Follow the Money

Posted July 29, 2010 by admin. tags:Tags: , , , , ,
The Wizard of Oz


photo bycourtneybolton

Much has been said about the May flash crash being caused by those “evil” traders on Wall Street manipulating prices.

There seems to be a widespread view that the market is rigged, and everyone on Wall Street is some homogeneous entity that can move the market at its will. The mostly ignorant media is all to happy to reinforce this conspiracy minded viewpoint.

Just as Dorothy and her companions were startled to find out the true nature of the Wizard of Oz, so would the retail investor be shocked to only find themselves behind the “market” curtain.

What do I mean?

It mostly has to do with investor psychology and the herd behavior mentality. Quite simply, selling begets selling. By selling due to market volatility and not for asset allocation purposes, investors actually create the condition they want to avoid.

Take a look at the recent Investment Company Institute’s weekly fund flow figures.

As of July 21, investors have pulled out almost $36 billion from equity funds and put in over $57 billion into bond funds since the beginning of May.

How has the market fared over that period? Despite interest rates at virtually historic lows, people are piling into bonds? Is that good market timing or emotion causing people to become their own worst enemy?

Instead of blaming Wall Street for the market gyrations perhaps we should look in the mirror!

Paragon Wealth
Management
 is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.

Unusually Uncertain?

Posted July 22, 2010 by admin. tags:Tags: , , , ,
Protest Sign

 Photo By Shutterstock

Written by Dave Young, President of Paragon Wealth Management

Yesterday, Federal Reserve Board Chairman Ben Bernanke said that the outlook for the economy is “unusually uncertain”.

He stressed that the economy was growing at a moderate pace. He mentioned that employment and consumer retirement sentiment were weak.

When he said, “unusually uncertain” the market sold off. What a surprise.

So why is this recovery “unusually uncertain”? What is unusual about it?

I’ve been through a few economic cycles and have never heard the fed chairman use those words.

I don’t know what he was thinking, but I’ll take a guess. After an economic slowdown/meltdown “usually” the economy goes through a normal cycle of recovery. He said this one is “unusually uncertain” indicating it is not “normal”.

What is “unusual” this time?

I believe it is the impact that politics is having on our economy and the markets. Usually politics do not have that big of an effect on the economy. This time is different.

Is it unusual for government to completely overhaul the private sector health care system, which makes up around 17 percent of our economy? Is it even more unusual to do it during such difficult economic times? Maybe it’s unusual to do it when surveys show that most Americans oppose it.

Or maybe it’s embarking on a complete overhaul of the financial system? Maybe it’s that the financial overhaul is based on the theories of senators like Chris Dodd and Barney Frank that have no “real world” financial experience and therefore those living in the “real world” have no confidence in them. Maybe it is because congress passes these monster bills (2500+) pages on a purely partisan basis without reading them.

Why as he said, is unemployment high and why are consumers scared?

If you are a business that needs to make a profit, (unlike a government agency), there are costs and risks involved in hiring new employees. Maybe you aren’t sure how much the new health care regulations are going to cost your company. Possibly you aren’t sure how much of your money you will still have left to pay a new employee with after the upcoming new tax proposals are implemented. Now that unemployment costs go on for 99 weeks, maybe you don’t want to accept that unknown liability you have if you need to lay someone off in the future. Or maybe it’s simply because as a business owner you have a target on your back that says “Need Money? Tax Me!” and you don’t feel comfortable with that.

Why would you hire a new employee?

Why would you take the risk? You wouldn’t. And most employers aren’t. They are making things work with the employees they have. The government tells us every day they are saving us, but they are actually having the opposite effect. They have created incredible uncertainty. That uncertainty translates into high unemployment and low consumer confidence.

Not to worry.

Today congress cleared the way to spend another $33,000,000,000 (that’s billion) of our grandchildren’s money, and extend unemployment benefits once again. This administration seems to be taking the law on unintended consequences to a whole new level. Maybe higher tax rates and permanent government expansion are not the solution after all.

Maybe we’ll have a chance in the voting booth to start repairing this mess in November. Time will tell. 

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Emotions Rule in Investing

Posted July 15, 2010 by admin. tags:Tags: , , ,
Emotional Investing

photo by Shutterstock

Written by Dave Young, President of Paragon Wealth Management

It is important to understand the role of emotions in investing.

There is an entire field of study dedicated to analyzing the correlation between emotions and investing called Behavioral Finance. Emotions always play a big part in investors’ actions. In a perfect world they should not have an impact, but in real life they do. It is the human element. If investors would take their emotions out of the picture, they would be much more successful.

After going up over 70 percent in 13 months, from March 2009 to April 2010, the market turned down at the end of April. Since the end of April we have seen huge increases in volatility with the Dow Industrials posting a 12. 4 percent drop in just 42 days.

Why did the market drop so sharply and quickly?

It was not because of fundamentals. Fundamentals have not changed that much. It was because traders were very nervous. It was a case of high emotions and extreme fear. Investors and traders still have a vivid memory of the nasty bear market in 2008. Even though fundamentals have changed significantly since that bear market, they still are looking over their shoulder and fearful that we may see a return of that nasty bear market. It is interesting that from a chart perspective, the recent decline has been much shorter but the angle of the drop mirrors the angle of the drop in 2008.

As the market rallied over the previous 13 months, each day we listened to all of the reasons why the market will not recover; and how we are just setting up for a disaster.

When you consider that 70 percent of retail investors completely missed out on the sharp recovery off the bottom, you start to understand why there is so much of the negative highlighted constantly in the press. 

Obviously, the investors who missed the move completely do not want to be wrong. Their only hope is to imagine they were not wrong, and they did not miss out on a huge 74 percent upward move. They need the market to go back down so that they can be invested the next time around. In short, they hope the market will go back down. With that hope they grab onto and magnify every negative piece of news imaginable. They do not look at the big picture. They only focus on the negative that will reinforce what they subconsciously hope will happen.

There are all kinds of scary issues investors are concerned about.

It is a never ending list:

-Europe’s problems
-The oil spill in the Gulf
-A jobless recovery
-Washington’s political insanity
-The dollar
-Illegal immigration
-The flash crash
-Potential inflation
-Possible double dip recession
-And more…

We talk for days if we want to focus on the negatives. If I would have listened to them 25 years ago, I would have taken my money and buried it in the ground.

In the short-term, markets can be pushed all over the place by the emotions of extreme fear and greed. In the long-term, corporate profits drive stock prices. Where are corporate profits in the midst of all the doom and gloom? They are up about 200 percent from where they were a year ago. Estimates are correct, that puts price earnings ratios at very low levels of 13 times this year’s earnings, and 11 times next year’s earnings.

In short, corporate profits are very strong, and stock valuations are still below their long-term averages. In addition, there are very few good places for investors to put their money right now. Our interpretation of the current data is that a double dip recession will not occur, and much of the fear surrounding it will eventually fade away. However, in the mean time, who knows how far emotional investors will let their fear and greed push the market around. We’ll leave that to our investment models to determine.

WHAT SHOULD YOU DO?

For investors, the only way to keep your sanity and ultimately make money is to be invested according to your risk tolerance and keep a long-term perspective. If you are worried or stressed, you are probably invested more aggressively than you should be. The danger of investing aggressively is that you will likely want to bail out at the worst possible time, and consequently miss out on the long-term returns you seek. Our job is to help you create wealth and keep you positioned in the best way possible in order to capture those long-term returns.

What do you think? Feel free to
leave comments, questions or thoughts.

Paragon Wealth
Management
is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.

What is going on with the stock market?

Posted July 9, 2010 by admin. tags:Tags: , , , ,
Depression in the markets

photo by pedrosimoes7

Written by Dave Young, President of Paragon Wealth Management

After starting out the year strong, the market has retraced, erasing its first quarter gains.

The S&P 500 is down about 6.66 percent year-to-date. From its peak in April, it has dropped a total of 14.5 percent from peak to trough.

Our conservative portfolio, Managed Income, has done well despite the difficult market. It s still up 0.48 percent year-to-date. Our growth portfolio, Top Flight, has done relatively well. It is down only 7.7 percent for the same period. At the end of the quarter, our investment models put Top Flight 20 percent in cash and 80 percent invested.

What is going on with the stock market?

I am asked this question on a regular basis. One day the Dow is down 300 points, and the next day it is up 300. Volatility levels have been extreme the past couple of months. In the short-term that can be a little unnerving to say the least.

In order to make good investment decisions, this question has to be addressed on two fronts.

-First, what is the market doing? (Going up or going down.)

-Second, do fundamentals justify the direction the market is moving?

The markets are continuously going through small up and down cycles within longer-term trends. Every time the market starts a downward cycle we attempt to determine if this is the beginning of the long-term trend turning downward. If it is, we should reduce market exposure. If it is not, we should stay fully invested.

If we sell out too early, we will miss out on returns if the market continues its upward trend. If we sell out too late, we may take more of a capital loss than we want to as the market declines. Investing when everyone is optimistic and selling out when everyone is scared is a recipe for buying high and selling low. It is also a great way to generate horrible long-term returns.

It is vital for us to make the right investment decisions, because if we are wrong, it negatively affects our long-term returns. A bad move not only negatively affects our clients, but it also hurts Paragon because our interests are identically matched with our clients’. If our clients are not happy with us, they can leave at any time without paying any surrender charges. This is unique in the financial industry. Most financial products have a penalty for leaving early. Because our clients’ investment success is very important to us, we place the utmost importance on our investment performance.

Fortunately, we have developed several investment models that take emotion out of the process and help us determine where we are in the market cycle. Also, we rely heavily on sector rotation models, which have done a good job of moving us towards those areas of the market that are holding up when the overall market is declining. While they are not always right, our long-term track record indicates that our models have done well at keeping us on the right side of things. From January 1, 1998 through June 30, 2010, our growth portfolio, Top Flight, has generated a net total return of 325 percent versus 32 percent for the S&P 500. (Click on this link to see our full track record and disclosures Paragon’s Track Record.)

To be continued next week…

What do you think? Feel free
to leave comments, questions or thoughts.

Paragon Wealth
Management
is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.

The Stock Market takes two Steps Forward and one Step Back

Posted July 2, 2010 by admin. tags:Tags: , , , , ,
High Rise Buildings




photo by iStock

Written by Dave Young, President of Paragon Wealth Management

Unfortunately, markets don’t move up in a straight line. If they did, it would make my job a lot easier.

The other issue that makes things difficult is that I cannot see into the future. A lot of guests on CNBC like to imagine they can, but the reality is they can’t.

That leaves us to try and make sense of where we have been, where the market currently is, and where it might be heading.

The market rallied hard off the March 2009 lows with the Dow Industrials going from a low of 6443 to a high of 11207 at the end of April.

Studies showed that about 70 percent of retail investors completely missed that rally because of overwhelming fear caused by the 2008 market meltdown. During that 13-month rally the market tried to selloff repeatedly. However, every time it started to selloff, bargain hunters would step in and buy and keep the rally going. Every time it started to selloff bearish investors (who missed the entire rally) proclaimed that this was the beginning of the end. But the market kept going up and the bears continued to get burned, and completely missed their opportunity to participate in the rally.

After the April highs, the market started selling off once again. The sixty-four-dollar question is always whether or not these sell offs are going to develop into a downward trend.

At this point everyone started spouting rules of thumb like “Sell in May and go away” or once we’ve broken the “200 day moving average” it is time to sell and run for the hills.

Rules of thumb can be useful but must be taken in context with where in the market cycle we are. Neither of these rules of thumb have been consistent when you are in the second year of recovery following a selloff.

Historically, during a recovery the market will start out strong, then ultimately selloff, but not as hard as the initial selloff, and then go through a transition period before trending back up. Second, third, and fourth year market action is usually muted compared to the first year but is still positive and usually still outperforms long-term performance averages.

Our conservative portfolio, Managed Income, is invested very conservatively and has been holding up very well through the selloff.

Our growth portfolio, Top Flight, is currently about 20 percent cash and 80 percent invested as such its performance has been dampened down somewhat. Generally speaking, it has been moving in synch with the broad market.

There are a lot of scary problems right now and most of them are directly related to the folks in Washington. If they would get out of the way, stop talking, stop scaring the investors, and let our economy recover, that would remove a lot of uncertainty, which would help the stock market immensely. 

So far this selloff is missing many elements that occurred in the 2008 selloff. For example, the VIX has not shown the same levels of fear this time, high yield bonds and preferred stock have not sold off like they did previously and volume is lower. So far, these are all divergences that make me question how severe this selloff will be.

With that said, we still don’t claim to see into the future.

For investors, the only way to keep your sanity and ultimately make money is make sure you are invested according to your risk tolerance and that you keep a long-term perspective. (If you are stressed out, then you are probably invested more aggressively than you should be). When you are not invested according to your risk tolerance, you will want to bail out (usually at the worst possible time), and you will never get the long-term returns you seek.

Have a great 4th of July holiday, and contact us if you need anything!

What do you think? Feel free to leave comments, questions or thoughts.

Paragon Wealth
Management
is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.

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