Category Archives: Oil

Back And Forth

Posted June 4, 2015 by paragon. tags:Tags: , , , , , ,

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.


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.


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.


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. 

Uncle, Uncle!!

Posted February 4, 2015 by paragon. tags:Tags: , , , ,
Oil Well

The dramatic drop in the price of oil over the last few months is captivating the markets. It seems it is coming down to a giant game of chicken to see who will cry first: Shale producers, unstable oil dependent export countries such as Nigeria, Venezuela, Russia, or other unconventional sources such as deep-water and oil sands projects. A massive supply glut that has been building for the last few years has finally come to a head. On Thanksgiving Day, to the dismay of many OPEC members, the Saudis decided against a production cut and in favor of letting the price fall in order to maintain their market share. They have decided to let the market do the work in taking out the competition. The competition to OPEC from the so called unconventional sources (e.g. shale, deep water, oil sands) is responsible for most of the global production growth over the last few years.

There is no way to know where oil prices will bottom. The drop is in a spiral that has tremendous downward pressure in the short-term and trying to call the bottom is nearly impossible. Everyone is producing as fast as they can while they are still alive. This causes inventories to continue to build in the short-term thereby exacerbating the supply situation and causing the price to continue to fall further. Drilled wells are literally “sunk costs” and you might as well keep pumping and getting something for them. However, new wells are discouraged from coming online at these low oil prices. The economic effects are just starting to be felt on the oil producers and it will take at least a few quarters to play out. In the end it is as it has been said, the cure for low prices is low prices. Ultimately it is more of a question of how long rather than how low.

The Saudis can withstand the drop with a few caveats. They may act sooner if the price drop creates systemic effects that threatens themselves in a geopolitical manner. The dramatic drop in oil is now getting so low that it is causing tremendous pain for oil dependent countries like Venezuela, Iran, Nigeria and Russia. The contagion effect from a crisis in these countries is becoming a significant concern. If the concerns for economic stability become too great you could see OPEC act as it is in no one’s best interest to have a significant devastation to the global economy.

Ultimately, oil prices are unsustainable at these levels and lower. How does a one percent excess of inventory levels lead to a fifty percent drop in the price of oil? In the end low oil prices are self-correcting as the effect on high-cost producers reduces supply in the out months and years. The big question long-term is whether $80 oil will be the new $100. The oil market is currently oversupplied by 2 million barrels a day. The irony is it really doesn’t take much disruption to take out that oversupply – which would cause prices to ricochet back up. Nigeria, Libya and Venezuela, produce about 5 million barrels a day and all are fragile situations that are hurting significantly. Much of the U.S. shale production is on the ropes, especially among those who came late or in low quality areas. Cheap capital and high prices made the shale boom viable but now the situation is the opposite. Some shale production will always remain but much of it could fail. The majority of shale wells are depleted within two years requiring constant drilling to keep up production. The constant drilling requires continual capital infusions making it questionable even in good times. On December 11, Bloomberg reported that a Deutsche Bank analyst report predicted that about a third of junk rated energy companies may be unable to meet their obligations at $55 a barrel. When prices recover shale will not recover as quickly now that its weaknesses have been exposed.

As I mentioned in a previous blog post, much of the energy boom in the U.S. has been financed with cheap credit to due to the easy money policies of the Federal Reserve. The process of normalization has caused the dollar to rapidly strengthen because our rates are higher relative to other developed countries. Since commodities like oil are priced in dollars a rising dollar pushes the effective oil price down. Rapid currency movements can create economic stress with major casualties. Normally the Fed could combat this by lowering interest rates but rates are already at zero.

Although the price of oil is down over fifty percent since last summer the current panic indicates that a bottom could be found in the first quarter of 2015, if not within the next few weeks. Whether that means it dips into the $20 or $30 range first is a real possibility. However, there is the very real probability that prices could recover quickly. Shale production growth will come off faster than expected. As mentioned previously, most of the current oversupply is due to shale production which can be brought online much quicker than conventional oil projects and requires constant drilling to maintain production. Now the lower price and higher financing costs will preclude new shale production from coming online thereby reducing the future supply growth. From a technical point of view, the price of oil itself is in a panic sell-off with extremely negative sentiment. As the supply/demand dynamics eventually change it could cause the price to snap back as quickly as it went down. As I mentioned earlier the surplus of oil is only one percent above daily demand. That is literally on a few hours of worth of consumption! Oil fields are always in a natural state of decline and so require new means of production to offset the declines. The demand for oil grows faster at $50 a barrel than $100 and demand was growing when the price was over $100. The net effect of lower oil prices is a stimulus to the economy.

So what is our current approach in regards to energy? We are currently altering our exposure in the energy space to reflect the new reality and opportunities. Along with everyone else, we have been surprised by the dramatic drop in oil. The impact on energy companies’ shares has had a negative short term effect on our performance but is also creating great opportunities as the quality assets get taken down along with the weak ones. The challenge in the short term is whether some version of a crisis develops because of the contagion effects of the economic damage done to energy producers or export dependent countries. We will use any continued drop to gain exposure to quality assets in the space but in a patient manner as a bottom has not yet been put in. We want to take advantage of the sell everything related to energy mindset that is currently unfolding. We favor conventional and well capitalized energy producers and servicers and will be moving our exposure in this direction.

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.

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