Simply amazing. Junk bond indexes and funds should now drop the “High Yield” description that they use in their names. With these bonds now yielding around 5% we have sold out of most of our positions in this area. At this level the returns are just not worth the risk. That doesn’t mean junk bonds will blow up any time soon but we would rather sell high and take what the market is giving us at this time. Junk yields at 5% are a direct consequence of the Fed’s Zero Interest Rate Policy as investors fight for anything with yield. It wasn’t too long ago when you could get 5% on a money market!
To view the entire article please visit: barrons.com
Here is an exerpt from the article:
The 5% yield barrier has proved no match for this Federal Reserve-fueled junk-bond market, which last night reached yet another all-time record-low average yield-to-worst of 4.97%, according to the Barclays US High Yield Index. It marked a new level of market capitulation to central-bank forces as it’s the first time the index has dipped below 5% in its 30-year history (before January the market had never even fallen below 6%). The average price of 107.31 cents on the dollar also marks a record high.
The other widely followed market index, the Bank of America Merrill Lynch High Yield Master II Index, closed last night within a whisker of 5%, at 5.005%, with the average dollar price closing above the 107-cent mark for the first time ever at 107.20.
“The most surprising thing this shows is that there’s really no yield floor for this market,” says Brad Rogoff, head of credit strategy at Barclays. “Those mental barriers really haven’t existed that we thought existed maybe a year ago.”
With the Fed and central banks around the world keeping interest rates near zero and pumping money into the financial system, investors have been encouraged, if not forced, to invest in the highest-yielding investments around, even if those yields aren’t that high anymore. All this liquidity and low borrowing costs have helped companies shore up their balance sheets, and default rates remain negligible, which further emboldens investors to take on credit risk.
Rogoff says the high-yield market’s main attraction used to be – as its name would indicate – its high yields. At sub-5% average yields now, the market’s main justification is its comparative yield versus other types of bonds, namely its risk premium over Treasuries. The option-adjusted spread on the Barclays index stands at 406 basis points over Treasuries, below its historic average but still far wider than the historic tight of 233 bps reached on May 23, 2007. The spread of the Bank of America index stands at 424 bps, above its all-time low of 240, also recorded in May 2007.
“Usually this is a market that’s traded based on yield, but now it feels like it’s trading based on spread. It’s much tougher to justify based on historical yield standards but on spread, its reasonable,” Rogoff says. The average spread could still tighten a bit more, he adds, but any further tightening “is not necessarily in conjunction with where rates are now,” meaning Treasury rates would have to rise before junk bond spreads compressed much further, leaving all-in junk-bond yields more or less where they are now.
The average dollar price of 107 cents presents another problem, since many junk bonds can be called by their issuer beyond a certain date at 103 cents on the dollar. Rogoff says roughly half of the market is currently trading above its first call price. “Those call dates typically are not tomorrow, but the market is definitely constrained,” he says. “A year ago, you would have thought there was a yield floor created by a dollar price constraint.”.......
To view the rest of the article, please visit: barrons.com
To view the entire article, please visit www.prweb.com
Paragon Wealth Management, a national leader in the investment and wealth management field is proud to have been awarded the 2013 Best of State Award for investment advisory services.
This is the fourth year that Paragon has been awarded this prestigious award, that recognizes their commitment to financial excellence and the community they provide for in Utah. Paragon also received the award in 2008, 2011, 2012, and now 2013.
“We are excited to once again win Best of State,” says David Young of Paragon Wealth Management. “We never get too comfortable being the best, we are just always working hard to provide the best service for our clients.”
The company has been focused on the best customer service in helping their clientele with 401(k), asset and wealth management, as well as investment services.
Proud representatives of the wealth management company will be attending the Best of State Awards Gala on May 11th in Salt Lake City.
As one of America’s 50 fastest-growing RIA Firms, Paragon follows the high standards of fiduciary responsibility. With over 26 years of experience within the investment and wealth management field and now 4 Best of State awards, Paragon is being recognized as Utah’s premier advisory firm.
About Paragon Wealth Management:
Paragon Wealth Management is registered investment advisor (RIA) located in Provo, Utah. Established in 1986 by Dave Young, the company gives investors a smarter way to invest their money, develop sound investment strategies and achieve financial goals. Paragon was created to provide a more active and personalized alternative to the traditional buy, hold and hope approach to wealth management. Today, after over 26 years of refining proprietary quantitative financial models and building a trusted world-class organization, Paragon offers its clients across the U.S. a unique blend of proactive and proven money management techniques, extraordinary personalized service and a proven track record.
Judging criteria for the Best of State Award Reference: www.bestofstate.org
There are three basic judging criteria used by the judges, and each has a different weight.
The Best of State judging process involves a 100-point system. The 100 points are allotted in the three following areas:
50 points are possible regarding the overall excellence, superiority and quality of a nominee's products, services or performance.
30 points are possible regarding the creativity which nominees display to differentiate themselves from their competition.
20 points are possible regarding the nominee's accomplishments to improve the quality of life in their community and state, and their efforts to make the world a better place.
With the market hitting new highs, this is another question that is regularly asked. When you look at the market over the long term it provides a different perspective. Currently, the broad stock market is back to where it was almost 13 years ago. In August of 2000 the S&P 500 hit a level of 1517. Then after seven years of ups and downs, in October 2007, the S&P 500 finally hit 1549. Then five and a half years after that, the S&P 500 hit 1514 again. The bottom line is that it has taken almost 13 years for the S&P 500 to get back to the level it was at in August 2000!
Stock prices are driven by their earnings. Earnings have increased over 300% since 2000 while stock prices haven't moved much. In my opinion, it appears that stocks are still a good value even though we are hitting new highs.
Managing Money is Difficult
Managing money is difficult. When you try to protect against downside exposure, often it hurts your upside return. Likewise, if you are too aggressive, then your account can be decimated in an extreme bear markets like we experienced in 2002 and 2008.
By way of example, some of the brightest and most talented money managers are hired by the large University Endowment Funds. The endowment funds for Harvard, Yale, Princeton, Stanford, Columbia and Notre Dame manage about 100 Billion Dollars.
Many of the high profile University endowment funds incurred significant losses in 2008. It is human nature to be more defensive after getting beat up. So how did these top managers adjust to their investments 2012 as the stock market hit new highs?
In 2012, the combined average return for these six endowments was only 2.63%.
The bottom line is that even for these top tier managers, with every resource and option imaginable, managing money is difficult.
Paragon Investment Portfolios
We have recently added some new portfolios to our menu of investments. Below is a brief description of each. Our investment process is to help you determine your risk comfort level then allocate your funds to an appropriate mix of the portfolios.
As always, we appreciate your trust in us and the opportunity to be your advisor. Please contact us if you have any questions or need assistance.
There was an interesting report yesterday published by NDR (Ned Davis Research) highlighting the current financial position of households through 2012. The data shows how households have continued to recover from the financial crisis and in many cases are now in the best position in over a decade. Households have been paying off debt aided by low interest rates, rebounding asset prices and slowly improving incomes. The data tracked by NDR covers various household debt service and financial obligations ratios. For example, one ratio compares household credit market debt as a percentage of total household financial assets. This ratio is currently at 23.6% and is the lowest since the first quarter of 2002. By comparison, at the heart of the financial crisis in early 2009 the ratio was 32.6%. Another financial obligations ratio that includes vehicle leases, rent, insurance and property taxes is the lowest since 1981. The debt service ratio which calculates minimum debt service payments on mortgage debt and consumer credit as a percentage of disposable income was at a record low (data goes back to 1980). This last statistic is no doubt influenced by today’s extremely low interest rates and would not look as favorable if interest rates were higher.
So the private sector has been doing the “right” thing by deleveraging which in the short term reduces demand but in the long-term increases demand. This deleveraging process by the private sector is one of the reasons why the economic recovery has been less than robust.
While the private sector has been deleveraging, the government has been doing the exact opposite. Gross federal debt now stands over 103% of GDP compared to around 64% in 2008. The average maturity for U.S. debt is around 5.5 years and the average interest rate on all interest-bearing U.S. debt is 2.487% as of the end of February (source: TreasuryDirect). In an effort to support or “stimulate” the economy since the financial crisis government spending has increased to about 24% of GDP compared to the 66-year average of 19.7%. Borrowing to spend means the government is taking money out of the economy to try and put it back into the economy. In the end we are left with a bigger debt burden that will weigh on future growth.
With these low rates, we are being given a tremendous opportunity to lower rather than increase our debt burden going forward. The government should lock in these low rates by issuing more long-term Treasuries which would give us more time to set our fiscal house in order. Once these conditions were set the American economic machine could soar on a firmer foundation.
Last week I received a call from a very concerned client. He was talking to a friend who told him that the stock market was about to crash. He had heard it from an expert on television and wanted to know if I had heard that the crash was coming! Also, he wondered, "What he should do with his account?"
I explained that no one knows with absolute certainty where the market is going next. The stock market is essentially a giant auction. Everyone has an opinion on whether or not the values are fair. Some think they are too low, some too high and some just right.
Just because the market is hitting all time highs that doesn't mean that it has to go down. Regardless of where it is at in the cycle, it will do one of three things. It might go up more, may move sideways or could go down. The only thing that is guaranteed is that one of those three options will occur.
At Paragon, we go to great lengths to position our portfolios in front of the path that our analysis shows the market is most likely to go. We are right more often than we are wrong, however, unfortunately we are not always right.
So how do you invest and keep your sanity? You control the variables that you can control and you don't worry about the others. One variable you can control is whether or not your risk tolerance is set properly. We also call this your "investment comfort level". If you are invested according to your appropriate investment comfort level then you significantly increase your potential for long term success.
If you haven't checked your Investment Comfort Level lately then I would suggest you take the Risk Tolerance Survey on our website. Click here to take the Risk Tolerance Survey. After you take the risk tolerance survey - then verify that your investments match your personal investment comfort level.
This is one of the most useful exercises you can do in order to make sure you are invested the way you should be. Call or email us if you have any question whether you are invested appropriately.
Could gold, the traditional and popular hedge against inflation, actually perform poorly during an inflationary period thereby frustrating its use as a hedge? For years now many have been worried that due to unprecedented central bank easing and huge government deficits we should be experiencing high inflation. Instead, with the CPI at 1.6% inflation is benign at best. We can “thank” the financial crisis for that.
The price of gold seemed to confirm inflation worries by having a stellar decade long run from $300/ounce in 2001 to over $1,800 by August of 2011. Since then, the price of gold has stalled. Perhaps gold moved up less because of inflation worries and more because it was a recipient of the money issuing forth from the central bankers? Now in anticipation that the easy money policies could start to end within a year or two could this be the reason that gold prices are stalling out?
What is equally interesting to me is that now as the economy is starting to strengthen somewhat as it leaves the financial crisis behind we could actually be on the cusp of inflation starting to pick up. As confidence returns, the massive reserves in the banking system could finally start to move out into the economy as lenders open up and demand for credit increases.
Productivity and margins are strong in corporate America and at this stage of the economic cycle as demand picks up they will have to hire more workers to keep up with sales. This would result in the wage inflation that the Fed likes to focus on. However, as inflation picks up and the Fed finally has to start reining in the money supply gold could actually decrease. It would be the opposite of what happened over the past decade. Just as stocks often price in all of the good news perhaps gold has done the same in regards to inflation? Asset prices love to move ahead of the actual events. Perhaps it is a good time for gold investors to lock in some gains if they were using it as a hedge against inflation.
Written by Dave Young, President & Founder of Paragon Wealth Management
I recently returned from a trip to the Dominican Republic. The trip was for a group of 30 entrepreneurs and their wives who were graduates of BYU.
The trip was great. It was a chance to get out of the cold. It was good to network with an upbeat, successful group of people. The days were nice, sitting on the beach, listening to the waves and enjoying the sun.
In retrospect, it reminds me of the stock market the past few months. There has been very mild back and forth movement within a general uptrend. All in all, it has been a good time to be invested.
About midweek, I was involved in a beach volleyball game. Everything was going great until this guy from Russia wearing a Speedo decided to go for the ball in the zone I was covering. He hit me full force with his shoulder going into my left lower ribcage. Both of us ended up out of bounds on the ground - with me getting the worst of it - with two broken ribs.
That sudden change of events kind of put a damper on the trip. Much like market sell-offs put a damper on nice market up-trends.
The moral of the story is to never be complacent. When investing -especially when times are good- we are always looking over our shoulder and preparing for the next bad thing that might happen. They say the best traders are somewhat paranoid. When investing, hope for the best but prepare for the worst. When in the Dominican Republic - watch out for that Russian in a Speedo...
Written by Nathan White, Chief Investment Officer of Paragon Wealth Management
This is an interesting article for anyone interested in buying or selling a home in the current environment. Many regions in the country are now experiencing a lack of supply which has given the sellers the upper hand. It’s certainly a different market than the last few years to say the least.
To view the article, please visit bloomberg.com
Here is an excerpt of the article:
Strategies for the Spring Housing Scrum
By Carla Fried
It all seems so quaint now: the casual walk-throughs, the drives to check out the neighborhood, the luxury of sleeping on the largest financial decision you'll likely ever make. Trying to buy a home now feels more like being thrust into the trading pit at the Chicago Mercantile Exchange -- the frenzied bidding, the need for lightning-fast decisions, the packs of sharp-elbowed competitors.
In one fraught situation, a home near Union Station in Washington, D.C., drew 168 offers in December and sold for almost twice the asking price. In the tonier neighborhoods of Los Angeles, 20 bids per house is not uncommon, according to real estate agent David Kean. And the speed of deals can be intense. "In the middle of a snowstorm we have seen houses sell in one day," says Sam Schneiderman, owner/broker at the Greater Boston Home Team agency. "At open houses on million-dollar homes you are literally bumping into people, it's that crowded."
Finding an Edge
A dearth of homes for sale has run smack into a suddenly energized buying crowd egged on by rising values. The National Association of Realtors says the number of existing homes on the market in January -- 1.74 million -- was 25 percent lower than a year ago, and the lowest level since 1999. Over the past 12 months the inventory of existing homes for sale has dropped from a 6.2-month supply to a 4.5-month supply, the lowest level since 2005.
Price is obviously the main lever in all deals. What’s particularly important now is to understand how the seller will handle bids. Some collect all bids and immediately choose a winner, typically the highest offer, which is often more than the asking price. Other sellers give the top three or five bidders the chance to make one counteroffer. In those instances, you want to get into the bake-off but leave yourself room to counter.
In today's tight market, some sellers are asking every bidder to counter. That's what happened to a client of Schneiderman's in the recent sale of a house in Newtown Center, Massachusetts, listed for $975,000. The seller got nine offers -- four to nine offers is the norm now, Schneiderman says -- and asked for counter bids on all nine. Schneiderman's client bid $1,016,000 and lost. The seller's agent said the winning bid was "significantly higher."
To gain an edge in counteroffers from the start, you can put an escalation clause in your original offer. With one of these, you agree to beat the top offer by $5,000, up to a limit. So if you bid $380,000 and have a $5,000 escalation clause up to $400,000, that means if another bid comes in at $385,000, you automatically agree to $390,000.
Beyond price, buyers need to craft an offer that screams “I’m easy” to the seller. That starts with the buyer’s agent getting vital intel from the seller’s agent on what buttons to push. Some sellers are in a hurry to close. Others would love an extra month before escrow to coordinate their move. Sometimes letting the seller stay in the home for a month or more, rent-free, after a fast close can provide the seller valuable breathing room that seals the deal..........
To view the rest of the article please visit: bloomberg.com
Written by Nathan White, Chief Investment Officer of Paragon Wealth Management
Bloomberg reported today that the biggest U.S. banks are lending the smallest portion of their deposits in five years. The banks have been flooded with cash since the financial crisis of 2008 as people have sought to conserve cash and not borrow. Due to tighter lending standards, less credit worthy borrowers, increased regulation and capital requirements loans have not been exactly flying out the door. This doesn’t mean banks haven’t been lending but more that they are a lot more cautious and that demand isn’t what it once was.
The economy, while growing, hasn’t felt strong enough for robust lending to reignite…yet. Could this change? The economic numbers, while not great, have been getting better and banks have significantly cleaned up their balance sheets and raised capital. The potential is there. While lending will probably not return to the levels of the past (at least for a while), it wouldn’t take much releasing of the spigots to keep the economy moving along and get better. It’s like a virtuous cycle where once confidence and conditions improve it creates a sort of self-reinforcing momentum.
Dare I say we could be entering a sort of boom or “normal” period? I know that sounds like heresy to so many and contrary to the gloom scenarios that having ruled the day since 2008 but I agree with James Paulsen of Wells Capital Management who says that the economy is now “gearing”.
As I have talked about before, the fly in the ointment is the Fed. As the economy strengthens it will have to reverse its easy money policy and shrink its tremendous balance sheet and these actions act as a drag on the economy. This is one of the reasons why I never liked so much QE and have always said that the Fed’s big test comes when they have to start reversing policy and whether they will have the guts to do it. For now the Fed is in no hurry to reverse course and with their stated target of 6.5% unemployment they could be very slow in the process of reversing course when that time comes.
Politically it will be difficult. That means we could enter a period where, with the aid of increased lending, the economy picks up for some years before the Fed finally takes away the punch bowl. That means that stocks and the economy could do well for a while before inflation forces action.
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