The economy has slowed down from the red-hot pace of +4.5% in GDP growth in the 1Q.  On August 27, the government revised its estimate of 2Q GDP growth from 3% down to 2.8%.  Most economists believe growth in the current 3Q will be about the same.  Nevertheless, the media would have us believe that the economy is stalling.  John Kerry certainly wants us to believe that.  And the gloom-and-doom crowd promises (yet again) that we are headed into a new recession. 

Yet our good friends at The Bank Credit Analyst, who have the best record for forecasting US economic trends that I know of, remain optimistic about the economy for the balance of this year and well into 2005.  Likewise, the latest economic reports simply do not support the view that the economy is waning or that a recession is on the way.  I’ll summarize BCA’s latest thinking and the latest economic reports for you in this issue.

The stock markets have rallied for the last four weeks, especially as oil prices eased a bit and President Bush improved his standing in the polls.  But are we still in a downtrend?  September is historically the worst month of the year for stocks.  Yet it can also be one of the best times to buy.  In this issue, we’ll look at the equities markets and what you should be doing now.  I continue to recommend Niemann Capital Management and Potomac Fund Management for a portion of your equity portfolio.  I also continue to recommend Capital Management Group for high yield bonds.

This month, I focus on “affinity-based” and “faith-based” investing.  There are an increasing number of mutual funds, and financial advisors, which provide a way to invest according to your personal beliefs and values.  While I applaud this ability to invest according to your conscience and/or your religious beliefs, I also urge caution.  Securities regulators consistently list affinity-based investment fraud as one of the most prevalent scams, so faith-based investments should be checked out just as carefully as any other investment program (see pages 4-8).

The Latest Economic Reports

While the economy did slow down to an annual growth rate of 2.8% in the 2Q, according to the Commerce Department, the latest round of reports does not support the view that the economy is in trouble.  Let’s take a look at the latest economic reports, starting with the negative reports first. 

After rising sharply for most of the year, the Consumer Confidence Index fell from 105.7 in July to 98.2 in August.  The Index of Leading Economic Indicators fell slightly (-0.3%) for the second month in a row in July (latest data available).  New and existing home sales fell in July but still managed the third highest monthly totals on record.  Auto sales fell sharply in August.

On the positive side, consumer spending rose 0.8% and retail sales jumped 0.7% in July.  Durable goods orders rose 1.6% and factory orders climbed 1.3% in July, with the latter being the best in four months.  Construction spending hit a new all-time high in July.  Housing starts rose 5.7% in July, despite the expected slowdown in home sales.  Unemployment fell in August to 5.4% with 144,000 new jobs created.  New jobs in July were revised upward to 73,000, more than double what was initially reported.  (July data is the latest available.)

On balance, the economy still looks to be in good shape, despite comments to the contrary by the Democrats and the media. 

Most economists expect GDP growth of around 3% for the 3Q and 4Q and expectations remain positive for the first half of 2005.  The recent drop off in consumer confidence must be watched closely, however, since consumer spending accounts for over two-thirds of GDP.  The latest encouraging employment report for August could boost consumer confidence just ahead, and could help President Bush’s standings in the polls.

The Bank Credit Analyst Remains Optimistic

While the media and the Democrats drone on about how bad the economy is, the highly respected editors at BCA remain upbeat.  Here’s what they had to say in their latest September issue:

“The rise in oil prices is clearly a headwind for the economy and contributed to the recent deceleration in growth.  Yet, there is no compelling evidence of any serious distress.  Equities have continued to struggle, but other market-based indicators of the economy have stayed firm.  The economic fundamentals are generally sound: corporate finances are excellent, monetary policy remains accommodative and the majority of consumers are in good financial shape…  Real [inflation-adjusted] consumer spending should be able to grow at around a 3% pace going forward as long as income growth is sustained near its recent level.

The payroll report for August will be important in determining whether or not the July report was an aberration…  Our payroll model still predicts steady employment gains…  If employment rebounds [it did, 144,000 new jobs], then it will restore faith that the economic slowdown is temporary…  The bottom line is that the foundations for the economy are reasonably solid.”

The editors at BCA qualify their optimistic view, as does everyone, with the universal caveat that a major negative surprise, such as another terrorist attack on US soil, could prove them wrong.  Otherwise, they believe the economy will improve and that growth will average “at least a 3½% pace next year.”

There you have it from the folks who have been more accurate on balance in predicting US economic trends than any research group I have read over the last 27 years.  

Stocks rallied in August to the highest levels since late June.  Some believe the rally has been fueled most recently by President Bush’s much improved standings in the polls.  Still, this year has been a particularly frustrating time, both for investors in the market and those sitting on the sidelines hoping to get back in.  Even the professional money managers we recommend have had trouble gaining any traction in this choppy market.  With the major averages now just about where they started the year, many analysts believe stocks are stuck in a broad trading range. 

Historically, September is the worst month of the year for stocks.  That means you should stay on the sidelines, right?  Certainly millions of investors are still on the sidelines as evidenced by the mountain of cash still sitting in money market funds.  However, while September is historically the worst month of the year, that also means it is frequently one of the best times to buy.  This year could be one of those times.

One of the main negatives weighing down stock prices in recent months has been skyrocketing oil prices.  Yet the peak summer demand season for gasoline is now behind us, and the recent increases in oil production are now reaching the market.  Thus, there is a very good chance that oil prices have peaked and will trend lower during the rest of the year.  Here’s BCA’s latest on oil prices:  “Oil prices appear to have overshot on the upside and the odds are good that prices will fall back during the balance of the year.”

After peaking at a record $49.40 per barrel, oil prices have now fallen to near $43 (as of September 7).  If oil prices fall below $40 per barrel in the next few weeks, this could cause stocks to breakout strongly to the upside.

In addition, given that the economy remains solidly positive, the rising interest rate environment is still relatively benign and the situation in Iraq is improving (albeit slowly), I think this is another good time to invest in stocks and mutual funds, especially if we get some dips this month.  If President Bush can hold his now sizable lead in the polls and goes on to win in November, this should be yet another plus for the equity markets.

I continue to recommend that you invest in the stock markets using professional money managers that have the ability to “hedge” their positions or move partially or fully to cash should market conditions warrant.  Niemann Capital Management and Potomac Fund Management are both currently net  long in equity mutual funds, and they have been taking advantage of the latest rise in the stock markets.  You can go to www.profutures.com to see the performance records of these money managers who can be long, hedged or in cash (money market) at any time depending on market conditions.

Bonds Improve, But...

Treasury bonds and other high quality long-term bonds have appreciated since the low in May.  But in the bigger picture, bonds are still in a downtrend.  Bonds peaked in June last year and fell apprx. 16% in value.   The market then recovered somewhat, but in March and April of this year, bonds plunged again.  Thus, the current rally appears to be another correction before moving lower.  The trend in interest rates remains higher, and this is not good for Treasuries and other high quality bonds.

High yield bonds, on the other hand, have the potential to appreciate in a growing economy.  While not suitable for all investors, I continue to recommend Capital Management Group which invests in large, highly diversified high yield bond funds.  CMG has an outstanding performance record which you can review at www.profutures.com, or call us and we will send you complete information.

"Affinity-Based" & "Faith-Based" Investing - Is It Right For You?

As you might expect, I get tons of financial publications that discuss many topics related to investments and investing.  In a recent issue of a magazine directed toward Investment Advisors, I read an article about how more and more investors are using “faith-based” investment vehicles and advisors.

“Socially responsible” investing has been popular for a long time, but it’s important to note that this is not the same as faith-based investments.  Socially responsible investments seek to invest only in companies that meet certain social standards, such as being environmentally friendly or not using animals for testing, etc.  Faith-based investments are different in that they seek to mirror the beliefs and values of their investors, whether they be Christian, Moslem, Jewish, Buddhist, etc.  These investments seek a profit like any other investment, but do so in such a way that avoids stocks of companies that violate a particular set of values.

As such, these investments fall under the general heading of “affinity” investments, in that they target investors who share a common religion, nationality, or background.  If you attended college or are a member of an organization, I’m sure you have been offered affinity-based credit cards through the mail.  Affinity-based investments are like that except they offer an investment that restricts its holdings based on established guidelines that fit the particular group to which it is aimed.

While most of us are comfortable dealing with others who share our values and beliefs, the area of affinity-based investments is, unfortunately, also ripe for fraud.  In fact, securities regulators consistently list affinity fraud among the top ten investment scams.  Therefore, it is important that religious minded investors educate themselves so as not to be taken in by potential scams.

For many years, I have known that most of my readers have strong religious ties, and so you may be interested in affinity-based investments.  This month, I’ll discuss some of the legitimate choices out there, as well as provide information on how to identify and avoid affinity frauds.

Moral Investments

The recent growth in religious affinity investments has come as a result of some investors insisting that their investments mirror their spiritual beliefs.  However, this desire is nothing new, as there have been morality-based mutual funds since the early 1970s.  Many of these funds are associated with church denominations or religious organizations that originally offered these values-oriented funds to their membership, and then branched out to the public in general.

Many religious investors do not want to own stock in businesses that engage in questionable activities. Today, however, with huge corporate conglomerates, it is sometimes difficult for individual investors to know exactly what all of the subsidiaries of a corporation may do.  Thus, it is beneficial to have a faith-based mutual fund with a professional investment manager who has the resources to determine the kinds of activities all of a company’s subsidiaries engage in.  In most cases, these funds screen out companies that profit from abortion services, pornography, immoral lifestyles (including the promotion of such lifestyles in entertainment), alcohol, tobacco and gambling.  Still others will not invest in defense industries or gun manufacturers.

While you may wish to put your money to work only in companies that reflect your particular set of beliefs, it is often easier said than done.  As the presence of various religious denominations attests, there are different interpretations of what is right and wrong.  What may be a violation for one denomination may be just fine for another.  For example, the Baptist Church generally teaches abstinence from all alcoholic beverages, but Catholics have no such teaching.  However, Catholics would not want to invest in a company that makes contraceptives, while some Baptists would have no problem with this.  As a result, a religious investor has to know what screens a fund manager is using to insure it matches his or her values.

You also need to know how far the screens go in excluding companies.  Some funds exclude businesses only if they make or distribute products that violate the investor’s religious beliefs.  However, other funds exclude companies that might otherwise be acceptable based on their product or service, but have offending employee benefits policies such as providing medical benefits to unmarried or same-sex domestic partners.

In addition, some of the companies founded on moral principles are not particularly attractive from an investment point of view.  As a result, fund managers sometimes include companies that have a very minor part of their revenues generated from immoral activities.  I recently read a report from back in 2000 that graded religious funds based on a set of moral criteria.  Violations in these funds ranged from 0% to over 50%, illustrating the difficulty in maintaining the funds’ moral direction while also providing a reasonable return.

Finding Faith-Based Alternatives

Finding faith-based investment alternatives may prove as challenging as deciding which ones best fit your values.  While you can search for socially responsible investments on various Internet websites and software packages, faith-based alternatives are not usually given as a separate category.  Therefore, one way to find these funds is to do a search of socially responsible funds, and then review each alternative’s prospectus.   

There are a number of excellent online resources for those interested in learning more about socially responsible and faith-based investments.  I have listed a few of these websites below:

The Social Investment Forum:    http://www.socialinvest.org/   
SocialFunds.Com:     http://www.socialfunds.com/  
The Calvert Group:    http://www.calvertgroup.com/sri_kwyo.asp
Financial Seminary:  http://www.financialseminary.org/

In addition to these resources, there are mutual fund families that have been established to serve specific religious groups.  Below, I have listed the names and too free numbers of mutual funds that serve various religious affiliations.  Please be aware that I am listing these fund families for information purposes only, and do NOT endorse any particular fund or fund family shown below. 

Catholic:       
      Aquinas Funds (877-278-4627)      
      Ave Maria (866-283-6274)

Christian Science:  
      American Trust Allegiance Fund (800-385-7003)

Conservative Christian:   
      Timothy Plan (800-TIM-PLAN)  
      Noah Fund (800-794-6624)

Islam:   
      Amana Funds (888-732-6262)      
      Dow Jones Islamic Fund  (877-417-6161)

Lutheran:     
      Thrivent Funds (800-847-4836)

Mennonite:     
      MMA Praxis Funds (800-348-7468)

Presbyterian:
      New Covenant (800-858-6127)

Seventh Day Adventist:  
      Capstone SERV Funds (800-262-6631)

As you research funds, you should be careful to not put money into any fund just because it purports to incorporate your religious beliefs. 

Once fund alternatives have been identified, you should review each alternative just as you would any other investment, and compare it to applicable benchmarks such as the S&P 500 or Russell 2000 indices.  You should also look at the tenure and experience of the money manager.  Since faith-based funds are a “niche” market, they sometimes have trouble attracting the best and brightest managers.

It has been said that investing with your conscience will result in lower returns.  However, the Domini 400 Social Index (a stock index made up of companies screened for a variety of social concerns) has outperformed the S&P 500 since it’s inception in May of 1990.  However, this index is not limited to only those companies that would be acceptable to faith-based investors.

To get an idea of the performance of strictly faith-based funds, I ran a sample of the more popular funds through our mutual fund analysis software.  Out of a sampling of 42 funds with at least a five-year track record, only twelve (28.5%) performed in the top half of their respective Morningstar categories as of July 31, 2004.  A possible reason for this poor relative performance – in addition to the limitations on what they can invest in - is these funds tend to be smaller in size, so the expense ratios are typically larger than for mainstream mutual funds. 

Even so, there were some faith-based funds with performance in the top 25% of their respective Morningstar categories, so it shows that it is possible to get a reasonable return while also investing according to your conscience.    However, with so few funds with good performance, it may be difficult to find enough viable funds to adequately diversify your portfolio.   Also remember that past performance is not necessarily indicative of future results.

Faith-Based Financial Planners

In addition to faith-based investment products, more and more financial planners are starting to hold themselves out as faith-based planners.  They seek to provide financial guidance that is based on the Bible, the Koran, etc., depending upon the affinity group they wish to serve.  The largest religious affinity group in the US is made up of Christians, so most faith-based financial planners seek to provide Christian-based investment counseling and services.

These financial planners are providing religious-based financial counseling as a result of a perceived demand from their clients for spiritually based investment advice.  According to the National Association of Christian Financial Consultants (NACFC), the mission of their membership is to integrate Bible-based principles within their financial consulting practices.   In other words, their practices are generally viewed as much a ministry as a profession.  You can find out more about the NACFC on its website at www.nacfc.org.

Religious-based financial counseling can be a good thing, especially if the addition of a spiritual side to your finances helps you to develop the discipline to save and invest the way you should.  However, faith-based planning is no guarantee that the advice you get will be the best available.   From my own personal observations, I have not found all Christian-based businesses to be superior to their secular peers, and I expect financial planners will be no exception.  And in fact, I have found certain groups, especially in the investment world, that use their supposedly religious orientation to lure investors into trusting them, when many times they should not.

Therefore, you need to evaluate financial advisors the same way I recommended that you evaluate faith-based mutual funds – that is, based on their credentials and performance, and not solely on the fact that they have a sign of the fish on their door. 

Honesty, integrity, and caring for your fellow man are some of the most important precepts of the Bible.  However, these moral values must be mixed with knowledge and experience (call it wisdom) for a financial planner to be effective.

You should never do business with any financial advisor based solely on the fact that they profess to base their advice on religious principles.   Many unwary investors have done so, and have lost everything.

Faith-Based Affinity Fraud

Unfortunately, financial scams involving religious affiliation are nothing new.  There is the story in the Bible about Jesus driving the moneychangers from the Temple during his ministry because they had made it a “den of thieves.”  There are numerous other references to financial deceit in the Bible and other religious works.

While I have no problem with fellow Christians seeking to spread their values to clients, I am wary of the implications of financial advice that is deemed to “come from God.”  I have heard from far too many people who told me they were ripped off by investment promoters that touted themselves as being Christians.  The fact is, securities regulators consistently list religiously based investment scams as among the most prevalent.

People tend to do business with people they trust.  Building trust is one of the basic requirements for having a successful financial planning practice.  However sometimes, untrustworthy people advertise themselves as Christians in order to shortcut the trust issue.  Clients come to him or her not because of the trust they have in the advisor, but because of their common trust in God.  This ability to have immediate trust and credibility based on a common affinity is why scam artists flock to religious themes.   New York securities regulators say they receive a constant stream of complaints from surprised victims of affinity-fraud.  Most disturbing is the fact that many of these complaints are about fellow church members who the victims have known for years.

Ways to Avoid Affinity Fraud

As I stated above, crooked promoters like to utilize religious beliefs to shortcut the normal trust-building process.  However, religion is not the only affinity relationship used.  Other scam artists have targeted members of certain ethnic groups, various nationalities, the elderly, or just about any other group of people who have something in common.  Therefore, it is important that you know how to protect yourself from these wolves in sheep’s clothing.

According to securities regulators, there are a number of steps you can take to protect yourself from affinity fraud.  Among these are:

1.  Check everything out – no matter how trustworthy the person seems, how much scripture they can quote, or how long you have known them.  Never make an investment solely upon the recommendation of a member of your church or other group, especially if the person implies that God has somehow endorsed it.  Be especially cautious if the person offering you the investment appears to be offended by your checking them out.  “Don’t you trust me?” should be a huge red flag.

2.  Verify that the person is licensed to sell securities in your state.   If so, contact your state securities regulators (look in the government pages in your phone book) to see if there are any disciplinary actions on record.  If not, or if they say that the investment does not require registration, check with your state securities regulators to see if this fits the description of an investment scam.

3.  If it sounds too good to be true, it probably is.  Don’t fall for investments that promise huge profits or guaranteed returns.   Also, be wary of investments that are promised to have “no risk,” since very few investments are risk-free.  Promises of high profits with little or no risk are classic warning signs of fraud.

4.  Insist on written material explaining the investment and the risks involved.  In many cases, promoters of fraud avoid putting anything in writing, but legitimate investments are usually offered in writing.  Also be cautious if the promoter claims the opportunity is based on “inside information,” or if you are told to keep the investment opportunity confidential, even from your spouse and grown children.

5.  Be wary of any investment that requires you to make a decision too quickly, or if the person offering it to you just won’t take “no” for an answer.  High pressure is another classic sign of a fraudulent investment.  Also, investigate any offer that is promised to be a “once in a lifetime” opportunity.  This may be unfortunately true, in that after you lose your life savings, you may not have any money left to invest in anything else for the rest of your life.

6.  Be sure to take all of the above steps even if you have a friend or relative who made money in the investment opportunity.  Scam artists often pay out high returns to early investors in order to have a source of “testimonials.”  What greater endorsement could a promoter have than a Pastor or Deacon who attest that the investment worked for them?

7.  When in doubt, have a trusted third party, such as your CPA, financial planner, or lawyer, review the investment for you.  In addition, you can access information about investment scams on the Internet by contacting the North American Securities Administrators Association (NASAA) at  www.nasaa.org or the Securities and Exchange Commission at www.sec.gov . 

Another good source for checking out possible scams is Scambusters at www.scambusters.org.

Conclusions

All of us have a spiritual side to our nature, whether we want to admit it or not.  For many years, however, it was difficult to find investments that coincided with one’s beliefs and values.  For those who did not want to invest in stocks or mutual funds for fear of including a company that supported immoral activities, government bonds and bank CDs were about the only answer.  However, even with the bank CD, you may never know whether the bank is lending money to businesses that engage in the same questionable activities.

Today we are fortunate in that there are investment products that allow investors to put their money where their hearts are.  There are dozens of affinity/faith-based mutual funds to choose from.  But you must be very careful since many of these funds have underperformed other mainstream funds as noted earlier and below.  There is also a growing number of financial advisors who will provide values-based financial counsel that may coincide with your particular values and beliefs.

However, because religious affiliation is such a fertile field for scam artists, you need to be especially careful when dealing with anyone who contacts you from your church, mosque, synagogue or other religious affiliation regarding a sure-fire investment opportunity.

You should also never confuse religious faith with faith in a particular investment.  Just because an investment is based on spiritual principles, or is recommended by a religious-based financial advisor, that is no guarantee that it will do any better than any other investment.  As I mentioned in this article, two-thirds of faith-based mutual funds rank in the bottom half based on performance.  So check out the choices very carefully.

Finally, do not trust someone – especially someone touting investments – just because he or she claims to be a Christian or a believer in whatever your faith may be.  One of the most unscrupulous and unethical people I have ever dealt with was a man who claimed to be a devout Christian.