Whither the Europeans…

Posted August 19, 2011 by admin. tags:Tags: , , , , ,
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photo by lyng883

Written by Nathan White, Paragon’s Chief Investment Officer

During the financial crisis of 2008 to 2009, there were many Europeans who scoffed at our troubles and blamed us for dragging them down. How irresponsible we Americans were was the general tone. Oh the irony.

How’s that Greek investment feeling right now?

It felt good to get that off my chest…

With the markets continuing its record moves and volatility and testing the recent lows, what is next? In the short-term, the market is extremely oversold and sentiment is extremely negative. It can be very hazardous to sell into this condition. The bad news is that Europe is reeling and their banking system is under extreme strain. Their recent futile efforts such as banning all short selling and the proposal of financial transactions tax are extremely counterproductive. Their fractured political system makes it hard to organize a bailout like the U.S. engineered three years ago. At some point they will organize a bailout, but the questions is a matter of timing. Will it come after bank failures occur or before?

In the meantime the uncertainty is hammering the market and affecting the real economy.

It is normal at this stage of the economic cycle for growth to slow down after business catch up to a more “normal” level. The slowing economic data was exacerbated to the downside by the Japanese earthquake ramifications and then unfortunately coincided with the debt-deal circus in Washington. Now the great debate is whether all these developments are going to cause to a double-dip recession. Some leading indicators are telling as much and indeed the effects of the current events are going to have an economic impacts as they are somewhat self-fulfilling. However, whether we have another recession or not is a moot point with regards to the market as much of it has been priced in.

Washington is still MIA and the Fed seems to be out of bullets.

However, don’t count the Fed out as Bernake is not called “Helicopter Ben” for nothing and they could pull out new versions of QE3. Bailouts always help in the short-term, but retard the upside. If the Fed keeps expanding its balance sheet at some point in time it will have to be reversed and that is the risk I fear in the future. I wish the Fed would have been selling all their bonds into this recent rally for a tremendous profit!

In the background of all this is that corporate profits have been tremendous supporting a low valuation argument and corporate balance sheets are generally strong and flush with cash. If a recession ensues they are much better prepared than three years ago (including the banks).

No one stopped buying iPhones during the last recession.

Survival is a powerful instinct and as we enter an election year, policy makers could come to their senses and realize they need some “real” policies that encourage economic activity or they are history (note to President Obama – extending unemployment is not one of them).

In the short-term, and until we get some kind of clarity/resolution regarding the European debacle, it is going to be a tough and volatile environment. The up side risk is that if at any time we get some resolution of the Euro situation stocks are extremely undervalued and could rebound so fast that sellers would be left holding the bag.

In this environment, we are cautiously looking at the areas such as energy and materials that get beat up the most and then offer the best upside while at the same time holding some cash for a bit of protection and future opportunities. In both of our portfolios, we have raised just shy of 20 percent cash and as a precautionary move. We have moved out of all traditional money markets into U.S. Government money funds (or FDIC Bank- sweep features) in order to avoid the negative effects should the European banking system freeze up.

Disclaimer
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.

Downgraded…

Posted August 8, 2011 by admin. tags:Tags: , , , , ,
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Written by Dave Young, President of Paragon Wealth Management

Over the past couple of weeks we’ve seen extreme volatility in the financial markets.

The volatility started with political drama over the debt ceiling, which initially created uncertainty for investors. After a high drama last minute agreement, which apparently didn’t solve anything, the markets sold off hard. Uncertainty in Europe exacerbated the situation.

It looked like we might have put in a market bottom last Friday with the selling reversing midday. Then, Friday evening we found out that the S&P Bond Rating Agency had lowered their rating on U.S. Treasury Bonds to AA+ from AAA.

Their timing couldn’t have been worse. 

I knew we were in for a ride, but wasn’t sure how much of one. U.S. Treasury Bonds have held a AAA rating ever since the rating agencies were created and started rating bonds. United States Treasury Bonds have always been considered the icon of safety and security. Their yield has always been always been characterized as the risk free rate of return. Historically, no security has been considered safer than a U.S. Treasury Bond.

Downgrading U.S. Treasury Bonds takes us into unknown territory. It’s that unknown that causes investors to panic. Panic ruled the day today with stock investors taking the Dow Industrials down another 634 points on top of the 513-point loss last Thursday. This puts the market down over 1900 points in 12 days.

This extreme drop in a short amount of time with the bulk of it happening over two days. This type of market action is virtually impossible to avoid by moving to cash. It was driven by politics and occurred so quickly that there was no time to react and move to safer assets.

On a chart this drop is extreme, which puts us into very oversold territory.

Often, when you have moves this extreme, either upside or downside, they are followed by extreme reversals. The problem is that nothing is guaranteed, and you don’t know that for certainty. All you know that the probabilities favor it.

A hard and fast sell off out of nowhere, like the one that we have just experienced, creates a quandary for investors. They consider selling because they don’t want to see their account go down anymore. If they absolutely knew that the market was going to keep going down then it would make some sense to sell.

However, they know that selling into a panic is usually a mistake, because it locks in their losses and hurts their long-term returns.

On the positive side, stocks are not overvalued like they usually are when you have a bear market. A combination of falling prices and rising profits has pushed stock valuations 20 percent below historical P/E ratios. More than 75 percent of corporations in the S&P 500 index exceeded their earnings estimates in the second quarter. In total, corporate earnings are expected to rise 18 percent in 2011 and 14 percent in 2012 (recent Bloomberg studies).

According to another Bloomberg survey, chief strategists at 13 of the largest banks still see the S&P 500 ending the year around 1400, which would be 25 percent higher than it closed today. While I’m not that optimistic, it is positive that they see fair value 25 percent higher based on corporate earnings.

Another positive is that fear and panic hit extremes today.

The VIX closed today at 48, which shows extreme fear. Historically, 42 on the VIX has been a level where markets reverse and start to rebound. The 2008 bear market was the only exception to that rule that I know of.

The negative side of the equation is made up of macro issues.

1- Europe has a debt mess that is trying to sort out and yet to do so.

2- Economic growth in the U.S. is slowing. Most economists don’t believe that we will see a double dip recession, but that is currently a concern.

3- Politics and our debt are creating uncertainty for investors.

4- Panic is currently ruling the markets. Even though the markets are severely oversold and undervalued, there is always the possibility that they can become more oversold. That short term selling pressure can be unduly stressful if your risk tolerance is not correctly set.

Is today’s market action creating a buying opportunity over the next one, three and five years? Or should you be selling? If you think prices will be lower over the long term or you need the money right now, then maybe you should sell. If you believe that prices will be higher one, three or five years from now, then this may be a buying opportunity.

My best advice is to stay focused on the long-term. Generally, decisions made in a panic situation are bad ones.

If you have questions or concerns, feel free to call us at 800-748-4451 or email us (dave at paragonwealth.com, nwhite at paragonwealth.com).

Disclaimer
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.  

Ugly Thursday

Posted August 4, 2011 by admin. tags:Tags: , , , , ,
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 photo by Associated Press

Written by Dave Young, President of Paragon Wealth Management

The Dow Industrials dropped 512 points today. It is the worst point drop since 2008. Over the past 10 days the Dow has lost 1341 points or about 10 percent of its value.

Why have we seen these steep losses in such a short amount of time?

As we’ve seen in the past, it starts with our “leaders”. President Obama and his Senate seem to have one focus. Their focus has been to spend every dime they can find. This administration has taken government spending to an entirely new level. Unfortunately, when they can’t find any more money, they borrow it from our grandchildren and keep spending. That mentally has put us 14 trillion dollars in debt.

The House of Representatives told the White House and Senate to slow down the spending spree before they bankrupted us. A new player in politics, the Tea Party, took the position of an interventionist to an alcoholic. They told the entire group to stop their spending now.

No more compromises, no more kicking the can down the road… Just stop now. 

All of that drama started the market tumbling initially. We anticipated that once the politicians did something, anything, the markets would recover. Our belief was that the initial sell-off was artificially caused by the debt limit drama. That made it very difficult for us to sell and raise cash. Raising cash is the last thing you want to do when you expect the market to snap back to the upside. Surprisingly, after an initial jump higher the morning after the agreement, the market continued lower.

Essentially, the debt agreement gave more money for Washington to spend in the near-term for a promise to cut spending later, once someone else, “a committee” figures out what to cut. Apparently that wasn’t enough to soothe the markets.

Unfortunately, then Europe decided to join the party. Investors decided that Spain and Italy weren’t getting enough of a bailout so the European markets started selling. The European markets closed down hard, right before our markets opened yesterday and today. That was enough to send everyone into a panic. What happens when you panic? You sell.

So where does that leave us?

On the positive side, investors “usually” buy stocks because of the earnings power of the stock they are buying. Corporate earnings are the highest they have been in four years. Corporations have generally been “knocking it out of the park” with their earnings. Corporations are lean and mean and very profitable. Stock valuations are very good. So in theory, stocks should be gaining in value.

At the same time, we have a weakening economy, high unemployment and inept politicians in charge. These factors all throw fear and uncertainty into the equation. Fear and uncertainty usually translate into selling.

But at some point, we run out of investors who are selling because of their fear and uncertainty. At that point, when the sellers are exhausted, buyers will enter into the picture and start buying up the bargains that exist… because of the reasons listed.

The problem is that no one rings a bell to identify when the selling has ended. We do know that stocks are 10 percent cheaper than they were 10 days ago, and there are a lot of reasons to buy them. Over the long-term, this should be a good buying opportunity. In the short term, it’s anyone’s guess.

At these prices, it seems that stocks have already priced another recession. Our data indicates that the last few months have just been a soft patch in the economy and the second half of the year should be much stronger.

We don’t see a double dip recession ahead. 

The problem is that if everyone scares themselves to death, then the fear could gain momentum and create a self induced recession. It would be unnecessary and we don’t think it will happen, but it is possible.

In the end, recent corporate earnings have been exceptionally strong, investor sentiment is very negative (which is good for stocks) and market valuations are low. Overall, these are usually positive indicators for the stock market.

We will continue to follow our models. Stay tuned. 

Disclaimer
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.  

NABCAP Ranking – 2011

Posted August 1, 2011 by paragon. tags:
NABCAP

Financial decisions touch nearly every aspect of an individual’s life. Working with a capable, trustworthy financial advisor can make the difference between financial success and sleepless nights. Though separating and identifying the strongest advisors from the industry’s pool of professionals is a challenge, we hope to make the daunting task a little easier. We worked with the National Association of Board Certified Advisory Practices (NABCAP), an unaffiliated, nonprofit organization, to compile a list of financial advisors you can trust.

ASSEMBLING THE LIST

NABCAP and its board of directors created an unaffiliated evaluation process in which 20 categories of practice management are evaluated. Advisors are invited and/or nominated to participate by submitting an online questionnaire. The multi-step process uses independent resources to verify the accuracy and truthfulness of the information submitted by participating practices. NABCAP’s methodology provides more transparency for investors by using largely objective, not subjective, procedures for making sense of advisors. The NABCAP list of Premier Advisors is not merely defined by assets or revenues, but identifies top advisors regardless of size, firm or affiliation.

PUTTING THE LIST TO USE

The list of advisory practices is in alphabetical order. The NABCAP suggests narrowing the list of practices by average client size. Consider selecting practices with an average client size of a quarter to half the size you estimate yourself to be. For example, if you have $2 million of investable assets, then identify practices with an average client size of $500,000 to $1 million. By doing this, you fall within the top 20 percent of the practice’s clientele, increasing the probability you’ll receive the greatest care and attention. Make sure the practice is capable of handling your needs by checking their top five specialties and designations. You should also interview at least three practices to see if you align well with different personalities, service models and practice methodologies. 

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