by setting the stage for the adoption of a new and lower inflation CPI.

But while it might shock many Americans to learn that the government could be lying, it wouldn't faze most Europeans. In most places in the world, citizens assume their governments lie about statistics, and they always doubt the "official" rates. Sad to say, America has become like most other countries in this respect.

The lesson is clear: You would never trust politicians to safeguard you, so don't trust them to tell you the truth about what's really happening with the economy.

There are many reasons why it is in the government's interest to make the inflation seem lower than it actually is. First and foremost, it saves them billions of dollars. For instance, cost-of-living adjustments in Social Security, welfare payments, Medicare, and other entitlements are all based on changes in the CPI.

Similarly, keeping the official CPI rate low keeps salary and pension adjustments for government employees and retirees much lower than they would otherwise be. And a low official CPI also helps suppress interest payments on the national debt, while it limits the cost of government borrowing, which is now over $1 trillion a year.

Next time: We'll talk about HOW the official inflation rate is manipulated.

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NEXT MEETING: Thursday - September 15, 2005

This month we begin our Fall Speaker Series with a very special guest - Mr. Carl Birkelbach, Chairman and CEO of Birkelbach Management Corp. and Birkelbach Investment Securities, Inc.

Topic: "The 5-Point Guide to Investment Success"

Carl Birkelbach will draw on his nearly 40 years as an investment strategist to spell out a five-point strategy that offers the best hope for high returns in the volatile market of 2005 as well as in the years ahead. Among the points he will cover:

1. Finding stocks of enterprises that are in a position to hold out solutions to the problems inherent in today's new market era.

2. Using technical analysis to pick stocks with the best growth potential.

3. Determining your risk/reward tolerance.

4. A strategy for monitoring your investments.

5. Establishing the right broker/client or money manager relationship.

There will be time for a question and answer period and, Mr. Birkelbach will conclude his presentation by giving attendees his current evaluation of the market as well as some suggested investment ideas.

So do plan to join us for what should prove to be a most enlightening and informative presentation!


NOTE: Looking ahead to next month, for our meeting on October 20th, we will welcome back for an encore presentation Mr. Jim Bittman, of the Options Institute Council, who will spend the entire meeting discussing Covered Calls with us.

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Our meetings are open to anyone who shares our interests in both investments and investing. We have a very modest yearly membership fee of $15.00, and non-members may attend any of our meetings for a $5.00 donation.

We meet at the DePaul University - Naperville Campus which is located at 150 West Warrenville Road in Naperville, Illinois. Meetings begin at 7:00 P.M. and end promptly at 9:00 P.M.. The room number for each meeting is posted on the easel which stands near the reception desk in the main lobby.

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Small Investors, Sitting Ducks!

Labor Day is traditionally a time to assess the condition of wage workers. But in many ways, today's small investors have more affinity with the proletariat than either class has in common with the unscrupulous insiders, middlemen, and CEOs who have been fleecing both. Today, nonsupervisory workers have the same inflation-adjusted earnings they had in 2001. But investors, if anything, have taken a worse hit. The broad stock market is still down about 18% from its peak in 2000. And no prudent investment strategy is evident. Bonds are unattractive because of low yields and the risk of rising rates. Stocks are trading within a narrow range, dividend payouts are paltry, and there's no bull market in sight. Even real estate is a sudden gamble.

As the Wall Street scandals so vividly demonstrated, small investors ought to be particularly wary of their supposed servants. The worst scoundrels were not the CEOs of outfits such as WorldCom. Far worse were the ostensible agents of investors - the accountants, investment bankers, and stock analysts, who vouched for, and profited from, the deceptions. Regulators, with a few heroic exceptions, also let investors down.

What every recent abuse had in common was that insiders and middlemen manipulated corporate books, inflating the value of stocks and getting rich at the expense of ordinary investors. Self-regulation and market discipline failed. And if enforcement against conflicts of interest is not vigilant, investors will be snookered again.

An important new book, The Best Way to Rob a Bank is To Own One, introduces a valuable concept called "control fraud." The author is William K. Black, and the book is partly the definitive history of the savings-and-loan scandals of the early 1980s.

The S&L scandals foreshadowed the broader Wall Street manipulations that followed. And despite a brief episode of S&L re-regulation, we did not learn the general lessons that financial markets and self-regulation can't police systematic efforts to defraud by those in control. So we were sitting ducks for the next barrage of control frauds by the Enrons and WorldComs, this time with blue-chip investment bankers and tame regulators as enablers. That vulnerability continues.

This Labor Day, wage workers are struggling to re-invent a labor movement; it's only investors who lack an effective interest group. Investors sorely need a movement of their own to fight for transparent markets, honest books, and uncorrupted regulation. Whether in post-Soviet Russia or on Wall Street, the real spectre that haunts capitalism is corruption. Investors of the world, unite!

NOTE: This is taken from an article by Robert Kuttner, appearing on Page 110 of the September 12, 2005 edition of Business Week.

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