Which of the following options sound best to you:

1. Over the last 90 years, the Dow Jones average has grown at an inflation adjusted annual rate of about 3%. During the last 10 years the Dow has grown at an inflation adjusted annual rate of about 4.5%.
2. Over the last 90 years, the Dow Jones average has grown about 5.4% annually. During the last 10 years the Dow has grown by about 7.2%.
3. Over the last 90 years, the Dow Jones average has grown by over 12000 points. During the last 10 years alone, the Dow has nearly doubled.

Many ways exist to say the same thing. Marketing techniques depend on presenting to optimal picture to the consumer. Leaving out the inflation correction factor is a silent marketing tool. As a consumer of stocks, accurately measuring you financial progress and decision requires using inflation adjusted numbers for comparisions.

A Quick Example: Your purchase 1 share of stock for $100 which you sell after one year. During that one year period inflation runs 3% and the stock price rises 3%. When you sell the stock you receive $103. When you file your taxes you record a profit of $3 on the sale and pay $0.45 (15% bracket) of taxes on your gains.


Figure 1: Inflation Adjusted Profits Based on Stock Performance (fees not included)

The true profit can be calculated via the following formula:

i : inflation
t : tax rate
T : shares purchased
B : Price per Share when purchased
S : Price per share when sold
PI : Profit (Inflation Adjusted)
R : stock appreciation ratio
E : Breakeven Price per Share when sold
PP : profit percentage after taxes and inflation adjustment
 
E = B * (1-t+i) / (1-t)
PI = (S-B-Bi-St+Bt) * T
R = S / B
PP = (R+Rt-1+t-i) / (1+i)

For our example, E = $1.035, PI=[$0.45], R = 1.03, and PP=[0.44%].

[Note: How taxing powers are used is critical. If the productive portion of society becomes the minority, the masses realize that they can take from the productive portion of society and the productive people learn how to become part of the non-productive majority. This may be the pattern of all societies.]

Demand for money depends on the supply of money. Every coin or dollar in circulation has been printed by the Treasury in exchange for Federal Reserve debt purchases. The Federal Reserve has three vehicles for creating money:

1. Federal Reserve Requirements: Sets the reserve requirements for banks.
   • The Federal Fund Market allows banks to meet overnight reserver requirements by loaning reserve deposits from banks with excesses to banks with deficits. The Fed Market Funds rate target is set by the Federal Reserver and the Federal Reserve maintains the funds rate by Open Market Operations. When Federal Fund Market lenders have problems, the Federal Reserve must step in to and flood the banks with money to loan by buying assets & debts on the open market [alias "Liquidity Injections"].
2. Open Market Operations: Federal Reserve buys a an asset of similar value from a bank.
   • Normally the assets are Treasury bonds.
   • Fed can buy other unsecured assets from banks [such as mortgage based securities]. However, these purchases normally include repurchase agreements with the borrower.
3. Discount Rate: Interest rate that the Federal Reserve charges banks to borrow money.
   • Discount Window Loans, base on bank collateral, provide banks with temporary cash during liquidity shortages.
   • The Federal Fund Market is the preferred method for loaning money to banks because the Fed Fund Market rate can be managed by Open Market Operations.

Without the uptick rule (10a-1) the individual investor may be at a disadvantage. Hedge funds with lots of capital can now continue to short a stock until other margin owners are forced to sell at a low price. This type of predatory shorting leads to very violatile markets.

Violatile markets are not well understood by the average invester and can lead to panic sales. Without the uptick rule, the average investor may want to shy away from margin buying. Maybe this is the SEC's way of avoiding a stock market bubble like the 2005 housing bubble.