Category Archives: Market Update

Market Summary

Posted April 13, 2018 by paragon. tags:Tags: , , , , , ,
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Written by David Young, President & Founder of Paragon Wealth Management

The markets have been strong the past few years — and they have been exceptionally strong since Donald Trump was elected. Most of the strength was based on investor expectations. Specifically, that Trump’s free market policies and tax reform would benefit stock prices. As a result, last year the markets were up 10 to 20 percent depending on the market. Volatility was almost nonexistent.

The broad market hit a peak on Jan. 26, 2018. Since then, volatility has picked up significantly and the market has been acting more like its old self. Three issues are currently pushing it around.

First, valuations have been at the upper end of fair value for some time. Whenever valuations get this high, investors start looking for reasons to sell rather than buy. They tend to look at everything through a negative lens.

Second, Trump has been pushing a protectionist trade agenda and recently announced tariffs against China. Investors do not like tariffs. Throughout history, tariffs have always caused more harm than good. Every time tariff news comes out, the market sells off.

Third, tech stocks (specifically the FANG stocks, i.e. Facebook, Apple, Netflix, Google and Amazon) have been leading the market up for the last 18 months. But recently, they have had more than their share of bad news, which is causing them to put a downward pressure on the market.

Overall, excellent market fundamentals are still in place, which forces us to stay invested. However, with interest rates slowly rising, we are on “high alert” more than we have been in some time.

CHANGES AT PARAGON

If When I founded Paragon 32 years ago, it was because I couldn’t find a fiduciary firm that managed my money the way I wanted.

I had sold several businesses and needed a place to invest my hard-earned money. I met with Shearson Lehman, Smith Barney, Merrill Lynch and Northwestern Mutual, to name just a few. None fit the bill.

I wanted them to invest my money as if it were their own. I wanted to cut unnecessary investment costs wherever possible. I wanted a proactive investment manager who would adjust my account depending on whether the markets were going up, down, or sideways. I didn’t want them to passively buy an investment, hold it forever, and pray it worked out.

When I started Paragon, I was trading through Fidelity Investments. Each of my clients had to sign a limited power of attorney so I could trade their accounts. We called in our trades on land phone lines, one by one, because there was no internet.

After a few years, Charles Schwab became the leader in the newly developed RIA industry. They were at the cutting edge. We moved from Fidelity to Charles Schwab, because Schwab allowed us to provide the best technology and lowest costs to our clients.

We have been at Charles Schwab for almost 25 years and have enjoyed that working relationship. However, after an in-depth review, it is time for a change. Looking to the future, we believe making some significant changes will provide our clients with a better technology platform, lower transaction costs and outstanding client service.

We did not make this decision lightly. Moving 330+ accounts and upgrading multiple technology platforms is not my idea of a good time.

But change is always painful … in the short term. We are doing this because it will allow us to better serve you and provide you with the best technology available to trade and monitor your accounts.

TD AMERITRADE

TD Ameritrade is at the forefront of technology in the Registered Investment Advisor space. TD Ameritrade is a leader in trade execution. We have negotiated trade pricing that is either the same or one-fourth the cost of what we were paying, depending on the account. Better trade execution and lower costs ultimately lead to better investment results.

Safety and security of the accounts is of the utmost importance. TD Ameritrade is committed to delivering one of the highest levels of security in the industry and carries FDIC, SIPC and additional insurance against fraud up to $152 million per client.

ORION

In conjunction with moving to TD Ameritrade, we will also be implementing a new portfolio administration package from the industry leader, Orion. The Orion platform will cost Paragon five times more annually than our current provider, but that cost will not be passed on to our clients. Your costs will go down while ours go up. We believe you are worth it.

In addition to enhanced trade order management, cost basis, tax reporting, compliance, and RMD distributions, this state-of-the-art Orion platform will provide you with an incredible array of tools.

Each client will have an online portal, which will provide them with immediate access to accounts and performance across multiple timeframes. We will build these reports for you, as simple or as complicated as you desire. We will use an aggregator, which will allow you to view any of your bank accounts, or other financial accounts that are outside of Paragon. You will have immediate access to your accounts and a variety of reports via your smartphone, computer or through the mail — whichever you prefer.

EVEN MORE…

In an effort to provide you with the best client service, we will also be upgrading our client contact software. This industry-leading client software, known as “Wealthbox,” will allow our staff to take your already excellent service experience to the next level.

Finally, we are significantly upgrading our Financial Planning Software. The state-of-the-art software will make it easier to build and update your plan online. Your plans will be updated daily since they pull in the data data directly from your investment accounts. They will also be available online through your portal. Whether it is a Retirement Income plan, a tax estimate, a Roth Conversion, or Social Security Optimization, our hope is to make it easy for you to understand your plan, access it and update it as needed.

Our ultimate goal is to provide you with the VERY BEST in the Investment Advisor space. We are excited with these enhancements, and over the coming months, we will reach out to you as we get everything put in place.

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. 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 To Normal?

Posted April 11, 2018 by paragon. tags:Tags: , , , ,
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Written by Nathan White, Chief Investment Officer

After a tremendous start in January (and what seemed like a continuation of 2017), the markets finally hit some long-anticipated turbulence in February and March.

The stock market had been riding a nice wave. Last quarter, I suggested it was a prudent time to review allocations and risk exposure while the markets were doing well. Now that volatility has returned, let’s review current conditions and factors, as well as future considerations.

The current economic conditions are generally considered to be exemplary of the late stage of an economic cycle. However, cycles can run longer than anticipated, and there is no way to know exactly when they will end. The effects of the fiscal stimulus are helping to extend the economic cycle, but they could also increase the potential for inflation to finally rear its head. A characteristic of a late economic cycle is where the economy continues to do well, but asset price declines or increases only moderately.

A research report from NDR (Ned Davis Research, Economics/Global Comment March 2018) indicates that two-thirds of countries are growing above their long-term growth potential, which last happened in 2000 and 2007 before major recessions. However, the dangerous threshold could still be a year or so out, and the timing can be tricky. Does this mean we are bearish? No. We are just getting cautious. There are still a lot of positives, but it is our job to investigate the risks.

Our risk models are indicating a rise in risk. Our trend and breadth models, while still bullish overall, have deteriorated. We are monitoring these closely. Equity valuations are still broadly high, but earnings are forecasted to grow nearly 20% for the year. We will be watching for changes to these results and expectations. Another characteristic of a late economic cycle is a flattening yield curve. This occurs when short-term rates exceed long-term rates. The curve has been flattening as the Federal Reserve increases interest rates, but for various reasons, long-term yields have not moved commensurately. The following graphic on the next page helps put the current environment in perspective.

Investing is a long-term game, and trying to time exits can be hazardous to returns — especially if future returns are harder to come by (i.e. lower). You will need to keep exposure to get returns. Stay invested — but be flexible in the mix of those investments.

Remember, pullbacks are a normal part of market action and create opportunities. What is not normal is the absence of pullbacks (like we experienced in 2017). The trillions of dollars — pumped into the markets by global central banks since the Financial Crisis — has smoothed out volatility and market corrections. The latter should increase as central banks begin to reverse course. Keeping interest rates so low for so long has encouraged massive borrowing at cheap rates. Corporate borrowing has surged with U.S. companies’ debt reaching their highest levels since 2000. Many companies have been able to borrow at rates and amounts that wouldn’t

have been possible in a “normal” rate environment. As rates rise, the cost of servicing this debt will increase and could expose many weak hands. This is healthy in the long-term, though, as it discourages wasteful or inefficient use of precious resources. The real question is that as credit conditions normalize, what will be the effects on markets and the economy? I believe current market conditions to be exemplary of returning to a more normal environment.

STRATEGY REVIEW

The S&P 500 ended down for the quarter, and only two of 11 S&P 500 sectors posted gains and outperformed — Technology and Consumer Discretionary. Bonds were also down for the quarter as they face an uphill battle of rising interest rates. Within TopFlight, all three of the strategies (Fundamental, Momentum, and Seasonality) were up slightly for the quarter. Some of the best performers within our Momentum strategy were Nvidia, NetApp and Micron Technology. Our small cap momentum stocks generally lagged in the first quarter but closed the gap by quite a bit in March. Within our Fundamental stocks, the best performers were Northrup Grumman, Ruths Hospitality and Eastman Chemical. After a difficult 2017, our Seasonality strategy posted a gain for the quarter as well. We continue to like the valuation position of our current stock holdings. Their collective forward P/E (price/earnings) multiple is about 14.8 versus 17.4 for the S&P 500, which is about 15% less expensive. Many of these holdings are industrial and materials companies that could benefit more from the tax cuts and possible infrastructure spending.

Our Managed Income portfolio ended the quarter slightly down, primarily due to the slide in equities. We continue to maintain about 40% of the portfolio in short-term corporate bonds, which will allow us to capture the rise in interest rates without getting hit with significant capital losses. Another 15% of the portfolio is in intermediate Treasuries. We continue to avoid long-term bonds.

Going forward, our models still indicate a reasonable case for further stock market gains, but probably not on the level of past years. Inflation trends are still positive for now, and the strong economy and earnings growth outweigh the concerns I discussed earlier. But as the risks increase and the economic cycle matures, it is important to have a more flexible approach with your investments to control risks and take advantage of opportunities. This is exactly the way we like to manage investments.

If you have questions about your allocation and risk exposure, please give us a call. We are here and happy to help.

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. 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.

Not What Anyone Expected

Posted January 20, 2018 by paragon. tags:Tags: , ,
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Written by David Young, President and Founder of Paragon Wealth Management

Two-thousand and seventeen was a banner year for stocks. Not just in the U.S., but around the world. Investors with a long-term perspective were rewarded once again.

It was not a good year for the market forecasters. Their primary talent is consistency — and they were consistently wrong.

At the beginning of last year, most Wall Street Strategists forecasted a gain of 4% or less for the upcoming 2017. The actual gains were five times more than those projections. Following their advice would have been disastrous.

Between U.S. tensions with North Korea, the new presidential administration, and the state of politics in America, the forecast was increased market turmoil. Instead, we saw a calm in the markets we had not seen in decades. The VIX, which is a measure of market volatility, unbelievably closed below a level of “10” more times last year than any other year in its history.

In addition, the forecasts regarding global growth and inflation were off base. If you have been a client for a while, you understand why we never invest based on market forecasts.

Successful investors, on the other hand, focused on the upbeat fundamentals. Corporate profit growth was sparked by economic gains at home and abroad. The political push to decrease regulations and effectively free the “free market,” combined with the recently passed tax plan, increased positive expectations even more.

The U.S. economy grew at 3.3% in the third quarter. That was the second quarter in a row the GDP exceeded 3% — a feat that hasn’t occurred in three years. Even more impressive, fourth quarter estimates by the NY Fed expect GDP to come in at almost 4%, which is higher than anyone previously forecast.

The S&P 500 performance reflected the strength of the economy and was positive every single month in 2017. That has not happened since 1970.

PARAGON PORTFOLIOS 

An interesting surprise with this year’s rally is how many individual investors did not benefit from it. Throughout the last nine-year surge, after the devastating market of 2008, individual investors have continuously pulled money out of funds that own U.S. stocks. Nearly $1 Trillion has been pulled out since the start of 2012, according to EPFR Global, a fund tracking firm.

From a trading perspective, this has been a difficult market. Why? When markets consistently go up they don’t require a lot of trading. They require you to be in the right place and hang on.

Additionally, straight up markets, like the one we experienced last year, create false confidence amongst investors. Many people decide they are investment geniuses. And they are … until they aren’t anymore.

Investing based on luck, without a strategy, is impossible to replicate. Since no one knows in advance when the market is going to go up, go down, or run sideways, relying on luck rather than strategy eventually catches up with investors. Just like the temporarily successful gambler, it is just a matter of time before they implode and suffer significant losses. As the saying goes, no one rings a bell at the top when it is time to sell.

And then there were Bitcoin experts this holiday season. They sought me out at seemingly every event I went to. But they had a puzzled look on their face when I asked them to explain exactly “what” it was that they were investing in, or why their Bitcoin fortune would vanish if they lost their account password.

Another axiom we dodged this year was that traditional wisdom of “sell in May and go away.” If we had done that, we would have missed significant gains between May and November. That was another obstacle that could have cut your returns by more than half. Fortunately. our models kept us invested all year.

Overall, we were pleased with our portfolios. All performed well in the context of the risk level they are invested in.

Managed Income acts as the anchor to the portfolios. As long as interest rates stay pushed to the floor, its returns will be relatively low, but still better than bank rates. On a positive note, it looks as though we may see an increase in rates this year, which should help Managed Income. Regardless, its primary purpose is to provide stability for our portfolios.

Top Flight, with all of the changes we made a year ago, performed well. If you would like more detail on the three portfolios — momentum, fundamental and seasonality — that make up Top Flight, give us a call and we will happily walk you through them.

The new Balanced Portfolio and the two Private Funds both had a strong performance this year as well.

GOING FORWARD 

Our Consumer confidence or individual optimism is the highest it has been in 17 years. Investor sentiment is also the most bullish it has been as far back as we are able to track it.

This puts us in a tricky spot. Historically, we know that as investor sentiment moves higher we are approaching a market correction. The theory is that once everyone who is going to invest is invested, there is no one left to push the market higher.

The difficulty with market sentiment as an indicator is timing — you don’t know exactly when such a correction will occur. As a result, we are also watching internal market technicals but with a more skeptical eye than normal. Trend indicators, Advance/Decline lines, Industry Breadth, etc. all still look good.

Last year we updated Top Flight with our best individual stock models. In an effort to match or exceed the returns of the broad markets, we tied Top Flight’s more directly to those broad markets than we had historically. Our belief is it is better for Top Flight to accept more short-term downside volatility so that its returns over the long term will increase.

With this year’s market strength, along with the changes we made to Top Flight last year, it is important to correctly set the amount of volatility you are willing to accept. We can effectively reduce your overall volatility by decreasing your exposure to Top Flight and increasing your exposure to our more conservative portfolios. Getting that right is one of the pillars of investment success.

If you would like to talk about how you are positioned or make any changes, please give us a call. We are always happy to hear from you. Have a great 2018!

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. 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.

Calm Seas?

Posted January 10, 2018 by paragon. tags:Tags: ,
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Written by Nathan White, Chief Investment Officer

For the stock market, 2017 was a year of unprecedented smooth sailing. The S&P 500 has risen for 14 months straight, a new record. It also didn’t have a monthly decline, which has never happened before. Volatility was non-existent. The economy continues to move along with no signs of an imminent recession. Moreover, there have been no corrections in sight.

The latest global manufacturing indexes (PMIs) ended with the strongest reading in nearly seven years. Many of our forward-looking economic indicators also point to even faster growth in the coming months. New orders and export orders are at their highest levels since early 2011. The ratio of new orders to inventories matched its strongest level since June 2014. Backlogs are at the highest point since May 2010. On the back of this strong data, job growth looks set to expand further. (Source: NDR – Economics, Global Comment, 1/3/2018) 

Price pressures are strong but have not exploded, which means inflation is still modest. In 2018, we will be watching to see if the tax cuts and possible infrastructure spending will push inflation expectations higher. Interest rates are still low overall, but moving up. The bond market could become a problem in the coming year (more on that later). Other risk factors coming from our models are high equity valuations and extremely optimistic investor sentiment. Most of our models are still positive, so it remains a bull market until proven otherwise.

2017 REVIEW 

The best performing areas of the equity market last year were large-cap stocks, growth stocks and the technology sector. Small-cap and value stocks, while still up for the year, lagged the broader market. It will be interesting to see if value stocks make a comeback in 2018.

Top Flight had good performance being up 18.5% for the year. It was up about 11.9% for the last six months of the year, which was about a half percent better than the S&P 500 after fees. As you know, in 2017 we started taking individual stock holdings that comprise about 60-64% of the Top Flight portfolio. We have been pleased with the result. Our stock holdings overall averaged nearly 21.5% for the year. The stock portfolio is broken down into two segments. The first is a fundamental-based approach that focuses on stocks with the least downside risk. These stocks performed well and were up about 25.5% for the year. Considering these stocks have somewhat of a value/quality aspect, this was an impressive showing. The second segment of our stock holdings is a momentum or trend-based approach. This segment was up just shy of 18% for the year. Within this segment, the small-cap names did the best, particularly in the last half of the year. Overall, the best performing individual names were Home Depot, United Health Group, Domtar, Owens Corning, and Northrop Grumman.

Looking ahead for 2018, we like the valuation position of our equity holdings. The forward PE (price/earnings) multiple of our stock holdings is about 16.8 versus 19.8 for the S&P 500. This means our current holdings are about 15% cheaper based upon projected earnings for next year. Not a bad place to be after the significant upward move in equities.

Top Flight also includes two other strategies based on ETFs. One strategy is a seasonality approach that rotates among various sectors and industries. This strategy comprises 20-25% of Top Flight and was up about 11% for 2017. While up for the year, seasonality was our weakest performing strategy last year. However, in the prior three years it was our best performing ETF strategy. Our approach with Top Flight is to diversify by strategy. No strategy will outperform every year, and due to its solid long-term record, we still have confidence with the seasonality method. The second ETF strategy we employ is a single ETF momentum-based strategy. This strategy, which comprises 10% of Top Flight’s allocation, performed well on the year and was up over 25%. Most of this performance came from the PowerShares QQQ, which is heavily weighted in large-cap technology.

On the conservative side, our Managed Income portfolio had a net return of about three percent. Still not ideal, but we are constrained by the environment of low yields. We achieved similar returns to our benchmark, but with a lot less risk to rising interest rates. To get a higher return, we would have had to load up on risky debt, which would have only produced an additional 1-2% return. Not worth it in our estimation. We still do not recommend long-term bonds. The bond market is getting backed into a corner. As interest rates rose last year, it was short-term rates that moved up while the yields on longer maturity bonds didn’t move (or went down slightly). The difference in yield between the two and 10-year Treasury bonds is now only about a half percent. The Federal Reserve is set to raise interest rates another 0.75% to 1% next year. If longer maturity bond yields do not start going up, it won’t take long for short-term bond yields to exceed them. This is called an inverted yield curve and is often a harbinger of recession. If longer maturity bond yields do move up with the Federal Reserve actions, then 10-year Treasury could lose at least 5%, and longer maturities 15% or more. Because of these dynamics in the bond market, we are not as exposed to interest rate risk as most bond portfolios. We don’t hold any maturities longer than 10 years and the Treasuries we do hold are a hedge against any possible stock market correction. Keeping most of our fixed income exposure to shorter-term maturities allows us to increase our yields as interest rates rise without getting hit with significant capital losses.

MAKE HAY WHILE THE SUN SHINES 

The roaring stock market offers investors an opportunity to review their asset allocation. Now is the time to rebalance — not when the inexorable correction comes. Most have the tendency to put money into whatever has been doing well. To keep the proper risk exposure, investors should trim their exposure to stocks as stocks increase. One of my favorite axioms is to take what the markets give you, but unfortunately, investors have short memories. The increase in the stock market has simultaneously increased allocation to stocks. When the correction occurs, those who have not re-allocated will take a bigger hit to their portfolios than they can actually stomach. Please contact us if you would like to re-view your allocation.

We appreciate your trust and business and wish you a prosperous and happy 2018!

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. 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.

Quiet Summer

Posted July 18, 2017 by paragon. tags:Tags: , ,
Chair on beach_opt 2

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

In terms of market volatility, it’s been a quiet year so far — mild back-and-forth movement with a general upward bias. Unusually quiet.

Stocks outperformed bonds in the second quarter. The NASDAQ Composite was the leader for U.S. markets. Emerging Markets had a strong showing. International markets surprisingly outperformed the U.S. The weakest trades were commodities, gold and the U.S dollar.

The market has appeared stable because of the primary indexes like the Dow and S&P 500. Also, large cap stocks have been fairly consistent through the first half of the year.

However, under the surface, it has been difficult to latch on to any consistency. There has been a random movement between growth and value, small caps and mid-caps, sectors and industries.

In the sectors and industries, the trends have been the most divergent. The Trump trade stalled as congress stopped implementing his agenda, while the FANG trade from 2015 (Facebook, Apple, Netflix, Google) reemerged. Also, the drop in oil prices and the flattening of the yield curve contributed to the dispersion.

All in all, mostly positive so far.

2017 PREDICTIONS… 

It is always interesting to compare what the “experts” predict versus what actually happens. At the beginning of 2017, Wall Street strategists projected the S&P 500 to end the year up about 5.5%, according to Birinyl Associates.

For the first six months, the index is up 8.2%. No one predicted that only five tech companies — Facebook, Apple, Amazon, Microsoft and Google — would account for about one third of the indexes gain.

In contrast with predictions, The VIX, which measures market volatility and is known as the “fear index,” plummeted to its lowest level in 20 years.

The Fed told us they were going to keep raising interest rates this year — and they have. That factor, combined with the Trump Administration’s pro-growth policies, led investors to plan for the Ten Year Treasury interest rate to move up. Instead, surprisingly, the yield dropped from 2.446% to 2.298% over the past six months.

The U.S. Dollar was supposed to strengthen in 2017. Instead, it has dropped 5.6% since the beginning of the year.

Oil prices were predicted to stabilize after major producers agreed to limit output in late 2016. Instead, U.S. oil prices fell into a bear market in the middle of June and are down 14% year-to-date.

It seems stock prognosticators and fortune tellers still have a lot in common. This is why we ignore forecasts and base our decisions on models that interpret what is actually happening in real time.

WHERE FROM HERE? 

The last time we saw a 5% correction was after the surprise Brexit vote. You probably missed that correction if you weren’t watching the market daily — it came and reversed in a matter of days.

The Brexit correction was 250 market days ago, which set another record of the longest period of time (in the past 20 years) we have gone without a 5% correction.

This low volatility is not normal. Following the first quarter’s low volatility, we only saw two days in the past quarter where the market moved up more than 1% (April 24th) or down more than 1% (May 17th).

In my opinion, we are in a difficult spot. On the one hand, the market is not cheap. But if the S&P 500 is not reasonably priced, then why does everyone keep adding money to it?

There are three pillars holding the market up.

First, the lack of other alternatives has kept the money coming into stocks. Investment options are banks and money markets, which pay nothing. Treasury notes and bonds also pay nothing, and they have significant downside if interest rates go higher. There are annuities, which shouldn’t even be classified as investments, in my opinion. Or there’s real estate, which you have to search long and hard to find anything of value. There just aren’t many decent options.

Second, the economy is fundamentally sound. Historically speaking, stock corrections aren’t usually bad when the economy is on solid footing. If we start to see signs of a recession on the horizon, the risk to the market increases significantly.

Third, the Trump hope. The market took off when Trump got elected. That didn’t make any sense if you read the papers or listened to the nightly news. However, it did make sense to investors. When the market rallied, investors believed Trump was going to reduce taxes, reduce regulations, fix healthcare and move our economy back toward its free market roots.

Then congress got involved and the Trump hope waned. That is where we are now. However, there is still some of that hope intact. Many investors no longer believe his changes are a slam-dunk, but they do think the changes still “might” happen. The fact it is still a possibility is the third pillar holding up the market.

These three pillars are what’s making an expensive market get more expensive. This is why every time the market acts like it is getting ready to sell off … it doesn’t. So far, everyone who has been sitting on the sidelines lamenting they are missing this run, jumps in when the market starts to go down.

How long will this last? It has already lasted longer than normal. It can keep going until it dies of exhaustion or one of the three pillars is taken out.

IN THE MEAN TIME 

Rule one: Don’t worry. It doesn’t change anything. It makes you feel bad. It is completely pointless.

Rule two: Stick with the basics. Invest according to your risk tolerance. Make sure how you’re invested is aligned with how much money you’re willing to put at risk. Even though it seems like a great idea to get more aggressive when markets are good (like they are now), don’t take the bait. Stay the course. This is a long-term project. Stay invested in a way that makes sense through good and bad market environments. Feel free to reach out to us — we are always happy to re-evaluate your investment strategy and risk tolerance.

Finally, if you haven’t had a chance to look at our new Private Income Fund, give us a call. It is a good option to consider in this market environment.

Have a great summer!

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. 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.

Mid-Year Review And Outlook

Posted July 12, 2017 by paragon. tags:Tags: , , , ,
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Written by Nathan White, Chief Investment Officer

Volatility in the equity and bond markets has been at historic lows. The economy has been strong enough to support stocks, but not too strong to disturb bonds. While still on the expensive side, equity markets are being sustained by growing earnings. They are also still anticipating an increase in economic growth based on upcoming fiscal and policy measures. If the intended reforms keep getting delayed, it could result in a return of volatility in the second half of the year.

Global growth has been improving, and so far looks to be around 3.4% for the year compared with 2.3% for the U.S. As growth in places like Europe has improved, the ECB is setting up to follow the Fed’s footsteps in tapering its extremely accommodative monetary stance. Central banks are becoming more hawkish and could be worried about financial stability. That means they need to keep/start tightening to stay ahead of any issues and build up their ammunition. But for now, asset prices keep improving in this low inflation environment.

Recently there have been indications that the leaders of the first half of the year seem to be overdone. Whether it is simply profit taking or an outright rotation remains to be seen. We could see a churning process throughout the summer as the market tries to digest the first half gains and anticipate the environment and factors that will affect the second half of the year. For now, 75% of industries are still in uptrends. The majority of our models are bullish, but we have seen deterioration in some areas. We would like to see a broader advance across all segments rather than just the narrow leadership that has occurred. Our sentiment models are flashing caution, as they are in the overly optimistic zone. Earnings growth must continue in order to support current high valuations in the face of rising bonds yields.

Growth names doing well in a low economic growth enviroment? 

On the face of it, you would think growth stocks would do better in a high-growth environment, as opposed to the current moderate economic growth conditions. Well, markets aren’t always logical. As the stocks that benefitted from the Trump rally stalled along with his reform agenda, growth stocks took over and became first half leaders. Sectors such as Technology and Healthcare have been the best performers. In an environment of moderate growth, investors placed a premium on names that are currently growing. Much of the focus was concentrated in large mega-cap names such as Facebook, Apple, Amazon, Microsoft, and Google. These five names accounted for about one third of the S&P 500’s year-to-date gain. They are basically defensive names in a low-growth environment. Our exposure to these names has accounted for most of TopFlight’s gains as well.

Our seasonality model, which has performed well the last few years, was a laggard in the first half of the year. The energy sector tends to dominate this model in the first half of a year, but energy stocks have been poor performers due to the drop in oil prices. Seasonality signals are not high conviction through summer months. Small-cap stocks have also been trailing large-cap stocks, as they are more economically sensitive. We have observed this in our small cap momentum stocks as well.

Outlook for the second half of the year 

If a rotation out of the first half leaders develops, we could see a move from growth into value. This would better benefit the energy and financials relative to the technology and large cap growth names. We have had a slant toward value and small-cap in the first half of the year. These stocks will potentially benefit from a shift of growth to value in the second half of the year. We will keep exposure to the high-flying names for now, but want to keep exposure to the value names that have lagged, as they could benefit from a rotation in the second half of the year. If the Trump agenda gets close to becoming reality again, then our small-cap and value exposure could take off.

With oil breaking down, it creates an opportunity in the energy names. Sentiment on the sector is extremely low, and large financial traders drive oil prices in the short run. In the end, low prices are the cure for low prices in commodities. We don’t know where the bottom will be, but are watching this sector for potential plays in the stronger names.

Managed Income 

Interest rates are slowly heading higher. The Fed has raised rates twice this year and is indicating one more increase later in the year and additional ones next year. The Fed also announced it will start to reduce its massive holdings later this year. This will put pressure on bond prices — warranting caution with one’s bond exposure. We still do not recommend buying long maturity bonds, especially as yields have fallen. The extremely low yields are still not worth the risk of owning at these elevated prices. However, we are still in a waiting game until we can lock in higher yields. We have a significant amount of capital to deploy, and we want to wait for a more favorable environment. As yields have come down on longer maturity bonds, they have moved higher for short-term bonds due to the Fed raising rates. A flatter yield curve calls for shifting into cash rather than bonds. We favor short-term corporate bonds where the yields have moved up but the prices have not. We only want to use Treasury bonds as protection as opposed to an outright investment.

We are watching some oversold names in the REIT and telecom space. For example, in the heavily damaged retail space, Tanger Factory Outlet Center (SKT) is looking attractive. With its modern stores and attractive locations, it has been drawing customers away from traditional malls. Its retail tenants comprise unique desired brands along with a discount aspect enabling Tanger to boast a 95% occupancy level. The stock also has a 5.2% yield.

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. 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.

Market Mayhem

Posted October 28, 2015 by paragon. tags:Tags: , , , ,
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Written By Dave Young, President and Founder of Paragon Wealth Management

This article is from Paragon’s Third Quarter Newsletter.  If you are interested in receiving a free printed copy of Paragon’s Newsletter, please click here

It’s been a difficult three months. From July through September, investors worldwide faced a market with vicious volatility and the worst performance we have seen in four years. As a group, hedge funds posted their worst performances since 2008.

Prior to this, the benchmark S&P 500 had gone 44 months without suffering an official correction, which is defined as a decline of 10% from its high. That streak ended on Aug. 24 when the index was hit with an intraday plunge of 1,100 points.

It is interesting to note that while the S&P 500 index itself declined — 12.4% from its highs — just over half of the stocks that make up that index were actually down more than 20%. This disparity shows the actual breadth of the decline.

Most indexes and asset classes were down for the quarter. The large cap stocks of the S&P 500 were actually a bright spot — only losing -6.9%. The NASDAQ was down -7.3%, U.S. Small caps lost -11.9%.

The international EAFE index lost -9%, while the emerging market index declined -12.1%. The broad-based GSCI commodity index lost -18.5%. Australia was down -15%, Canada -20%, Singapore -19.5%, China -22.7%, and Brazil -33.6%.  Gold mining companies lost 25% and silver miners lost 28%.

Why The Drama?

Last quarter, we were wrapping up our annual Greek drama. This quarter, the worry shifted to China. China’s stock market languished for much of the decade, but with encouragement from government officials, the Shanghai Composite Index went up 152% from June 30, 2014, to its peak on June 12, 2015. It is amazing what impact government meddling can have.

It was a meteoric rise by any standard, with a buying frenzy fueled by margin debt. But the index quickly shed 32% of its value in less than one month, forcing the government to implement additional measures to stem the decline.

China is the world’s second largest economy, and its growth rate has been slowing. Although China officially announced that Q2 GDP expanded by 7.0% in Q2, few believe the official report.

The most immediate impact has been on the emerging market currencies, which are grappling with a China slowdown and a possible Fed rate hike.

In addition, China surprised markets by devaluating its currency on Aug. 11 by about 3%. China’s central bank billed the surprise announcement as a market-oriented reform and a one-time move. Almost everyone else viewed it as an attempt to shore up their sagging economy by increasing their exports.

The Federal Reserve is also being blamed for the sell-off. In late July and early August, markets seemed resigned to the idea the Fed was set to boost rates at its Sept. 17 meeting. When they didn’t raise rates, it led to a circular argument as to whether that was positive or negative for the markets — which ultimately led to more uncertainty.

In my opinion, Greece, China and the Fed were just excuses for a sell off. In reality, we were in the seventh year of a bull market that was overdue for a correction.

The U.S. economy is doing OK — but not great. More importantly, market internals have been deteriorating. Valuations have been hitting the upper end of fair value. Earnings growth has slowed. And the weakness in the energy sector and the stronger dollar have both provided headwinds for the market.

Paragon Portfolios

We ended last quarter’s newsletter by saying, “We cannot see into the future.  However, as of today, (June 30), we are conservatively positioned. Based on our indicators, it would make sense that the market may continue to move sideways or that we could see a 15% to 20% decline from these prices. Our expectation is that this may play out over the next three months.”

As a result of our defensive positioning, we were able to avoid most of the carnage.

Managed Income Portfolio, our conservative portfolio, generates returns three ways.

First, Managed Income captures yield whenever available from government and corporate bonds. With interest rates being held down by the FED, most bond investments haven’t made much sense for some time. The risk-to-reward ratio for bonds is upside down and will stay that way until interest rates reset higher.

Second, Managed Income generates returns from several less risky, equity income oriented asset classes. Those are high-yield bonds, utilities, real estate, convertible and preferred stocks, MLPs, closed-end funds and some equities. The current sell-off temporarily eliminated most of these options because the market was so weak. This will likely change when the equity markets start to recover.

Third, for a very limited portion of the portfolio, Managed Income generates returns from select equity positions. Those opportunities have not been available with the market in a downtrend.

Managed Income is down -3.4% year to date. The portfolio generated a compound annual return of 5.09% from its inception Oct. 1, 2001, through Sept. 30, 2015. Its total return for that period is 100.4%.

Top Flight Portfolio is our flagship growth-oriented portfolio. Considering the difficult quarter we have just been through, we are very pleased with its performance.

This portfolio is driven by two sets of models. The first group is made up of eight primary models, each of which is either on a buy or sell signal. These models measure price momentum, volume, advance decline ratios, sentiment and a host of other market indicators. These models took us to a 50% invested status about four months ago.

The second group of models provides a ranking system, which rates about 100 asset classes. These asset classes give us potential exposure to almost every investment category available. That rotation between asset classes also helped our performance.

Top Flight is only down -0.46% year to date. Its compound annual return is 11.45% from Jan. 1, 1998, through Sept. 30, 2015. Its Total Return for that period is 584.7% versus 174.7% for the S&P 500. (See our track record page for appropriate disclosures.)

Going Forward

The good news is there can be advantageous opportunities created by the sell-off. We will work to capitalize on them as they become available.

When the market stabilizes and the potential reward justifies the risk, we will re-enter our investment positions. We do not attempt to forecast; we only react to what the market is actually doing at the time. We will continue to follow our models.

Successful investing is about playing offense and defense — each at the right time — and keeping a long-term perspective. Patience is key.

We appreciate your confidence in us. Feel free to reach out to 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. 

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.

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