As seen in Paragon’s second quarter 2008 print newsletter
Written by Dave Young, President
The first half of the year made life difficult for investors.
Worries about the financial sector scared the market down during the first three months. Just as everyone decided “life was not over as we know it,” the market rallied and came back to life during April and May. this was short-lived as high oil prices and inflation prospects gave us one of the worst “June’s” in history.
For the first six months of the year, the S&P 500 finished down -11.9% and the Dow Jones Industrials ended down -14.4%.
Our portfolios performed exceptionally well last year. That’s great, and most of our clients appreciate it.
But, in this business everyone still asks the question, “What have you done for me lately?”
Paragon’s Conservative Portfolio
Our conservative portfolio, Managed Income, has stayed in capital preservation mode. As a result, we have held more cash than normal for the first six months of the year. We have taken selective positions in high yield bonds, dividend paying funds and natural resources. As valuations have reached the ridiculous level, we have been taking some small positions in the financial and real estate sectors. Managed Income is down -1.89% through June 30, 2008. The Managed Income portfolio has done a great job so far this year, considering its first priority is to preserve capital.
Paragon’s Growth Portfolio
Our growth portfolio, Top Flight, has been invested in Canada, Brazil, Steel, Transports, Mid-cap stocks, real estate and energy, to name a few areas. We have also held some excess cash for protection. We have started to see a shift from the international markets back to the U.S. Market. So far this year, our stock selection has added more value than our cash allocation. Recently, we have been reducing our energy exposure and adding more cash. When our models move more positive we will begin reducing cash and increasing equity exposure.
For the first six months of 2008, our Top Flight Portfolio is down only -4.7%. In a very difficult environment, Top Flight actually gained 4.36% over the past three months.
While we are not thrilled to be down at all, with our benchmark the S&P 500 down -11.9% and the Dow Industrials down -14.4% for the first six months, Top Flight has performed well. (See Paragon’s full track record for more details).
Bear Market #34
The bear market we discussed last quarter has continued, and everything we talked about still applies. Click here to read the article about bear market #34.
Since bear market #34 began, over eight months ago, the S&P 500 has lost -16.5%. It has continued for 261 days through June 30, 2008.
Since 1981 the median bear market decline has been -24% and lasted a median of 204 days. However, since 1900, the median bear market has lasted 363 days and taken the Dow Industrial down by -27%. As you can see, this bear has lasted longer than the more recent bear markets, but has been shorter than the historical bear markets dating back to 1900. Also, its decline thus far has not been as deep as normal.
I wish I could tell you when this bear market will end, but unfortunately, no one knows that answer. No one rings a bell to tell us to sell at the top or buy at the bottom. There are two things that we can say with certainty. First, this bear market is closer to being over today than it was yesterday. Second, when a bear market finally ends, historically there are always significant gains.
Investment performance reflects time-weighted geometric composite returns of actual client accounts. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions. The Lehman Bond Index is a benchmark index made up of the Lehman Brothers Government/Corporate Bond. Benchmarks are used for comparative purposes only. The Paragon Managed Income Portfolio is not designed to track the Lehman Aggregate. Past performance is no guarantee of future results. Investments in securities involve the risk of loss.