Tag Archives: oil

PLAYING DEFENSE

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

 

Back And Forth

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

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 click here to see full track record and disclosures.

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.

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.

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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