2013 Opportunities and Focus

Posted January 24, 2013 by admin. tags:
A Compass and Map


Written by Nathan White, Chief Investment Officer of Paragon Wealth Management

Overall, we currently see a positive year in 2013 for equity
markets.  The negative effects of higher
taxes and somewhat lower government spending will be offset by improved
corporate spending and economic growth as the year goes on.  Companies and consumers have been cautious
now for years and that could finally reverse in 2013 resulting in better
economic growth.  This could help the
market’s current low to medium valuation multiple to expand thereby benefitting
stocks overall for the year.  The Fed
should stay in continued easing mode as they try to boost inflation.  Government policy wants you to spend not save.  We remain cautious on bonds and are still
avoiding Treasuries and long-dated maturities.
The risk for reward is still very unattractive in this area.  There will be the usual ups and downs
throughout the year and the now seemingly ever present uncertainty caused by
government action and policy will continue to be over the market’s shoulder.

Starting to Look Abroad

It’s has been awhile since we have had a significant
position in foreign markets.  We have
been waiting patiently since the financial crisis for the emerging markets to
reassert themselves and it looks like the time has finally arrived – or at
least started to.  The reason this
excites us is because the inherent growth story associated with emerging market
countries is now coupled with attractive valuations.  The past few years have seen the U.S. market
outperform on a relative basis.  In fact,
the S&P 500 has returned about 18 percent for the last two years while the
MSCI Emerging Markets Index was down over 3 percent.

We are seeing signs that the tide is starting to shift.  Over the last three to six months the
emerging markets area has outperformed the S&P 500 on a relative
basis.  The deceleration in growth rates
for many emerging market economies appears to be stabilizing.  Chinese manufacturing PMI improved for the
fourth month in a row in November to the highest figure in seven months.  This adds to the evidence that the Chinese
economy is on the mend and starting to recover.
By the way, when I say recover, I mean returning to an 8% growth
rate.  Due to their stronger fiscal
situations, many emerging market countries have more flexibility in enacting
economic stimulus measures.  Recent moves
by many countries indicate that they are starting to move more aggressively on
this front.  Brazilian policy makers
recently cut reserve requirements for lenders to stimulate investment in Latin
America’s largest economy.  The recent
leadership change in China has heightened speculation that more measures will
be introduced to boost consumption.

Growth Potential

The main reason why emerging markets matter is because of
their growth potential. Stronger economic growth turns into strong earnings
growth over the long term and that is what ultimately drives stock prices
higher.   Over 80% of the world’s population lives in
emerging markets and their workforces are young and increasingly educated.  These economies experience a structural change
as middle classes emerge with individuals achieving rising levels of
wealth.  They are often rich in resources
and labor.  Their gross national incomes
and per capita incomes are small compared with developed economies.  As these countries open their economies and
enact policy reform there is dramatic potential for their incomes to
climb.

Compared with developed markets, emerging markets have
historically had greater return and volatility.  The volatility rises from the ever present
risks inherent with emerging markets:
political uncertainty, regulatory and corporate governance issues, and
the dominance of state owned firms.  Because
of these factors, investors demand greater return to compensate for the
heightened risks.  The higher volatility
normally associated with emerging markets will still be a factor going
forward.  In addition, the currencies of
many emerging market countries could strengthen on a relative basis due to
their stronger fiscal situations offsetting some of the possible advantage.

Normally, stocks or sectors with higher growth rates command
higher valuations.  Emerging markets
currently have higher growth rates and lower valuations.  This spells opportunity.  The current price to earnings multiple for
emerging markets is about 11 compared to 14 for the S&P 500.  This is about a 27% difference and indicates
some of the relative value that we believe exists in this area.  These low valuations could help to cushion any
downside if markets fall and provide more upside if markets rally.  The main reason that valuations in emerging
markets have come down is because their growth rates have come down from the
lofty levels usually experienced when growth first kicks in. Part of the reason
for the slowdown has been from the effects of the worldwide recession which
emerging markets are not immune from.
However, part of the slowdown comes as these economies start to develop
more domestic demand and transition from relying primarily on exports.   For
example, China and India had growth rates of 14% and 10% respectively in 2007.  Those rates have now come down to 8% for
China and about 5.5% for India.  By
comparison, U.S. GDP growth estimates are currently around 2.5%.  On the whole, we believe the better growth and cheaper valuations of emerging markets offer a
compelling opportunity compared to the risks.

Other Areas of Focus

Closer to home, the U.S. sectors we like are healthcare and
some of its sub-industries such as healthcare providers and
pharmaceuticals.  The financial sector
looks favorable as it has gone through years of cutting costs and employees and
is no longer burdened by toxic assets.
This could set the area up for better profitability going forward.  We see other intermittent opportunities in
technology, homebuilders and energy throughout the year.   As U.S. fiscal contentions could last all
year with no quick fixes it might be time to look outside the U.S. for the best
relative opportunities.  U.S. valuations are
reasonable at current levels considering artificial low interest rates.  Retail investors are still woefully
underinvested as they continue to fight the specter of 2008.  This bodes well for equity markets overall
and emerging markets in our opinion could be one the best areas of the
market.

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.

The Year In Review

Posted January 17, 2013 by admin. tags:Tags: , , , , ,
Cold Winter


Written by Dave Young, President & Founder of Paragon Wealth Management
2012 continued the volatility that’s characterized markets since the global financial crisis, which will be marking its fifth anniversary in
September.  This year’s market moves were driven by three primary issues, Europe, the Middle East, and U.S. Politics.

We had a back and forth flow of good and bad news all year out of Europe.  Positive indications for Europe’s economy in the first quarter led to the strongest start for markets in recent memory.  These gains were promptly given back as concerns rose in the second quarter. Markets then rallied in the second half of the year when the European Central Bank announced that it would provide liquidity to governments and financial institutions – to the point that for 2012 as a whole, Europe’s stock market actually outperformed the U.S.

Middle East problems added to the mix this year.  This time it was Syria, Libya, Egypt, Israel and Iran that kept things stirred up.
Problems there always add an element of fear to investors in the U.S.

Our politicians provided a lot of political theater due to the election
year.  Markets rallied from June through October and then sold off into the election. After a short post election sell off, the markets surprised a lot of nervous investors and rallied through December.

The final act of the year was the drama surrounding the “fiscal
cliff”.   According to the press the fiscal cliff was the “Big Scary” issue that was going to sink the stock market.  Instead, our politicians
came through an hour before year end and voted on a 150 page bill they had three minutes to read.  As usual, it doesn’t cut spending, doesn’t significantly raise revenue and kicks the can down the road another few months.  The more things change the more they remain the same.

Overall the year was very volatile and very choppy.  The surprise this year was that in the face of all of the negative news most markets moved higher.

The Outlook for 2013

In the short term, through 2014, there are a lot of reasons to be bullish on stocks.  The US housing market has hit bottom and should be a positive force in 2013.

Growth in the middle class in emerging markets will continue to provide opportunities for investors and for companies selling into those markets.  Huge new oil discoveries should put a cap on the price of oil, which is always a boost for the economy.  Stock valuations are still favorable.  Low interest rates that hurt bonds are very good for stocks.

Over the long term, I have some serious concerns.  The biggest obstacle is going to be the debt that our politicians continue to grow.
We are 16+ Trillion in debt and going further into debt every day.
Forty two cents of every dollar that the federal government spends is still borrowed from our kid’s and grandkid’s future. Based on current policy, that 16 Trillion dollar debt isn’t going to magically disappear.  At sometime in the future it will have to be addressed.  If it isn’t then we will experience a real cliff.  That is the one that we will be watching out for.

Investing is difficult.  It rewards those who have the discipline to stick with their long-term strategy during challenging times. It punishes those who jump in and out and are always chasing what worked most recently.

Always focus on what you can control. That includes managing your risk by making sure your risk tolerance is set properly.  Following a disciplined, systematic process that has a long term track record.  Stay focused on your strategy and let the long-term results take care of themselves.

We appreciate the opportunity to be your financial advisor.  Please contact us if you have any questions or concerns.

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.

GARP?

Posted January 11, 2013 by admin. tags:
World Globe

Written by Nathan White, Chief
Investment Officer of Paragon Wealth Management

Growth at a reasonable price,
or GARP as it’s known in the investment world, is practically the holy grail of
investing.  Whether you’re a value or growth disciple (or any other type
of investor for that matter) in the end everyone wants the same thing – their
investment to go up.  Short sellers excluded of course.  GARP is
theoretically the best of both the value and growth worlds.  Who wouldn’t
want a stock that is cheap and has good growth? 

The risk with value investing
is that the stock is cheap not because it is undervalued but because its
fundamentals are deteriorating and offer little prospect of reversing.
It’s the classic value trap that many fall for.  The risk on the growth
side is that stocks with higher growth rates tend to be expensive and priced
for perfection.  Any disappointment can bring the stock down in a hurry.

In actuality, most GARP stocks
fall somewhere on a continuum of relative growth to value and an investor or
manager decides what their threshold is.  Because I view investments in a
relative manner I have always like the idea comparing growth to value as a way
of finding good investments.  For example, right now one of my favorite
investment ideas is in the emerging markets.  The MSCI emerging markets
index trades at a PE of 11 compared to 14 for the S&P.  That is about
a 30% difference.   In the past emerging markets have traded at
premiums to developed markets to compensate for their growth and risk.
While growth rates in emerging markets have come down from the lofty levels of
the past, they are still much higher than in developed countries (e.g., 2.5%
for U.S. vs. 8% for China, 5.3% for India).  I believe this is a great
GARP opportunity as emerging markets have cheaper valuations and better growth
than many developed markets.

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.

Fiscal Cliff Continued…

Posted January 4, 2013 by admin. tags:
The Fiscal Cliff

Written by Dave Young, President of Paragon Wealth
Management

The financial world was about to go over the fiscal
cliff.  Our world was ending as we know
it.  But then, our trusty politicians
came back to save us.  At the very last
minute, they came to an agreement.
President Obama even came back from his vacation in Hawaii to be
there.

Everyone cheered.  The
stock market jumped 300 points the next day.

We followed our models and our portfolios performed well
through all of the stress and uncertainty.

So what really happened?

Not much.  Payroll
taxes were put back to what they were before the payroll tax holiday – which
will cost average wage earners somewhere between $500 and $2000 per year,
depending on your income.

Of course, the rich, who are regularly told don’t pay their
fair share, were mandated to pay more.
Their top marginal rate was increased from 35% to 39.6%.  I guess they can feel grateful that their tax
didn’t go up to 40%, just 39.6%.  It’s
kind of like when they price gas at nine tenths of a cent so you feel better
about it.

The definition of rich was changed again.  For at least the next few months, single rich
people earn $400,000 and married rich people earn $450,000.  I guess it’s important to define who is “rich”
so that we know who should pay everyone else’s bills.

The estate tax exemption was set at $5,000,000 per
person.  That was relatively positive
because for the first time in a decade there will be some certainty around
estate planning.  Unfortunately, for
planning purposes, it’s nice to know how much more the government will take
when you die…

At the end of the day, nothing has really changed.  We are still 16+ Trillion in debt and going
further into debt every day.  There were
virtually no cuts made to government spending in this agreement.  Forty two cents of every dollar that the
federal government spends is still borrowed from your kid’s and grandkid’s future.

So, for now – until the next politically induced crisis – we
should have some stability in the market.
That crisis will be the debt ceiling debate.  It should occur between now and March.

The fundamentals of the market actually look fairly positive
for 2013.  Based on our models and the
economic trends, I am positive on the economy and the market for the next
couple of years.  The issue is whether or
not our leaders will continue to create unnecessary uncertainty.

In summary, over the short term, market conditions look
good.  Over the long term, I have some
serious concerns.  Based on current
policy, our 16 Trillion dollar debt isn’t going to magically disappear.  At sometime in the future it will have to be
addressed.  If it isn’t then we will
experience a real cliff.  That is the one
that we will be watching out for.

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.

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