Tag Archives: interest rates

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.

Oh, What A Tangled Web We Weave….

Posted December 12, 2014 by admin. tags:Tags: , , , , , ,
Pick Pocket

Written by Nate White, Chief Investment Officer of Paragon Wealth Management
It looks like we are finally starting to see the consequences of the Fed’s great monetary easing experiment. Getting in was easy – getting out maybe not so much. The fear throughout the Fed’s great adventure was what type of unforeseen consequences could the happen as a result of QE and artificially low interest rates. Now we are starting to find out. Along with others, I have said for some time now that QE has distorted the markets. It has recapitalized the banks, which I believe was the main purpose, but the exceptionally low rates and asset purchases have supported asset prices and distorted credit markets as well. The need for yield has caused massive amounts of money to flow into the corporate bond space. Almost all corporations have been able to borrow with ease. Many projects that otherwise would not have been taken on had rates been more normal have received the green light. Due to lack of robust economic growth much of the borrowed corporate credit has gone into share repurchases rather than being used to expand business. It’s hard to blame the companies though for borrowing as much as they can at these low rates. The process of normalizing monetary policy (i.e. ending QE and raising interest rates) has caused the dollar to strengthen because our rates are higher relative to other developed nations. The other developed nations such as Europe and Japan are just beginning their QE programs which causes their currencies to weaken relative to the U.S. Since commodities like oil are priced in dollars a rising dollar pushes the effective oil price down. A stronger dollar can also encourage capital flight from developing nations and decreases the attractiveness of US products and services. The dangers of a credit bubble in high yield space and perhaps other corporate areas could be coming to light. (http://www.bloomberg.com/news/2014-12-11/fed-bubble-bursts-in-550-billion-of-energy-debt-credit-markets.html) The low level of interest rates has created a huge demand for anything with yield.  Junk rated companies have been able to borrow with ease.  Higher rates would have discouraged this.  Example: Much of the energy boom in the US has been financed with this cheap credit.  This caused production and supply to surge causing an oversupply situation with oil. Exacerbating the situation has been the aforementioned rise in the dollar. When the prices of anything goes down it is good for those who use or buy it – until a certain point. As oil drops it lowers consumers fuel costs and is good for all industries that use it as an input. However, at some point the positives from the drop in price become a negative. If the drop in energy prices gets so low that it causes the energy companies to fail on a massive scale it then affects the economy as a whole.  At some point the crash of an industry can become systemic and affect the economy as a whole – think the dot-com/tech and real estate bubbles. Whether this happen spill-over effect happens in relation to what is going on in the energy space remains to be seen. The same effect can be seen on a geo-political and global economic level. The dramatic drop in oil is now getting so low and causing tremendous pain for countries like Venezuela, Iran and Russia. At first we don’t shed a tear because these aren’t our Favs, but what if Putin and the Iranian clerics do something drastic if they feel they are backed into a no win situation?  Venezuela is getting close to default and that is having ripple effects on other emerging markets. I don’t mean to be so tough on the Fed as I don’t believe they are the cause of all our present or future troubles.  Nothing happens in isolation and they are one piece of the puzzle as there are many other factors at play (e.g. regulation, fiscal policy, etc.).  Let’s hope the adjustment back to a more normal monetary policy can be made without too much pain and disruption. Could what is currently happening with the energy markets be a sign of things to come? How far does the unraveling go?  Does it become systemic or not?  How much is already priced in?  No way to know until after the fact.  One thing for certain is that these type of events will create opportunities in the markets that we have been waiting for.
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 ffto 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.

Market Trends

Posted September 12, 2013 by admin. tags:Tags: , , , , ,
Scary market trends

Over the past three years the markets have been very correlated.  Not all, but many of the sectors have moved up or down in lockstep fashion.  The stocks in the S&P 500 have been the most popular making that index very difficult to beat.

Those correlations seem to have started to change, ever since August 1st, or about the time interest rates started moving up.  Increasing interest rates have historically disrupted many of the standard market correlations.  It will be interesting to see if the S&P 500 will be able to continue its dominance going forward.

Since August 1st:

  • The S&P 500 is down 0.3%
  • Small Cap stocks are up 1.2%
  • Cyclical stocks are up 2.9%
  • Consumer stocks are down 2.9%
  • Utilities (supposedly conservative) are down 6.8%
  • Real Estate (also conservative) is down 4.0%
  • Telecom is down 4.9%

Bottom line, sector correlations are more dispersed than they have been.  Conservative sectors are getting beat up.

At Paragon, we like to see less correlation between the sectors.   Uncorrelated markets give our models much more to work with.  It will be interesting to see if these trends continue.  Keep posted.

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.

 

QE or Bust

Posted September 13, 2012 by admin. tags:Tags: , , , ,
The Federal Reserve Chairman

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

The Fed announced its widely anticipated QE3 today. Much of the rally over the past
few months has been built on expectations of another round of QE and we saw the market gain another 200 points for the day.

There have been many valid risks throughout the year
(Europe being the largest) that have made investors hesitant to join in the
game, but now that the year is getting closer to the end they are feeling like
they can’t miss any more of it.  The US markets have broken through the
years high on weak volume and with central banks around the globe now getting
ready to provide more fuel for the fire there could more upside to come.
So many are waiting for a pullback that it just might not come…yet.  It is
looking more and more like the pullback might not come until after many have
finally capitulated and bought and by then the S&P could easily be in the
1475 -1525 range.

Our models have been primarily bullish all year but with
some reservations due to the possible severe negative consequences that would
unfold if Europe went off the cliff or the slow recovery in the US got
derailed.  To hedge against these risks we have been holding around 10
-15% cash in our Top Flight model for some time and 10 -20% cash in our Managed
Income model.  The cash holding has been a drag versus the S&P 500 for
Top Flight and caused it to lag, but considering the possible risks it was an
appropriate trade-off.  The Managed Income model has performed well for the
year while avoiding Treasuries and we have been taking some profits as income
oriented assets are getting pretty rich at these levels due to investors search
for yield.  At this point the risk of continuing to own many of these
assets is starting to exceed their potential return.

As for Top Flight, the models may place it back into fully
invested mode to ride out the rest of the rally as the structural problems
facing the markets get kicked down the road again.  The election
ramifications and the fiscal cliff will be the next problems to be concerned
about (before Europe comes around again!).

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.

Backing Into A Dead End

Posted July 27, 2012 by admin. tags:Tags: , , ,
Dead End

photo by bennylin0724

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

Backing into a dead end is the way I feel about much of the bond market right now.  It might keep you off the risky streets, so to speak, but eventually gets you nowhere.  Just when you think rates couldn’t go any lower bond yields continue to hit record lows.  The 30-year Treasury hit a record low of 2.47% and the 10-year is around 1.42%.  Yields are getting compressed across the board.  Simply amazing to put it plainly.

Prudence would dictate to take profits on bonds but where would you put the money if you’re a conservative investor?  In order to get a real yield on any bond investment it must either be in the high yield (junk) space or you must go to the long end of the curve.  That means you’re taking on significant risk.   The alternative is to put your money in cash and get nothing and hope that inflation stays low so your purchasing power doesn’t erode.

Bonds seem to be entering what could be their final blow-off phase.  There is so much money that continues to flood into bonds due to many factors but there is not much road left at this point.  We are starting to hedge our bond exposure (almost all corporate) from this point on as the reward is just not worth the risk.  For example, as of 7/25 the iShares Barclays 7-10 year Treasury Bond ETF (IEF) has an average yield to maturity of 1.15% with an effective duration of 7.51.  What this basically means is that the price appreciation potential from this point is barely over 7.5% and the 10-year would have to drop to zero for that to occur.  Just a year ago the 10-year Treasury was in the high 2% range which was still amazingly low.  If the yield returned to that level the holder of IEF would lose 7.5% and it would take 6 – 7 years with its measly interest rate to get back to even.  That’s not the kind of trade-off I like but one that large numbers of investors are currently taking.

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.

The Search for Yield

Posted May 10, 2012 by admin. tags:Tags: , , ,

Written by Nathan White, Chief Investment Officer, Paragon Wealth Management
Taken from Paragon's 2Qtr 2012 print newsletter.

In an environment where interest rates are at historic lows where does one go for yield?  As the baby boomers start to retire there will be a higher demand for fixed-income type investments of all types.  The effects of the

How Can Conservative Investors Survive in this Low Interest Environment?

Posted March 29, 2012 by admin. tags:Tags: , ,
Piggy Bank

Paragon Wealth Management advised conservative investors to think twice when investing in CDs or money market funds.

“Investors who save money in CDs and money market funds don’t have a lot of options right now,” said Dave Young, president and founder of Paragon Wealth Management. “With inflation rates at 3 to 4 percent and interest rates between 0.5 and 1.9 percent, savers are actually losing money in their “conservative” accounts.”

Ben Bernanke, chairman of the Federal Reserve, said they’ll keep interest rates this low until sometime in 2014.

“Savers can either stay ultra conservative, and watch their savings go down each year or take a little more risk in order to get higher returns,” said Young. “On a one to ten risk scale, with ten being the most risky, I believe that many investors would benefit by slightly moving up the risk scale.  If they move from a level of one to a three or a level of three to five they could potentially, significantly increase their earnings.

Young said, “On the other hand, investors shouldn’t jump from very low to very high risk.  That is usually when you see problems. Sometimes investors get tired of earning one percent, so they quit and move over into something extremely aggressive that promises a 20 percent return. He cautioned investors not to get extremely aggressive and invest in things they don’t understand, because that is often when they lose everything.”

“It is important for investors to determine their asset allocation based on their individual risk tolerance,” said Young. “This will help them stay invested over the long-term and optimize their investment choices.”

Making sure your portfolio is structured properly is more important than ever with interest  rates this low.

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Watch this video to learn more about how to invest when interest rates are low.

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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