Not Again

Posted August 26, 2010 by admin. tags:Tags: , , , ,
Lightening storm above the city


photo by stevoarnold

Written by Dave Young, President of Paragon Wealth Management

When people find out I am in the investment business, they usually ask me where they should invest. They ask if it is better to be in stocks, bonds or real estate. They want hot tips like, are U.S. stocks better than international stocks? What about China and Brazil? Etc., etc.

Next, they tell me their horrible investment experiences. Typically, they are convinced that anything they invest in is destined for doom. This leads me to ask, “Why do the majority of investors have bad experiences?”

It doesn’t help that for the past 10 years, the stock market and real estate markets haven’t gone anywhere. After mostly going up during the ’80s and ’90s, the markets went down hard between 2000 and 2002. From 2003 through 2007, they did great. But, what came in 2008 to early 2009 was one of the worst bear markets in history, after which the markets rallied once again.

It’s understandable investors have had it tough. However, studies have shown that the average investor did poorly during the good times, too. Historically, retail investors have underperformed horribly when markets are bad. No wonder investors are frustrated and disillusioned.

So, are people hard wired to invest in the wrong place at the wrong time? Yes. And I’ll tell you why:  emotions. Most investors invest based on emotions, driven by a constant tug of war between fear and greed.

Will Rogers said investing is simple:  All you do is buy low and sell high. The problem is when prices are low, everyone is consumed with FEAR. And when people are afraid to invest, prices plummet.

The other side of the cycle is when markets have gone up. Investors tell their friends about the 20 percent return they got last year, and all of a sudden the 1.5 percent they got in their CD doesn’t look so great. So then they, along with millions of other investors, come piling into the market consumed with GREED.

This cycle of fear and greed repeats itself over and over. Consider where the masses invested the past 10 years. Back in 2000, record numbers flooded the stock market right before a horrible three-year bear market hit. Investors in the NASDAQ watched their accounts lose 80 percent of their value.

Many of those investors said they would never invest in stocks again. So they piled into real estate to be safe. As we saw in 2008, it wasn’t safe after all. Depending on which part of the country they were in, they experienced losses anywhere between 30 and 80 percent. Some leveraged real estate investors wiped out completely.

For the past year, we’ve seen investors piling into bonds. Bonds have been pushed to the lowest yields I’ve seen — simply because everyone is buying them “to be safe.” The bond bubble looks a lot like the previous stock and real estate bubbles. Odds are that investors who buy bonds for safety are about to get crushed.

At Paragon Wealth Management, we avoid emotional investing by following our quantitative models. We do not care what the media is saying or what we hope or how we feel. Our models process the market data and we invest accordingly. We constantly adjust our portfolios to what the market is actually doing.

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.

Continued Recovery or Double Dip Recession? Part II

Posted August 17, 2010 by admin. tags:Tags: , , , ,
Newspaper Paper Headline


 Photo By Shutterstock

 

 

Article taken from Paragon Wealth Management 2nd Quarter Newsletter

 

Written By: Nathan White, Chief Investment Officer

 

Media & Current Affairs

In the short-term emotions rule and volatility reigns as investors are pushed around by headline news. A study of bear markets by Ed Clissold of NDR showed that bear markets that occur on rallies after recessions tend to be relatively short and not associated with a new recession- a sort of “echo bear”.

Worries of the European debt crisis and its ramifications are coinciding with the slowdown in economic data compounding the market nervousness. Many are worried that the austerity policies being promoted by the European Countries will stifle the economic recovery even though those actions would reduce their large deficits, which are what the markets were worried about in the first place. The U.S. administration is arguing the opposite of the Europeans with the belief that it is too soon to withdraw stimulus and reduce deficits. 

I find it strange that people are fleeing Euro zone currency and debt due to fear over deficits into U.S. government debt, even though the U.S. is preaching more deficit spending? Somehow I don’t think that will end well. We are therefore avoiding long-term U.S. treasuries, as they could be a time bomb waiting to happen. It might not happen soon, but the low return (below three percent for 10-year Treasuries at the time I am writing this) is not worth the risk in our opinion. 

Above all, the market hates uncertainty and with the bear market still very fresh in investor minds we are in a condition where people are very fast to sell and ask questions later. A report in the Wall Street Journal on June 14 by E.S. Browning (Rapid Declines Rattle Even Optimists) showed that the 12.4 percent drop in the Dow Jones Industrial Average from the peak on April 26 to June 7 occurred in only 42 days. The article indicated that the only other time that the Dow has fallen that fast in the past 80 years was at the start of the Korean War. 

 

Conclusion

As I write this article, the S&P 500 is down about 14.5 percent from its peak. That’s only 5.5 percent away from the negative 20 percent that most consider as the condition for a bear market. It seems the market is pricing in a double-dip recession whether it actually unfolds or not! We have been slowly raising cash over the past month or so and as the market continues to show uncertainty. If our indicators weaken, we will raise more, but for now we still want to have exposure to the market as it could strengthen as fear subsides and investors realize that the market has already priced in any bad news. After all, we are still in recovery mode. Although it is weak, a recovery is still a recovery. 

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.

 

Continued Recovery or Double Dip Recession?

Posted August 6, 2010 by admin. tags:Tags: , , ,
American Stock Exchange



Photo By Shutterstock 

Article take from Paragon Wealth Management 2nd Quarter Newsletter

Written By: Nathan White, Chief Investment Officer

During the second year of an economic recovery, the economic data in the first year of a recovery is strong because companies ramp up production to refill depleted inventory levels, and economic activity in general resumes. As the growth rates come down in the second year, it often coincides with the stock market taking a break as well.

Part of the reason the market did so well in 2009 was because it was rebounding off extreme oversold conditions that were unwarranted. Now the we have entered the second year after the recovery low, the economic dad is slowing down, which is contributing to the reasons for the recent market decline.

The big question now is whether or not the recovery will continue, and if so at what pace, or are we headed for the dreaded double-dip recession scenario so widely reported in the press?

GDP, Income Figures, Government Actions
First quarter real Gross Domestic Product (GDP) was recently revised downward to a 2.7 percent annual rate, which is pretty anemic for this stage in the recovery. This shows that the recovery is not as robust as in past recoveries especially considering how severe the recent recession was. The economic data currently coming out is showing a mixed picture-as is to be expected at this stage of a recovery.

The main reason for the downward revision of GDP was that personal consumption expenditures were adjusted down and this is a significant portion of the GDP figure. It is a possible sign that consumers are still very timid and might not be willing or able to spend. On the other hand, income data show that personal income rose 0.4 percent in May, and this figure has been up for seven straight months.

Increasing income figures strengthen the recovery as it eventually provides people with more money to spend or shore up their finances. However, continued high unemployment, approximately one million less jobs than a year ago, is offsetting the benefits that are coming from income growth. For the most part the economic data is coming in at about average for this stage in the economic cycle. We hoped for better numbers due to the severity of the last recession. A less robust recovery is due to the damage done by the last recession and may indicate that we have not cleared all of the ghosts out of the closet yet. 

Government actions have created a significant amount of uncertainty, which continues to hamper the recovery. The most positive figures coming from the economic data are the rise in productivity and corporate profits. These two data points have performed better than average, and in my view are the main support for the rally off the bear market lows.

The productivity data has enabled corporations to increase profits in the absence of significant increases in sales. I believe this is a significant positive factor for the market moving forward. If the recovery continues with even small increases in sales, it could considerably boost earnings. On the other hand, if the economy wanes high productivity along with current relatively strong balance sheets can serve to support earnings in the face of a condition in which they would normally fall. In the end, markets are moved by earnings. Even if we entered another recession, you could see corporate profits hold up relatively well, which would end up supporting equity prices.

Article to be continued next week…

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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