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With the Federal Reserve’s decision this week to leave interest rates unchanged, everything remains in place for stocks to continue the strong advance that began in late summer. Overall market conditions remain essentially the same as they have for many weeks. So rather than give a repetitive market analysis, I’m devoting today’s report to something of potentially greater value.

As you are probably aware, I work full-time as marketing director for Strategis Financial Group, an SEC registered investment management firm headquartered in Utah. Because of our long-term success, we are regularly solicited by people who would like us to sell their investment strategy to our clients. We were recently approached by someone offering us the opportunity to sell a fraudulent strategy–something that is not uncommon. 

I thought by describing how this strategy is designed it might help some of you recognize and avoid similar fraudulent attempts to steal your hard earned investment dollars.

This scheme was promoted to us as a currency trading strategy that produces a guaranteed return of 24% a year. Income would be paid monthly at 2%. Already that is enough information that it should send alarms clanging in your head. No legitimate investment strategy or firm can guarantee returns that high. Current guaranteed return rates are about 6% maximum and are only available on products like certificates of deposit (CDs), some fixed income products (bonds) and variable annuity riders. Anyone who could produce currency returns of even 12% a year would have Wall Street’s biggest firms offering him a multi-million dollar salary.

Another warning sign was the fact that neither the person offering the product nor the one doing the trading were licensed in securities.

Now let me explain how someone can set up such a fraudulent investment to make it seem legitimate. How can someone produce guaranteed returns of 24% a year? First, the return really isn’t guaranteed. Second, the investors are paid with their own money.

Imagine that I convince you to invest $100,000 in this type of currency trading scheme. I am going to put the money in my account, and then set up a separate account for you. Each month I am going to deposit $2,000 into your account. This money comes from your original $100,000 investment. If you happen to be someone living on a fixed income who was previously invested in the stock market, this is going to seem wonderful to you. You are getting a regular monthly payment that is much higher than you could get anywhere else and you are not seeing monthly fluctuations in your account value like you did when you were invested in the stock market.

After six months or a year, you are going to start referring your friends to me because you are so pleased with the steady monthly return you receive. Many of them will sign up based on your recommendation. Some may express initial skepticism, but you will assure them that while you also had concerns, you have gotten your $2,000 a month every time as promised. You might even show them your account statement to convince them.

As your family, friends and neighbors sign up, I follow the same pattern for each of them. As my initial investor, I can continue to pay you your $2,000 a month for four years until your initial investment of $100,000 is used up. At that point, I have to make a decision. I can continue to pay you $2,000 a month from money I’ve collected from others, or I can simply shut everything down and disappear. Realistically that decision will come after about three years, because I will have taken a good chunk of your original investment for myself–after all, I need to get paid, too.

Let’s imagine that over the course of three years, with strong testimonials from you and others, I am able to convince 100 people to invest $100,000 each. That is a total of $10 million. My plan is to take 15% or $1.5 million for myself. All the rest I am going to pay back to the investors in monthly increments. 

As the end of three years approaches, I’m going to start expressing some concerns about the currency markets. But you probably won’t pay much attention, because you are still getting your monthly payments. Besides, by now you trust me completely and we are good friends. 

Eventually I am going to call with really bad news. One of the currency trades went bad and all the money is gone. I’m going to sound very upset and explain that I’ve lost all my personal money as well. Perhaps I’ll even put my fancy home up for sale.

Naturally you are going to be unhappy. But as you start to evaluate the situation, you realize that you really only lost $15,000. All the rest was paid back to you at $2,000 a month. Heck, you’ve probably taken much bigger losses in the stock market through the years. It doesn’t take long for you to accept your losses and move on. You might even feel sorry for me as you drive by my home and see the for sale sign. You might hear through the grapevine that I had to sell my Lexus and start driving a used Buick.

In the end, we might remain friends and a couple of years down the road I might approach you about a new investment opportunity. 

I assure you that this type of scenario takes place constantly. It might be described as an international bond strategy or as “kind of like a hedge fund.” If the payouts are kept more reasonable–say 15% a year–the person operating the scheme can keep it going for five or six years.

If the swindler chooses his victims carefully, chances are there won’t even be an investigation in the end. Everyone will accept their losses and move on. Besides, the victims don’t want to report on a friend who seemed to be just as taken in as everyone else. Even if some disgruntled investor goes to the authorities it is unlikely anyone will take much interest. After all, out of 100 investors there are only a few complaints and no one lost very much money. Chances are the paper trail would be very complicated and difficult to explain to a jury. Besides, many of the investors would be willing to testify that I’m a great guy who just ran into some hard luck. They don’t really hold me accountable.

If you want to avoid becoming a victim of such a scam, there are a few steps you can follow to protect yourself.

• Invest only with licensed securities firms. Licensing is no guarantee of honesty, but licensed firms are held to much higher levels of scrutiny.
• Don’t be unrealistically greedy. It is possible to make 50% in one year in an investment. But if someone is claiming outrageous returns year after year, don’t believe it.
• Choose firms that have been around awhile. Any type of investing has both up and down markets. Choose a firm that has survived both. If someone says he has been in business a long time and never had a loss, he is lying.
• If it sounds too good to be true–you know the rest. Be wary even if the person is a friend or family member.
• Don’t chase speculative investments with money you can’t afford to lose. Understand that risk and reward are inseparably connected. The higher the potential return, the higher the risk. 

F.S.

If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group.  This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call Mark Sumsion or Scott Garbutt at 800-279-3377.

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Now that the major indices have rallied for the past two months, plenty of market forecasters are saying that stocks are overdue for a correction. While stocks have made a nice move, a rally of this duration and amplitude is certainly not unprecedented. Plenty of investors and market analysts are gun shy because advances of any significance have been infrequent over the past couple of years.

We can find a similar example as recently as 2004. After struggling the first half of the year, the Nasdaq bottomed in August and rallied strongly through the end of the year. We could very easily see a repeat of that situation this year. The chart below should help you compare the two periods. In both situations, the advance followed a fairly significant corrective period. Fundamentally, there are significant differences. Most fundamental factors are much stronger today than they were at the end of 2004. The point is that it certainly is possible for stocks to continue to advance through the end of the year without a significant correction or consolidation.

If you can remember back to 2003, stocks advanced from mid-March through the end of the year without a significant correction. The Dow and the S&P 500 both ended the year with better than a 25% gain. The Nasdaq finished the year up 49%. Those kinds of years and returns are unusual, but economic, cyclical and technical situations are currently aligned in favor of a sustained advance. I’ve detailed many of these factors in previous weeks so I won’t repeat them now. Suffice it to say, there is reason for investment optimism.

I need to address one other topic. In recent days we’ve had a few clients question why we currently hold some positions in real estate funds. After all, for months the popular media has indicated that real estate is overvalued and even warned that a real estate crash is imminent. While a real estate downturn could be just around the corner, the fact is that real estate remains one of the strongest market sectors. It is also less volatile than many sectors.

The chart below shows iShares Cohen & Steers Real Estate ETF (ICF). The gold line is the Nasdaq for comparison. Notice that over the past three years, this fund advanced at an annualized rate of nearly 30%. There have been four significant corrections during that time, each lasting three to four months. Overall, the fund (and the sector) remains in a long-term upward trend. You can see that the fund has advanced strongly just in the past four months.

There is no question that there are some areas of the country where speculation has pushed real estate prices to unsustainable levels. In those areas, property values are likely to decrease. But there are also other areas where there has been no decline in real estate prices. Home sales and home building remain strong. By historical standards, mortgage interest rates remain at reasonably low levels. As long as the sector and real estate funds trend upward and remain among the market leaders, there is no reason to avoid holding a position.

F.S.

If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group. This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call Mark Sumsion or Scott Garbutt at 800-279-3377.

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During the third quarter of 2006 the S&P 500 gained 5.7% while the average mutual fund gained just 2.5%, according to a recent Morningstar report. The fourth quarter is starting the same way with the broad indices rising sharply and most funds lagging. There are many reasons why it is difficult for fund managers to outperform the S&P 500 even over short periods.

For the past couple of years, the top-performing sectors of the market were oil and natural resource stocks (including precious metals). In general, fund managers who wanted any positive performance had to find a way to add these stocks to their portfolio mixes. Depending on the category of fund, that isn’t always possible. Some managers tried to enhance performance by overweighting their portfolios in those sectors.

In recent weeks we’ve seen a major shift in the economy. The energy and natural resource sectors have been pummeled while blue chip stocks rallied. This is forcing a lot of fund managers to realign their portfolios. They must sell the energy and natural resource stocks that have become a drag on performance. And they must try to decide what sectors are likely to perform best over the next couple of quarters so they can overweight portfolios in those areas.

The chart below shows a comparison of the Dow (black line) against energy (gold line) and gold over the past three months. It is clear to see that beginning in early August, these three investment vehicles have been moving in opposite directions. A fund manager holding energy or gold during this period must concern himself not just with the money he is losing in those positions, but with the money he could be making by holding something else.

None of this is easy. A look at the top-performing sectors over the past 30 days provides no clear cut market leaders. For example, some of those showing up include home builders, brokerages, transportation, retail, software, leisure, and biotech. When international markets are included, Latin America and emerging markets pop up high on the list. But while these sectors have done well over the past 30 days, there is no guarantee that they will be the leaders over the next 30, 60 or 90 days.

Consider the choices a fund manager must make. With virtually every market expert predicting a major downturn in real estate, is now the time to invest in home builders, even though they are a leader today? What about transportation? It is doing well now because the price of oil has fallen. Is that a long-term trend worthy of a significant financial gamble? Retail could perform well through the Christmas shopping season, but will that continue in January and February? These are the types of questions fund managers are concerned about right now as they try to reallocate portfolios to the up and coming sectors. And it is why many very good funds are trending sideways right now while the major averages are advancing.

While the Dow continues to make headlines for reaching new all-time highs, most investors probably aren’t aware that the Dow is no longer the strongest performing major index. The Nasdaq claimed that role in mid-September and relegated the Dow to runner-up status. On the chart below the Naadaq is the black line and the gold line is the Dow. It is plain to see that for the past five weeks, the Nasdaq has quietly been outperforming the Dow. It hasn’t gotten as much attention because it is nowhere near an all-time high.

Having the Nasdaq as the leading index is a very positive development for the markets. Historically, investors make their biggest gains when the Nasdaq is the dominant index. It is generally composed of smaller, riskier stocks than the Dow or the S&P 500. When the Nasdaq is advancing fastest, it means investors feel good about the economy and the markets. So don’t be surprised if many of these fund managers start loading up their portfolios with technology stocks that trade on the Nasdaq.

Have a great weekend and enjoy the beautiful fall weather.

F.S.

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With the arrival of fall, it is hunting season in much of the United States. In our area, hunters are currently pursuing big game animals like deer and elk. An interesting phenomenon takes place on the opening morning of hunting season. As you sit and wait for the sunrise, the world around you awakens. You can hear the wind through the leaves and the songs of birds. As the light gets brighter, it is easy to imagine that the animal you seek might appear at any minute.

But most of the time, you don’t see anything. Before long a gunshot echoes from a distant location. Then you hear another shot, this time much closer. As the morning passes, you hear more shots in almost every direction, but you have yet to even see an animal. Your discouragement builds because from the sounds of all the shooting, you are convinced that every other hunter within miles is having success.

Right now something similar is happening with investors. The financial media is reporting almost daily that the Dow has set yet another record high. They talk about how General Motors or some other stock is up 70% for the year. Pretty soon the normal investor begins to believe that everyone else’s portfolio is growing by leaps and bounds. He wonders why he is the only one not making fantastic gains.Just like the sound of distant gunshots is a poor barometer of a successful hunt, relying on hearsay is not a reliable method of determining investment success. In Utah, over the course of a normal rifle deer hunt, about 35% of the hunters will bag a deer. About 10% of those hunters (3.5% of the total) will get an animal on opening day. So while it might sound like everyone is getting lucky, 96% of the hunters are wondering why they aren’t seeing the animals that everyone else is apparently seeing.

For now, the Dow is the only major index that has reached record levels. The S&P 500 is still about 11% below its previous high. The Nasdaq is still 60% away from a new record. Most stock indices are now trending upward, but most mutual funds and other investment vehicles are trailing the performance of the Dow.

Let me use a couple charts to illustrate what is happening. Below you see a year-to-date comparison of the Dow (black line), the S&P 500 (blue line) and the Nasdaq (gold line). You can see that the Dow is up about 10% for the year, the S&P about 8% and the Nasdaq about 4%. But returns are more about timing and perspective than about percentages.

For example, an investor who bought the Dow in mid-July has also seen a gain of 10%. But an investor who purchased the Nasdaq in mid-July would be up almost 12%. An investor who purchased the Dow in early May might only be up 1%. While an investor who bought the Nasdaq at that time would show a loss of 2%. Keep in mind that the Dow represents 30 stocks, the S&P is 500 stocks, and the Nasdaq includes more than 3,000 stocks.

So while the Dow is soaring, most indices, most stocks and most mutual funds are not doing as well–yet.

Let’s look at another comparison. On the chart below, the black line is Wells Fargo Mid Cap Disciplined Investor Fund (SMCDX) and the gold line is the Dow. For the year, SMCDX is up 11.65%–slightly ahead of the Dow. This fund is in a long-term, strong uptrend. It has a history of great performance. The average annualized return over the life of the fund is 17.05%. For the past three years it is averaging an annualized return of 17.35%. The fund also has a beta of .80, meaning it is 20% less volatile than the S&P 500.

We recently purchased this fund in the Strategis Foundation Strategy. The purchase was made in late August, after we were confident that the correction that began in May was over and a new rally was underway. Since our purchase, the fund has only gained about 1%, while the Dow is up almost 4%. Many investors make the mistake of making decisions based on short-term performance. In other words, someone looking at this chart might decide that based on what has happened over the past five weeks, the Dow would be a better investment option than SMCDX.

But remember that averaged annualized return I mentioned above? Since the start of 2004, the Dow has returned about 10%–the same 10% that it gained since mid-July. On the other hand, over that same period, SMCDX has gained more than 46%–four times as much. Based on that information, if you had to make a choice today about where to invest $100,000 for the next two years, would you invest in the Dow, which just set a new record, or would you choose SMCDX?

Many years ago I learned that when it comes to hunting, the shots I hear all around me are meaningless. Perhaps the guy on the next ridge just bagged a state record deer. On the other hand, maybe he got bored and shot at a tin can because he hasn’t seen any animals. My best chance for success is to find an area I know the animals are using and then wait patiently for an opportunity. Even if I pick the perfect spot, I might not see the animal I want today, tomorrow or even this season. Or I might see it in the next five minutes.

With investing, I can’t worry about my how much money my neighbor made in the past six months. I can’t fret over the fact that the Dow has gone up 10% while my account might only be up 2%. My best bet is to choose good investments, have a good strategy, and then just be patient. Eventually, I’ll be the one that scores.

F.S.
If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group. This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call Mark Sumsion or Scott Garbutt at 800-279-3377.