Tag Archives: Greece

PLAYING DEFENSE

Posted July 1, 2015 by paragon. tags:Tags: , , , , , , ,
shutterstock_121900894_opt

It’s hard to believe we just celebrated the Fourth of July. KaNeil reminded me we’re only six months away from Christmas! Time flies fast.

The broad stock markets continue to be relatively uneventful. From November 2014 through June 2015, the Dow Industrials has been stuck in a trading range. The Dow has repeatedly moved back and forth between 17,700 and 18,300 — back and forth, back and forth, and back and forth again. It feels like we’re watching a tennis match. As of June 30, the Dow once again hit the lower end of that range at 17,619.

Essentially, there is a war between good news and bad news that is volleying the market.

The good news is that the Global PMI indicators continue to be strong, indicating that the global economy is still expanding. Our tape composites are still positive with 68 percent of the sub-industries trending higher. Overall, the market trends are positive, even though they don’t look terribly healthy.

Europe, emerging markets, commodities, and the U.S. Dollar all had a strong first half of the year.

On another positive note, our growth portfolio, Top Flight, has turned in a better performance than the S&P 500 in this sideways-moving market — even though Top Flight has held a significant amount of cash. Over the past three months, we held between 25 percent and 50 percent cash, depending on the day.

In addition, Managed Income is defensively positioned. Its protective allocation paid off as interest rates moved higher in the second quarter (after a fake-out with rates moving temporarily lower rates in the first quarter). While Managed Income remained relatively stable, the increase in interest rates caused long-term bonds to lose 8.3 percent of their value, their worst quarterly performance since 1981.

Why So Defensive?

Why are we holding so much cash? Some clients have called to make sure we haven’t forgotten their accounts. I assure you we have not. We are holding cash because we are currently in a relatively defensive position.

Current market concerns:

  • •Seasonality. We track seasonality within the market on an ongoing basis. Every market sector has a seasonal bias. In other words, certain sectors underperform and outperform during certain months. Historically, July is one of the worst months to be invested. July is difficult because many traders take the month off. And because there are fewer traders, markets can move quickly to the downside.
  • •Rising rates? Stock valuations are significantly affected by competing investments. When interest rates go lower they provide fuel to push stocks higher. The opposite occurs when rates go up. While we don’t anticipate rates shooting up quickly, the fact that they are trending up rather than down is a negative for stocks.
  • •Puerto Rico just announced it would prefer not to pay its debts. If this doesn’t get resolved, it could negatively affect the municipal bond markets.
  • •China “A shares” are in a bear market, down 25 percent from their peak. Generally speaking, everything China does has a direct or indirect influence on the U.S. market.
  • •The Dow Jones Transports are in a bear market, down 12 percent in the past six months. According to Dow Theory, the transports are often a leading indicator for the rest of the market.
  • •Oil is in a bear market.
  • •Stocks are usually strong in the seventh year of an incumbent president. This is the worst start to a pre-election year since 1947.
  • •Earning expectations are weaker than they have been. The 12-year high in the Dollar may negatively affect some earnings. Earnings drive stock prices.
  • •The S&P 500 has gone 914 days without a 10 percent correction. That is the third-longest bull market run in history.
  • •Stock valuations are high by just about every measure.

 

It’s All Greek To Us

I am constantly asked about Greece and its impact on the markets. While Greece is a fun place to visit, its politics and fiscal mismanagement are extremely problematic for investors. This is not news to students of economic history.

Since Greece became an independent nation in 1829, it has been in default (or rescheduling its debt) 51 percent of the time through 2006.

The most recent round of dodging debts started in 2009. Since then, Greece and its creditors — the other countries in the European Union — have been going back and forth in negotiations. Since 2009, Greece has been bailed out twice while making promises to do better. It never does better. It doesn’t want to cut back on spending and doesn’t want to pay loans back. So far, it’s akin to the relationship between an addict and an enabler.

Now we are at the third potential bailout. The arguments are the same as the last two bailouts. Nothing has changed. The odds are high that something significant may happen in the next month or two.

In the overall scheme of things, Greece doesn’t matter much. In 2014, the U.S. exported $773 million in goods to Greece. That compares with a U.S. economy that totals more than $17 trillion.

The problem is that if Greece collapses, everyone starts looking at other places that are similar, like Spain, Italy and Portugal. They extrapolate Greece’s political problems onto those countries and start selling them as well. If Greece’s decline creates significant tremors in the credit markets, it could create a major problem. Even though Greece itself is “no big deal,” a contagion effect could cause grief in the global markets.

What Does All This Mean?

Let me be clear. We cannot see into the future. Anyone that tells you as such is likely delusional.

We manage investments by measuring risk versus reward. When our models and indicators become negative, we reduce market exposure by selling investments and moving toward cash. We do that because there is too much risk for the potential reward.

Conversely, when there is more potential reward for the amount of downside risk, we move toward being fully invested.

As of today, 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 percent decline from these prices. Our expectation is that this may play out over the next three months.

As the issues I mentioned become resolved 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 appreciate your confidence in us. Feel free to reach out to us if you have any questions or concerns.

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.

It’s All Greek To Me

Posted June 14, 2012 by admin. tags:Tags: , , ,
Greece

photo by spixpix

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

The much anticipated Greek elections this weekend promise to produce some potential market fireworks next week.  It seems to be a toss-up as to what the outcome will be and even if the pro-Euro side wins and the market rallies significantly it could be very short-lived.  Right now in the short-term bad news is good news for the market because it increases the odds that the central bankers will come to the rescue.  Case in point – today the markets were tailing off mid-day until a rumors spread that central banks were planning coordinated action in response to what might happen in Greece over the weekend.  The Dow immediately shot up about 200 points in minutes.  Markets love their sugar!

Trying to predict what will happen to the markets in the face of all this uncertainty and volatility can be very hazardous.  It can be very easy to make the bear case but then again so many are making the bear case and buying very expensive protection that perhaps the risks are priced in and any news to the contrary creates violent short squeezes.  In the end the Europeans won’t willingly throw themselves off the cliff.  However, they only move when the markets force them to and by continually dancing next to the cliff they run the very real risk of making a mistake and falling off.  I could go on making the bull and the bear case as both sides have valid points that I agree with but in the end I don’t know how it will all play out.

So what’s an investor to do?  In the long-run (which is what investing is) these short-term “events” won’t even matter.  Markets recover as they always have.  However, these headline events stir people’s emotions and then mistakes are made – something I have talked about in length in previous writings.

We have been raising cash in our portfolios to take advantage of the possible volatility events created by the European crisis.  I look at volatility as an opportunity rather than a risk.  Any sell-off based upon a Greek or Spanish meltdown would probably tend to be violent and short-lived and force the final endgame of the European mess.  As equities are already cheap they would become absolute bargains and this could be a great opportunity and therefore we feel it is prudent to have some dry powder!  However, as stocks are already cheap and pessimism abounds markets could already have priced in the risks and the central bankers could act before a meltdown causing the markets to move higher.  For this reason were are still 75% to 90% invested across our various portfolios/models.  This way if markets move up we will participate and if they move down we have money ready to be put to use.  Seems to be the best trade-off at the present time.

Over the horizon the elections and “fiscal cliff” worries promise another possible round or “opportunity” or volatility…

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.  

Crazy Day on Wall Street

Posted May 7, 2010 by admin. tags:Tags: , , , , ,
Greese

photo by eustaquio santimano

Written by Dave Young, President of Paragon Wealth Management

Yesterday we were reminded that investing in the stock market still involves volatility.

For the past 14 months we’ve seen a phenomenal rally off the March 2009 lows. Yesterday we saw the market “freak out” bringing back memories of the 2008 bear. The VIX increased by 60% yesterday and hit almost 41, which indicates extreme fear.

Why all the drama?

Greece hasn’t yet figured out that socialism doesn’t work and has come asking the more responsible Euro countries to bail them out of their financial mess. The other Euro countries agreed to bail them out with a 141 billion dollar package, but told them that they would have to cut back on spending and implement an austerity package. That caused rioting in the streets (the Greeks just wanted the money they didn’t want to cut back on anything). The rioting was picked up by the media and played over and over all day long.

The news and video from Greece caused traders and investors to assume the worst.

What if this rescue of Greece doesn’t work? What about the other “spend more than you have” countries like Italy, Portugal and Spain? Are they next? As traders assumed the worst, they panicked and sold their investment positions. That took the market down about 3%.

Then, just to make it interesting, there were some problems on the trading desks. No one is sure what happened, as it is still being investigated, but the rumor is that there were some huge trade errors that took the indexes down hard and fast. Then, just as fast as they went down, they recovered.

The market went from being down 3% to 5% to 10% in a matter of minutes. Then, just as fast as the market corrected itself, it returned to being down only 3%.

Even though the drop was temporary, the HEADLINE NEWS will most likely say that the Dow dropped 1000 points, which is the biggest drop since the 1987 crash.

So what’s next?

I wish I knew, but I don’t. In the very short-term (days), depending on the news, this market could move harder down or swing right back up. Yesterday’s market was very unusual.

I can speculate though. If this is like the majority of panic sell offs in the past 100 years, then calmer heads will prevail once traders decide that it’s not as bad as everyone imagines. If that occurs, then sometime in the next few days or weeks, the market will recover its losses.

On the other hand, perhaps we are on the beginning of a contagion that will take the market lower. No one really knows.

In the coming days the pessimists will be outlining “end of the world” scenarios and the optimists will ignore the market action altogether.

One thing for sure, if you act on your emotions you will likely do the wrong thing.

The bottom line, we won’t sell in a panic situation. That is always a mistake.

However, if this sell off does continue to unfold and gain momentum, then we will follow our models and rely on them to guide us through this.

Feel free to call us 800-748-4451 if you have any questions or concerns.

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.

Blog Role

Meta