Tag Archives: bond market

2015 1st Quarter Newsletter

Posted April 21, 2015 by paragon. tags:Tags: , , , , ,
Decisions Drive Destiny, Paragon Newsletter 1Q

Investing Evolved

A dynamic and proactive way to invest.

BACK AND FORTH 

by Dave Young, President

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-timehighs 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 see full track record and disclosures on page 7.

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.

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.

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.

Paragon’s Advice on Bonds

Posted October 27, 2011 by admin. tags:Tags: , , , ,

Luke Tait and Dave Young from Paragon Wealth Management discussed bonds in this short video. Watch the video to listen to their advice and learn what you should do as an investor. 

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.

Savers Beware

Posted July 8, 2011 by admin. tags:Tags: , , , ,
The Fed Building

 photo by cliff1066

Written by Nathan White, Paragon’s Chief Investment Officer
Taken from Paragon’s 2Qtr 2011 print newsletter  

Bond market yields are lower now than when the government was running a surplus a decade ago. Something is wrong with this picture. If you didn’t know otherwise, the low yields might lead you to believe that our national debt is low and sustainable. Further, just looking at the current yields,  you might think that our future budgetary concerns have been resolved due to significant entitlement reform.

THE FEDERAL RESERVE’S INVOLVEMENT

If real reform has not happened, then why hasn’t the bond market called the government’s bluff and reacted negatively to the prospect of future insolvency?

Part of the answer is in the question – future. Currently, everything is working. There is no crisis, and so he market is behaving as such. The government has a habit of only dealing with problems when they become crises. On the other hand, maybe the reason the bond market has not signaled caution is because a rather large participant (and that’s putting it mildly), namely the Federal Reserve, has been buying pretty much all of the debt. A government entity is buying government debt thereby expanding its already massive balance sheet.

I don’t care how you spin it, but something is not right with that picture. 

The Federal Reserve’s second round of quantitative easing ended in June. Ironnically, the ramifications of the program ending, along with a slowdown in economic growth, continued Eurozone soverign debt worries, and the U.S. debt ceiling fight, have caused people to flock to the safety of Treasuries sending yields back down to historic lows.

The Fed plans to continue maintaining its balance sheet by reinvesting principal and interest in an attempt to provide support for the anemic recovery. At this point, all further actions by the Fed produce lower marginal gains for the risks taken. The Fed is in no hurry to reduce its massive balance sheet, and it looks like it will not raise rates until well into 2012 and possibly 2013. I don’t believe the Fed will act until unemployment is significantly lower.

What will they do if the market forces them to act?

The real test of the Fed comes when they need to tighten monetary policy, but the economic and political climate are placing heavy pressure against such a move.

Volcker faced this climate in the late 70’s and early 80’s when inflation was soaring, and he had the guts to make the right move. This caused short-term pain, but long-term prosperity. Will the current Fed do the same when its time comes?

Who will fill the void now that the biggest buyer of new government debt is gone? Will foreigners continue to step up to the plate along with banks and the public? If market participants start to perceive that the U.S. obligations are nearing the tipping point, you will see rates rising ahead of Fed action.

If and when this unfolds is difficult to assess. It could be in a month, a year, five or 20 years from now. 

To be continued next week…

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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