Category Archives: Federal Reserve

Investment Choices in a Low Rate World

Posted April 29, 2016 by paragon. tags:Tags: , , ,
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On March 29, Fed Chair Janet Yellen gave a speech to the Economic Club of New York. Before you fall asleep, as is usually justified when it comes to mind-numbingly boring economic talk, let’s discuss how her comments will directly affect your investments. Yellen advocated for letting the economy run hot before continuing to raise interest rates. She basically admitted that the small increase administered by the Fed in December was a mistake, and that global and market events have significant influence on policy. (You don’t say …)

So now that the expectation of “lower for longer” interest rates is all but set in stone, how will this affect your investments?

First and foremost, the yields offered on savings and money market-type accounts will remain paltry. It will be hard to find and earn a safe return. Simply put: If you want a return, you’re going to have to take on more risk. Taking on more risk exposes one to a higher degree of losses and volatility. (Ironically, this is exactly what investors looking for a “safe” return want to avoid.) The search for anything with yield has caused the prices of bonds and other income-yielding assets to rise dramatically in price.

Many investors seeking yield have turned to alternative assets such as junk bonds, MLPs, utility, telecom and other dividend stocks. Whereas these can be valid long-term investments, many are treating these assets as “bond proxies” while ignoring their stock-like risks. These alternatives do have better yields than many safe assets, but they are exposed to the gyrations of the stock market. It doesn’t take much of a drop in the equity market to wipe out the small yields these alternatives offer. Plus, they’re expensive, and these assets are sensitive to changes in rates. At today’s low rates, this risk has become even greater.

Because bond yields move inversely to bond prices, it is getting harder to squeeze price returns out of bonds as interest rates get lower. The closer rates get to zero, the more sensitive bond prices become to changes in rates. As bonds increase in price, their future returns are lowered. This is true even if rates go sideways from current levels.

To understand the current situation for a conservative asset and what it implies about future returns, refer to the displayed chart. This chart presents the historical interest rate (black line) and the total return (red line) for the 10-year U.S. Treasury bond since 1928. Interests rates peaked in 1981 as the Fed finally hiked rates dramatically to kill inflation that had hobbled the economy for an extended period. Notice the sharp increase in the total return line that corresponds with the long drop in interest rates since the peak in 1981. During this period, shaded in blue, bonds performed very well. Now review the area shaded in green, which displays a period of rising interest rates. The red total return line barely rises during this period, illustrating the poor performance of bonds during this 41-year period. The point of the chart is to compare where interest rates are now and what happened to future returns the last time they were at this level. At a current yield of around 1.75% for 10-year Treasury bonds, the future return of bonds does not look good.

The Fed and other central banks are putting on a full court press to get higher inflation. But what happens if they actually get what they want? Inflation is the No. 1 enemy of bonds because it erodes the future value of bonds’ interest payments and return of principal. Central banks must raise interest rates to offset the negative effect of inflation. As interest rates rise, the prices of bonds go down. The lower rates go, the less cushion (in the form of interest earned) there is to offset decline in bond prices that come with increases in interest rates. Not predicting rampant inflation, but even a return to “normal” inflation can significantly affect bonds at their current prices. That is at the heart of what makes the current environment so risky.

So, in this low-return environment, how will we generate returns in Managed Income? Fierce flexibility and continued commitment. We look at the risk first, and then compare it to the potential return. We are more opportunistic. We expertly use a combination of strategies to offset risks — and work endlessly for your best interests. One thing is certain: Our flexible strategy will be the best approach to this uncertain future.  Here are some current investment choices that we feel offer better return for the risk versus the average alternatives that many investors chasing high yield are opting for:

High Yield/Higher Risk

  • Long Maturity Bonds
  • High Yield (Junk) Bonds
  • High Dividend Stocks

 

Better Option

  • Short to Intermediate Corporate Bonds
  • Preferred Stocks
  • Some REITs and Closed-End Funds
  • Dividend Growth Stocks

 

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.

Update on Recent Federal Reserve Announcement

Posted September 21, 2015 by paragon. tags:Tags: ,
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Written By Nathan White, Chief Investment Officer

There was quite a bit of anxiety leading up to last week’s decision by the Federal Reserve on whether or not we would get the first interest rate increase in over nine years.  Surprisingly citing overseas uncertainty, they decided upon no change and slightly lowered their forecast for the path of future rate increases. There are very heated debates about the pros and cons of continuing the current Zero Interest Rate Policy (ZIRP) and many valid points being made by both sides.  The Fed “officially” introduced more uncertainty last week by openly using overseas (i.e. China) volatility and weakness as the reason for continuing with zero interest rates despite the decent progress of the U.S. economy. While I understand the Fed’s reasoning and with inflation so low they can be justified in not raising rates yet, but it seems each time they get closer they trot out a new reason (justified or not) for holding off.

However, I believe this is now starting to create too much uncertainty and mixed signals which begs the question of when will the time ever be right to move off the zero bound?  The Fed is indeed trapped at this point as monetary policy has done about all it can and the longer it has to keep rates at zero is more indicative of a general economic malaise.  I do however think the economy is strong enough to raise rates a bit and it would actually help free up frozen capital, aide savers, and restore the healthy discipline of normal price signals.  Overly easy monetary policy basically steals from the future in that it pulls demand forward leaving us with less economic growth in the future when it has to get paid for. The current monetary policy is still commensurate with an economy in crisis and we are well away from that condition. The longer the Fed has to stay a zero or delays raising rates runs the risk of never getting out or moving dramatically in order to play catch up.  Both of those scenarios are not good.

OK, enough of my diatribe….What are our current plans and actions?

The net takeaway from last week’s decision was that we did not learn anything that would want to make us take more risk at the current time.  Our models are still telling us to be cautious at this point.  The speed of the August decline did create a short-term oversold condition, but we were ready ahead of that.  We do not see a recession in the cards at the current time, but the markets are still trying to adjust to new dynamics (i.e. slowing profit growth, emerging market risk, effects of reversing the Fed’s easy money policy, etc.). That can give us the opportunity to get assets at cheaper prices.  So for now we would sell some if we rally back towards the pre-August levels and buy some on dips toward the lows.  The cash we are holding in the portfolios gives us the flexibility and protection to take advantage of the current environment.

For those so inclined here’s a great take on the Fed’s move in the WSJ: http://www.wsj.com/articles/the-federal-reserve-pulls-a-lucy-1442531250

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.

 

 

Back And Forth

Posted June 4, 2015 by paragon. tags:Tags: , , , , , ,
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The U.S. stock market is in a rut. Since the end of last year, little progress has been made. In the last three months, it has moved back and forth in a trading range 10 times. Volatility has increased, with larger daily moves than we have seen for some time. During the month of March, major indexes closed down about 1.5 percent.

Many markets around the world hit all-time highs during the first quarter, which, depending on your perspective, has its ups and downs. For momentum or trend traders, it’s positive, because they ride the trend as long as it lasts. On the other hand, for range traders it’s negative. We are currently hitting the upper end of the range, which may mean it’s time to sell.

Last October, we had a 10 percent pullback. It is too early to tell, but so far it seems the market leadership of large cap stocks and the S&P 500 may finally be changing. Since the October correction, the S&P 500 has lost relative strength.

Contrary to what doomsayers perpetually predict, the dollar has been incredibly strong for the past nine months. So while it may be a great time to go to Europe, it’s somewhat tricky for investors. In addition to determining where to invest internationally, it is important to make sure your dollar exposure is hedged properly.

After falling from $106 to $46 in six months, oil has recently found some stability. This is in the face of analysts calling for $30 oil. Opportunities to invest seem to be spreading out from the U.S. We are entering a transition period where the markets are offering new opportunities and risks.

MANAGED INCOME

The bond market continues to be somewhat of a conundrum. We have been at all-time lows with the 10-year Treasury bond yielding around 1.85 percent. That means if you bought that bond today, you would earn 1.8 percent for the next 10 years. By way of comparison, Germany’s 10-year bond is yielding an unbelievable 0.20 percent. In fact, in a number of European countries, you would have to pay the government if you bought shorter-term debt because they have a negative yield.

The bottom line? Rates are at all-time lows around the world. And because of that, we know rates will eventually rise. When those rates rise, many investors will be hurt. If rates were to move up quickly, bond investors could potentially see volatility and losses similar to what we see in the stock market.

Investors invest in bonds rather than stocks because of their historic level of safety. And that’s a problem considering today’s market. When interest rates move back up to their historical norms, that illusion of safety could easily evaporate.

Interest rates were supposed to move up two years ago. They didn’t. The FED determined the economy was too weak. Ever since then, investors have expected rates to move up. Most recently, rates were supposed to move up this coming June.

Simply put, it’s a guessing game. There are many variables at play and no one knows when rates will rise. The problem is that we have to protect Managed Income from those eventual rate increases. Protecting the portfolio has a cost, in that we give up some of the meager returns currently available. We will continue to do our best to protect the portfolio and pull out whatever returns are available without putting the portfolio at undue risk. When we move off these all-time lows in rates, we should have better opportunities to once again capture returns in the conservative space.

TOP FLIGHT

Active management strategies are coming back into favor. This usually happens later in a market cycle — after the easy money has been made. Early in a market recovery, almost any strategy will work because almost everything is moving up. This is when everyone appears to be a genius.

Later in a recovery, as many asset classes approach full value, it is more difficult to generate returns. Typically, that is when active managers outperform. This is also about the time many investors switch from active strategies to passive ones. Historically, because of the increased market risk, that is exactly the wrong time to make the switch.

We have seen this change in opportunity within Top Flight over the past quarter. Top Flight Portfolio returned 3.98 percent net of fees for the first quarter versus 0.96 percent for the S&P 500. From its inception in January 1998 through March 2015, Top Flight has returned 615 percent to investors versus 193 percent for the S&P 500. That works out to a compound rate of return over that period of 12.08 percent compounded for Top Flight versus 6.42 percent for the S&P 500. Please click here to see full track record and disclosures.

WHAT IS AHEAD?

It’s the question I get asked repeatedly. While no one really knows, there are factors we do know. We know we are likely in the latter third of this bull market. This bull market is the fourth longest in 85 years. From a low of 6469 on March 9, 2009, the Dow Industrials has gone up an additional 11,700 points.

Other issues include:

• How does the market usually react to a severe drop in oil?

• What does the market usually do in the seventh year of a president’s term?

• How does a rapidly rising dollar affect the market?

• Stocks are overvalued by most historic metrics but undervalued relative to interest rates.

The list is endless. We do our best to separate out those factors that matter and adjust our portfolios accordingly. We apply those factors to our investment strategy to give us a framework. More importantly, we process the actual market data through our models, then react to that data as market conditions change. For example, Top Flight is currently holding about 30 percent cash, which is its highest cash allocation in some time.

Investing is difficult. As I have said before, there are 10 ways to lose money for every one way to make it. Fortunately, Nate and I have a combined market trading experience of 50 years. As they say, “This is not our first rodeo.”

Our objective is to make sure you are invested according to your risk comfort level. Each of our clients is invested differently depending on age, goals, total net worth and investment experience. In order to achieve investment success, you must be invested in a way that allows you to stay invested over the long term, through market ups and downs.

Please let us know if you would like to discuss your investments or make changes to them. We appreciate the confidence you have placed in us.

Written by Dave Young, President and Founder of Paragon Wealth Management

 

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. 

Change, Currency & Caution

Posted May 12, 2015 by paragon. tags:Tags: , , , , , ,
Changes Ahead

Noteworthy changes are affecting the economy and markets. The stronger dollar and the sharp drop in energy prices are impacting economic growth, corporate profits, and investment strategies.

DOLLARS AND CHANGE

The rising dollar hurts U.S. companies dependent on foreign earnings or on rising commodity prices. After a long streak of healthy employment gains, the jobs report on April 3 came in surprisingly weak — at about half of what was expected. Credit conditions — as monitored by the NACM’s Credit Managers’ Index — have experienced widespread deterioration with the first back-to-back declines since 2008. While we are not forecasting a recession, the near-term risks to the economy and markets have increased. For the first time since the financial crisis, S&P 500 profits over the next two quarters are set to drop on a year-over-year basis. In fact, many analysts are now estimating flat or slightly negative earnings growth for the year. With market valuations around the high side (at 19 times trailing earnings), it can be harder for equities to advance without earnings growth.

RATES ARE LOW AND SLOW

Another headwind with regards to earnings and market valuations is the coming interest rate increases — or “normalization” of monetary policy. The Fed still seems to be looking for any reason to make this process slow and gradual. Forecasts for the first rate increase have now been pushed to September from June, and the path of rate increases looks to be much shallower than previously estimated. As I’ve said in the past, the Fed will be very reticent to normalize policy, which could pose significant risks down the road at the expense of marginal gains in the present. Still, a slight increase in rates can make it harder for valuations to expand from already elevated levels. Adjustments to higher rates are actually healthy, as it lets the market and fundamentals align back together, ensuring a healthier market long term. The stronger dollar effectively tightens monetary policy and has thus given the Fed a pass on raising rates in the next few months. Stocks are cheap relative to bonds, but at these low yields that doesn’t mean as much.

THE VULNERABILITY FACTOR

On the sentiment side, the indicators are slightly negative. Margin debt is at a record high, and hedge fund managers are holding the highest positions in U.S. stocks since the financial crisis. We have also seen deterioration in market breadth back into a neutral zone, which could indicate that the market advance is a bit tired. These factors, along with the aforementioned risks, make equities look vulnerable, as many of these elements may not be fully priced into the market. This increases the likelihood of a long overdue correction in stocks. The last major correction was in the fall of 2011.

GROWING PAINS AND GAINS

Any correction would be an opportunity within the context of a continuing bull market. A continuation of weaker economic indicators would make us rethink this assumption, but for now the evidence indicates that any slowdown would be temporary. Even though there are some near-term headwinds, the economy is still set to grow and can benefit overall from lower energy prices and still low interest rates. The shape of the yield curve, which has been an effective predictor of stock market declines and recessions, is still moderately bullish. While the dollar could continue to strengthen, the majority of the move has already occurred. Once the markets and economy adjust, we should see moderate economic growth continue.

FLEXIBLE FUTURE

Now is a time for good risk management practices that will enable flexibility in upcoming opportunities. Managed Income has been in protection mode for some time now, and our current positioning will pay off as the year progresses. Many assets in the yield arena are becoming increasingly stretched and now contain too much risk. At this point, it is more advantageous to wait for better prices before owning many of these “safe” assets. Not being in Treasuries has been a drag on performance for Managed Income. Volatility has dramatically increased at these low rate levels and ahead of the projected rate increases by the Fed. While helping to protect the portfolio against an equity or bond market drop, our small hedge positions have also been a drag on performance. However, our reasons for holding the hedges have not changed. The price paid to buy this insurance is still worth the cost.

PROCEED WITH CAUTION

Our current strategy is caution. We have been repositioning our portfolios to reflect a more cautious approach and to take advantage of better, developing opportunities. The energy sector is a tug of war between short-term oversupply and a balancing out that is just over the horizon (as U.S. production finally starts to decline). Oil price is still a question of how long rather than how low — it’s a question of which companies will be able to endure. Current estimates are all over the map, and it will take time for the market to sort it out. New lows for oil prices would be an opportunity to add to investments in this area. Conversely, we also like areas such as consumer discretionary and retail that benefit from lower energy prices and a stronger dollar.

With regards to emerging markets, we are opportunistic. The headwinds faced by a stronger dollar could subside but still remain a stumbling block for many countries. Overall, emerging Asia still looks relatively better than other emerging markets. But we view the better prospects such as China and India as trading plays currently. Europe could get a boost from the ECB’s actions and economic growth could finally be turning up. The fly in the proverbial European ointment is still Greece. It now looks inevitable that Greece will have to leave the Euro. They simply have too much debt and not enough productivity to pay it off — no matter how much the debt gets restructured. It has been widely reported that they will run out of money (again!) and whenever the Germans decide to cut their losses the break will occur. When that happens, it will cause market disruption and uncertainty due to possible contagion effects. This would present a buying opportunity in the Euro and European equities. Again, retaining flexibility in portfolios is crucial to taking advantage of the volatility that could arise as the market adjusts to this new environment.

Written by Nathan White, Chief Investment Officer

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.

Now Showing in Europe: Negative Yields – Next Stop the U.S.?

Posted February 26, 2015 by paragon. tags:Tags: , , , ,
World Globe

Yes folks, the condition where you actually have to pay someone to hold your money or you get back less than you deposited is now a reality in Europe. In anticipation of the start of the ECB’s asset purchase program yields in many European countries are now negative. Why would someone accept a negative yield? One reason is that you might expect deflation to continue to fall pushing the price up even further or giving you a positive real yield. Another reason could be regulations that force people or institutions to hold negative yielding instruments. Unless you’re using your mattress you pretty much have to put your cash in a bank/depository. Fear of an economic downturn or disaster could make getting most of your money back rather than losing it a relatively better prospect.

Due to the Fed’s zero interest rate policy and QE we in the U.S. have almost been there for years. I bet you are just loving that zero percent you basically get on your savings! In fact, after adjusting for inflation we’ve had negative real yield for some time on cash or near cash instruments. However, now the Fed is in a tough spot trying to raise rates to match the economy because most of the rest of the developed world is doing the opposite. Our relatively higher rates are causing the dollar to soar as foreigners buy our bonds.  As the dollar increases it creates stress on emerging markets and U.S. multinationals. This in turn gives the dovish Fed the excuse to put off the date for rate increases to begin.

Central banks however can only do so much and their actions to prop up assets prices don’t necessarily translate into economic growth. Overtime the marginal benefit from asset purchases decrease and then we are left with paying the price of trying to unwind them. The pain of trying to unwind then causes the Central Bankers to refrain altogether or even add more QE. The cycle never ends and we are trapped.

Let’s hope the world doesn’t end up being stuck in an infinite loop of QE and negative yields as they seem to be associated with subpar economic growth in the long run – just ask the Japanese.

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

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.

Adjustment Period

Posted October 22, 2014 by admin. tags:Tags: , , , , , , ,
Rolling hills and fall colors

The era of QE has been a difficult environment for active managers. The last five years have been a heyday for the passive investor, aided directly and indirectly by the Fed’s Quantitative Easing (QE) programs, stocks and bonds have moved up in an indiscriminate manner. All one had to do was simply show up. Bonds have been directly aided by the trillions the Fed has purchased while equities have indirectly benefitted from the implied “put” or backstop inferred by these Fed actions. The Fed’s actions to keep rates artificially low have created market distortions that have interfered with many of our quantitative indicators.

When all equities or bonds generally get rewarded the same regardless of their quality or differences, it’s hard for the skilled manager to outperform. A rising tide of liquidity has lifted all boats making it easy for anyone to navigate in the harbor. But once the tide starts to recede, experience and skill are what matters. We have seen improvement with our models over the last year coinciding with the gradual reduction of QE. As markets return to “normal” we are better able to assess the risk and rewards of certain moves and strategies. We are seeing a number of opportunities develop that haven’t been available for years.

In the short run the market is looking tired. We have rejected the doom and gloom scenarios that have been so prevalent since the financial crisis and have caused many investors to miss out on the bull market. However, fewer stocks are hitting new highs and the breadth has been getting weaker. The uncertainty surrounding the end of QE and the timing of rate increases next year are factors contributing to the hesitancy. This is only natural and healthy in the long-run. As previously mentioned it also creates opportunities for us that have not been available for the last four years. Over the last few years we have held a cash position which has been a drag on performance. Going forward, this cash position is an advantage as it helps to cushion the downside and provide flexibility to take advantage of opportunities provided by any volatility and uncertainty.

Although the risks have risen, this doesn’t mean investors should get out completely. The market has been overdue for a correction for some time but it doesn’t mean that everything is ready to fall apart. Getting completely out now could cause you to miss crucial gains if stocks continue to rally as they have. The last four years have shown the futility of trying to time the market in an all in or out manner. It is still a bull market until proven otherwise.

The current economic data has been stronger indicating that the economic growth is picking up instead of getting weaker. Ultimately that is a good sign as it will support earnings growth that has been the key foundation for the current bull market. Any correction that comes will probably be more short-term and establish the next leg up for the market. Therefore, a correction would be viewed by us as an opportunity rather than a harbinger of doom. It is only natural after five years of market advances and ahead of interest rates starting to move up to get some market hesitancy or disruption. Our current exposures are to technology, energy, and materials which are late-cycle stocks and tend to do well in rising rate environments. We also continue to favor various segments of the healthcare sector such as medical device and healthcare providers. Several emerging market opportunities are also looking more promising than in the past and we have started to act in a few of these areas such as Mexico and Brazil.

It is no secret that we have been cautious on the bond market for some time. As the sun sets on QE the angst over when the Fed will begin to raise rates and by how much is growing. Markets always like to price actions in ahead of time and right now it seems the equity market is being affected to some degree by this interest rate uncertainty. However, the bond market has not moved much yet. Many thought that bonds would have a difficult year as they began to price in rate increases. So far, bonds have done the opposite and surprised many by having a good year. The inevitable is coming though and the window for bond gains is closing as we creep toward June of next year which is the most accepted time for rate increase to begin. Any equity market weakness will give bonds more time to put off the reckoning.

Although the potential for a bloodbath in the bond market is high, that doesn’t mean it will happen. It will probably be more like death by a thousand cuts. The Fed will be very slow and steady in raising rates as to minimize market disruption. After all, they do hold about $4.5 trillion of bonds!  Even if interest rates rise in a slow and gradual manner (which is what I believe will happen) bonds will still produce negative or flat real returns at best.

For example, take a look at the interest rate sensitivity of a broad composite of investment grade bonds such as the Barclays US Aggregate Bond Index. If interest rates are a half to one percent higher a year from now, the index could be down 2.5 to over 5 percent respectively. The current yield of about two percent would still not offset the losses.

In preparation we have been making changes and getting ready for the coming environment. We have been early on this call which has caused us to underperform in Managed Income this year so far, but not by a lot and we are better positioned for what is to come. We believe this approach is the most effective from a risk/reward standpoint and will pay off in the environment to come. Now is the time to take a look at the risk in bond or fixed income holdings and make adjustments. The first one to two percent moves from the bottom will be the most painful.

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

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.

Backed against the wall….

Posted September 26, 2014 by admin. tags:Tags: , , ,
The chains

Hands chained up

We, along with many others, have been cautious about the bond market for some time.  As the sun sets on QE the angst over when the Fed will start to raise rates and by how much is rising.  Markets always like to price things in ahead of time and right now it seems the equity market’s recent nervousness could be due in some part to this interest rate uncertainty.   The bond market however has not moved much yet.  Many, including us, thought that the bonds would have a difficult year as they start to price in the rate increases.  Instead, bonds have (so far) have had a good year surprising many.  Alas, the inevitable is coming though and the window for bond gains is closing as we creep toward June of next year which is the most accepted time that the rate increases will begin.  Any equity market weakness will give bonds more time to put off the reckoning.

Any rally in bonds should be sold as their time is getting short.  I think you’re seeing the cracks appear in the high yield market right now.  Historically, high yield is more correlated with the equity market and not that sensitive to interest rate risk but at these low rates it now contains interest rate risk as well.  With yields still below six percent the reward is just not worth the risk for holding junk bonds.

Although we don’t find bonds attractive it doesn’t mean that a bloodbath is coming.  It will probably be more like death by a thousand cuts.  The Fed will be very slow and steady in raising rates as to minimize market disruption.  After all, they do hold about $4.5 trillion of bonds!  The first one to two percent moves from the bottom will be the most painful but in a gradual manner as mentioned.  A year from now interest rate could be a half to one percent higher.  Take a look at the duration of your bond holdings and compare it to your yield – you’ll be hard pressed to find anything that would come out positive…

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

 

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.

Yellen Time

Posted November 14, 2013 by admin. tags:
Yellen Time

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

The confirmation process for Janet Yellen as the new Fed chair begins today.   Although the questioning may get a bit feisty due to the current partisan atmosphere in Washington she is expected to be confirmed.  The markets will be watching closely for hints and clues as to her thinking on all things QE.

Some short-term consensus has been building that the Fed might start to taper in December rather than in 2014 due to the recent stronger jobs report and economic data.  That has caused the market to pause at these levels while trying to decipher what the Fed might do.  The market always tries to move ahead of the Fed.  The key indicator that we are watching is the 10 year bond yield.  The closer it gets to 3% the more cautious we become.  At the same time there are a lot of people and managers trying to play catch up at this time of year which puts upward pressure on equities.  The overall momentum of the markets is still up for now.  We are definitely more cautious at these levels and holding some cash, but the Fed, as it has done so many times, could still easily call the markets bluff and delay the “taper” continuing to send stocks higher. 

We have held a cash position of around 10% for much of the year and that is the primary reason for our growth portfolios lagging the S&P on the year.  However, over the last six months we have slightly outperformed the S&P while holding roughly holding this same 10-15% cash.  This means we have taken less risk to get the same or slightly better return.  We feels this is especially prudent at this time after such strong performance in the equity markets.   Our strategy is to get as much of the upside as we can while holding some dry powder to protect against the downside and to take advantage of opportunities.

The Managed Income portfolio has been in a defensive stance for since about May.  It is not gaining much for the year but is beating the bond benchmarks which are down for the year.  This is a very tricky space right now and we want to keep our cards close to the vest and wait for opportunities when they come – but they are not here yet.  If the 10 year cracks north of 3% we see some good intermediate term opportunities.  

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.

More Money….But We Are Going To Pay For It

Posted September 18, 2013 by admin. tags:
Pile of American Money


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

The Fed surprised markets today by not beginning to taper
the massive QE program.  Markets were generally expecting a $10-15 billion
reduction and jumped sharply higher on the news.  The supposedly more
transparent Fed was anything but with this announcement.  This could cause
more volatility going forward as it introduces more uncertainty as to what the
Fed will do.  One thing for certain is that the taper will not begin under
Bernanke’s watch.  He is getting out before the hard part comes and
currently his most probable successor, Janet Yellen, is the most dovish policy
member.  That means it will be awhile before QE is ended and even longer
for an interest rate increase.

Personally, I think the Fed dropped the ball.  Better
to start to rein in QE now when things are not bad and let interest rates get
back to normal.  The important price signal that interest rates provide to
the economy has been muted for too long and is now hindering economic growth.
The longer the Fed continues QE the longer we will have subpar growth.
The longer they wait the harder it will be to do it down the road.
As I have often stated, if the economy does improve the Fed will be forced to
tighten which has a dampening effect on the economy bringing us right back down
to subpar growth.  If they don’t tighten when economic growth increases
then the inflation monster will rear its ugly head.

We will have to see how this plays out in the markets over
the next while, but this might provide an opportunity for bond investors to sell
into strength if rates on the 10 Yr head back down towards 2.5% or lower.

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.

Potential Energy

Posted February 20, 2013 by admin. tags:
Potential Energy


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

Bloomberg reported today that the biggest U.S. banks are lending the smallest portion of their deposits in five years.  The banks have been flooded with cash since the financial crisis of 2008 as people have sought to conserve cash and not borrow.  Due to tighter lending standards, less credit worthy borrowers, increased regulation and capital requirements loans have not been exactly flying out the door.  This doesn’t mean banks haven’t been lending but more that they are a lot more cautious and that demand isn’t what it once was.

The economy, while growing, hasn’t felt strong enough for robust lending to reignite…yet.  Could this change?  The economic
numbers, while not great, have been getting better and banks have significantly cleaned up their balance sheets and raised capital.  The potential is there.  While lending will probably not return to the levels of the past (at least for a while), it wouldn’t take much releasing of the spigots to keep the economy moving along and get better.  It’s like a virtuous cycle where once confidence and conditions improve it creates a sort of self-reinforcing momentum.

Dare I say we could be entering a sort of boom or “normal” period?  I know that sounds like heresy to so many and contrary to the gloom scenarios that having ruled the day since 2008 but I agree with James Paulsen of Wells Capital Management who says that the economy is now “gearing”.

As I have talked about before, the fly in the ointment is the Fed.  As the economy strengthens it will have to reverse its easy money policy and shrink its tremendous balance sheet and these actions act as a drag on the economy.  This is one of the reasons why I never liked so much QE and have always said that the Fed’s big test comes when they have to start reversing policy and whether they will have the guts to do it.  For now the Fed is in no hurry to reverse course and with their stated target of 6.5% unemployment they could be very slow in the process of reversing course when that time comes.

Politically it will be difficult.  That means we could enter a period where, with the aid of increased lending, the economy picks up for some years before the Fed finally takes away the punch bowl.  That means that stocks and the economy could do well for a while before inflation forces action.

 

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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