Highlights of the Current Issue
of The No-Load Fund Investor

From The No-Load Fund Investor, 8/10...

Robust Reviews

Our decision to maintain the equity allocations within Best Buys is working out well thus far, as equities were strong in July. European markets were the standouts, with double-digit gains throughout Continental Europe and the U.K. However, the U.S. market was no slouch. As a whole, it gained about 7%, led by rebounding energy and materials stocks, plus REITs. The U.S. equity market is about unchanged for the year, while developed international markets are down an average of about 5%.

We are still pretty neutral on the stock market, which means we are sticking with what we consider to be neutral equity allocations for different risk levels. Valuations are OK. Corporate earnings have been coming in well, generally speaking, though especially in the production areas of the economy. The economic backdrop is mixed. At this stage of an economic recovery, economic growth should be much faster than it is. However, it is positive, and the fact that it s slow has the Federal Reserve Board on hold in terms of increasing the interest rates under its control.

Best Buys Commentary/Changes. As we would expect in a big bull month, the fixed-income portions of our Best Buys models caused them to gain less than the U.S. equity market. However, our models still produced substantial gains for the month and are generally beating the market (in some cases, handily) so far this year.

We are making changes in two Fidelity Funds Best Buys models this month. You can learn the details in our August issue.

Inflation and Stocks

While traditionally many investors worry about the potential effects of runaway inflation on stock prices, lately others worry more about the potential effects of deflation, a falling price level. We believe that for the next year or two, likely low demand for loans and considerable slack in employment and capacity utilization greatly limit the possibility of rapidly increasing inflation. The odds of deflation are higher, but still not high. Though there s certainly a possibility that the U.S. economy could slip into negative growth if the housing and jobs markets fail to recover relatively soon, global competition for goods and services is likely to maintain or slightly increase overall price levels. Even if our job market fails to pick up, for example, increasing demand for oil from China, India and some other countries with above average growth is likely to keep pressure on oil prices, which feed into the prices of many goods in the U.S., especially gasoline.

There s certainly plenty of common sense behind worries that either deflation or significant inflation would be bad for equity prices. In a period of deflation, consumers might defer nonessential purchases in the expectations of even lower prices. This would slow the economy, cut corporate earnings and make it more difficult for borrowers to repay their debts (further slowing the economy).

In a period of rapid inflation, expectations of even more inflation would increase, boosting the uncertainty of future real returns and rendering contracts more difficult to agree upon. Bond yields would rise dramatically, making fixed-income investments potentially more attractive than equities while decreasing the present values of equity cash flows and dividends (in other words, reducing the value of future profits in today s dollars). People on fixed incomes would see their purchasing power erode, hurting consumer spending. For all of these reasons, share prices for equities might have to fall to reflect their increased risk and reduced prospects for real earnings growth.

However, common sense, or even seemingly sound economic theory, doesn t always stand up to historical analysis, using actual data. In our August issue, we examine how the stock market has performed since 1946 given various degrees of change in the price level: deflation; as well as inflation of between 0% and 1.4%, 1.5% to 3%, 3.1% to 4.5%, 4.6% to 6%, and above 6%.

Model Portfolios

Sample Model Portfolio from the Current Issue
of The No-Load Fund Investor

Wealth Builder Portfolio

Top Twenty No-Loads

Among stock and bond funds rated in Investor newsletter only.
Includes low-loads. Latest 2 years compounded.

#   Fund                                Obj.     % Change
---------------------------------------------------------
1.  Reynolds Blue Chip                  agg gr     18.7
2.  Yacktman Focused                    growth     18.5
3.  Yacktman                            growth     16.3
4.  Nbrgr Berman High Inc Inv s         fix-inc    15.9
5.  Matthews India                      intl-emerg 15.8
6.  USAA Prec Metals & Mins             sector     14.2
7.  Matthews Asia Dividend              intl-pac   14.1
8.  Price New Asia                      intl-emerg 13.9
9.  FBR Sm Cap Financial                sector     13.3
10. Fidelity Capital & Inc              fix-inc    13.3
11. iShares COMEX Gold                  sector     13.3
12. Paydenfunds Emerg Mkt Bd            fix-inc    13.1
13. Vangd LT Investmnt Grade            fix-inc    13.1
14. Fidelity Sel Retailing              sector     13.0
15. Wasatch Emerg Mkts SmCap            intl-emerg 13.0
16. TCW tot Return Bd N                 fix-inc    12.8
17. Fidelity New Mkts Inc.              fix-inc    12.7
18. Matthews Pac Tiger                  intl-emerg 12.7
19. USAA Hi Yld Opp                     fix-inc    12.4
20. Matthews China                      intl-emerg 12.3