Money Managers Live

Improvement In The U.S. Economy

Written By Nate White, Chief Investment Officer of Paragon Wealth Management

With all the talk of the fiscal cliff and the possible negative ramifications dominating the headlines I thought it might be nice to hear something different.  The following is a pretty good article outlining some optimistic data regarding the economy.  The author is a self-described “pessimist” and so I believe it is a balanced look at current trends in the economy that we have been monitoring.  These trends show that much of the damage done by the ’08-’09 recession have been repaired and are starting to reverse. 

To view the entire article please visit: seekingalpha.com 

Here is an excerpt from the article:

Let me start by making a confession:

I tend to be a negative person. I don't know why, but I expect and prepare for the worst. Few people know this. To the outside world I'm an average optimist, but to those I allow into the inner workings of my brain I'm a pessimist and a cynic.

It's not that I want to be a negative person. I've just seen enough to understand that eternal optimists are often disappointed. I'd rather prepare for the worst and be pleasantly surprised when things turn out better. But often they don't.

Despite my natural tendencies, over the past several years I have uncovered periods where economic data provides a glimmer of hope. I understand that change begins at the margin, and that secular positive trends start with a infinitesimal inflection point. It is easy for someone like me to tear these inflection points apart, but today I will open my mind to the possibility that the state of the US economy is improving.

Below I have outlined 9 charts that suggest that the US economy is digging out of a very deep hole, potentially validating the lofty levels of the S&P 500 (SPY).

1. Housing

Housing drove the US economy after the 2001 recession, destroyed the economy during the 'Great Recession' of 2008/2009 and may lift the economy into another boom era. Housing is a big deal because it has a massive trickle-down impact throughout the economy. Construction jobs, durable goods orders, building materials purchases, financial services jobs and so on are all positively impacted by a growing housing market....

To view the rest of the article please visit: seekingalpha.com

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. 

Investing Under Obama- Part II

Written by Dave Young, President of Paragon Wealth Management

After a seemingly endless campaign, we now know who will be in charge for the next four years. I believe that keeping the money you earn and investing it successfully will be more difficult than ever.

In the 26 years that I have managed money I have never seen government affect the free market in the negative way that it does now.  Unfortunately, every investment decision we make is affected by politics, government policies and regulations.

Going forward, what does this mean for investors?

The first problem is the uncontrolled spending in Washington that shows no signs of slowing.  Obama ran up the national debt from 9.6 Trillion to over 16 Trillion dollars, a 66% increase, in just four years.  His rate of spending is incomprehensible and dangerous.

To put this in context, $16,000,000,000,000, with one dollar bills stacked flat would go out of the stratosphere, around the moon and back, twice.  That is almost a million miles of bills. Put another way, to pay back just the 6.4 Trillion dollars that Obama spent during the past four years, at a dollar a second, would take over 202,000 years.

The second concern is that interest rates are temporarily forced to all time lows.  Low rates have kept the interest on the debt manageable.  If rates increase only one percent then the interest cost on $16 Trillion will increase by $160 Billion per year.  If rates go up two percent then the increased cost is $320 Billion.  A three percent increase would be $480 Billion, and so on.  When rates go up our debt will become more unsustainable than it is now.

From an investment perspective, these are troublesome and potentially hazardous problems. Maybe this is why several polls show 80%+ of financial advisors were not in favor of Obama.

Problem #3:  Obama seems to believe that the only way to balance the budget is to tax the "rich" more.  Never mind that the top 5% of taxpayers  already pay 60% of the income taxes.     He demonizes "millionaires and billionaires" but in reality there is a target on the back of anyone who makes over $250,000.  This continues to be his focus, even though taxing job creators (the rich) more will only bring in about FIVE PERCENT of the revenue needed to balance the budget over the next decade.

So what is an investor to do?

First, investors must be aware and take advantage of every legal method available to reduce their taxes.  In order to fund their out of control spending, the government will be raising taxes any way they can.  In order to make forward progress you need to avoid unnecessary taxes, so that you can keep and grow your money.

Second, you must be aware of our nation's fiscal mess and monitor it going forward. If spending continues at the current rate, then we may arrive at a tipping point sometime in the future.  If we cross that tipping point the government will have to take action to deal with the debt.

At Paragon, we are watching for signs of inflation, hyper-inflation or currency devaluation.  Traditional buy and hold, diversified investing will not work in this scenario.  Also, conservative areas such as bank CD's and bonds provides no protection from the ravages of inflation.

You or your advisor must be aware of what is going on so that you can monitor and adjust your investments accordingly.  If the inflation scenario plays out then investors need to reallocate their investments into areas that will be protected from or even benefit from inflation.

Over the next four years, these are scenarios that any serious investor needs to be aware of and have a plan to deal with.  Watching passively and hoping - is not a plan. 

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. 

To Infinity and Beyond!

Written by Nate White, Chief Investment Officer of Paragon Wealth Management

As a father of five this “famous” phrase from Buzz Lightyear of Toy Story fame is well known around our house.  I’m afraid this phrase is hanging from banners at Ben Bernanke’s office and other areas of the Federal Reserve in regards to the infamous program now known as Quantitative Easing or QE.  After seeing the market tank both times after ending QE1 and QE2 the Fed wised up this time and decided to leave the newest QE round as “open-ended”.  The Fed balance sheet stands at nearly $3 trillion and growing.    

The problem with these programs, as I have stated regularly, is that the benefits are not worth the costs in the long-run.  Much has been said and written about the potential inflationary ramifications of the Fed’s actions but there are other effects to consider as well. 

First, attempting to artificially keep assets prices high does not fix an economy and can actually cause harm by distorting the all-important price signals needed to aid in the allocation of resources.  I agree with Jim Grant, editor of Grants’ Interest Rate Observer, who remarked that today’s capital markets now resemble of house of mirrors.   For example, the market is currently trading at about 14.8 times earnings which historically is on the cheap side and relative to interest rates even cheaper still.  However, interest rates are a significant factor in determining the level of valuations and so the question becomes where would valuations actually be if interest rates were not being kept at these “artificial” low levels?  This makes it difficult to confidently make forecasts and economic decisions resulting in uncertainty which tempers investment and the economy.   The low rate environment is confusing for investors and damaging to savers.  It effectively forces people into investments that they might not otherwise own and that possess greater risk than is appropriate. 

Secondly, as the Fed’s balance sheet continues to massively expand it will act as a drag in the future when the process must be reversed.  The Fed cannot fix what ails today’s economy.  They cannot push borrowing rates any lower and unless they are going to lend directly to the public or “instruct” the banks to do so there is not much benefit that can come from buying $40 billion a month of mortgage securities and then possibly tens of billions more in Treasuries.  In fact, the continued purchase of Treasuries is causing the government to become more reliant on the Fed for funding and giving it the perception that the cost of providing public goods is virtually zero.  In 2011 the Federal Reserve purchased about 77% of the additional debt issued by the Treasury (Wall Street Journal, Phil Gramm & John Taylor - 9/11/2012). Without the discipline that a “real” or truer interest rate would provide a vicious cycle of ever expanding government is created.  This process leaves governments and economies extremely vulnerable to economic shocks.  If inflation or the economy picked up the Fed would have to stop buying Treasuries and start selling them putting upward pressure on rates.  As interest rates rise the earnings multiple (P/E) of the market tends to go down putting a damper on potential returns.  The private sector has been deleveraging since the financial crisis while the public sector has done the opposite.  As seen with Europe today, rising rates quickly reveal the true burden to large debt loads.   Due to their debt burdens, far too many state and local governments would have significant difficulty financing themselves in a slow growth rising rate environment.  Watch for a build-up of pressure for the Federal government to guarantee state and local debt as is already happening with public pensions. 

Now that I’ve discussed some of the potential downsides of the Fed action how does that affect us in the here and now?  In the short run, the Fed’s continued easy money policy is supportive of asset prices.  The popular adage of “don’t fight the Fed” has a lot of merit because all those billions have quite literally got to go somewhere.  I wouldn’t want to fight against someone who has unlimited ammunition! Fighting the Fed can be hazardous to your portfolio’s health. 

While the Fed’s actions can affect markets and the economy it is just one piece of the puzzle.  The upcoming elections and the looming fiscal cliff are obvious factors as well.  Trying to discern how much of these factors are priced into the market is very difficult to ascertain.  Any selling for political reasons, no matter how seemingly justified, could be very short-lived and ultimately backfire.  The European crisis still continues to be an influence in an off and on again manner. 

At the current valuation of about 14.8 times earnings the market is still at about a 10% discount to the 50 year average of 16.4. Corporate balance sheets are still in good shape and the real-estate market, while not off to the races, has begun to turn around.      

Our current strategy is still a bit cautious ahead of the elections and fiscal cliff worries with Europe always in the background as a recurring potential mess.  Valuations generally keep us positive but we are getting closer to the “upper end” of the range and better economic growth would be needed support more robust gains going forward.  We still view stocks better than bonds and are minimizing interest rate risk in our Managed Income portfolio.   Many income oriented assets are getting stretched as investors stretch for yield and so we have taken some profits and will look for better entries on pullbacks. We are also looking at seasonal plays, possibly shorting bonds on rallies and adding to cyclical sector exposure on pullbacks as tactics to employ going forward.  We believe that it is important to keep invested because we could be entering an environment where returns are hard to come by and so you will need every bit of what is available.  

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 Election

Written by Dave Young, President of Paragon Wealth Management

The number one question I am frequently asked is, "How do I think the presidential election will affect the market?"  In prior elections, I have always had a preference who won, but my preference did not affect our investment strategy.  This election is different.  I believe the outcome of the election will affect our management strategies, possibly significantly. 

I will apologize in advance to those who do not share my political views.  I do not mean to offend you.  However, my opinions are based on my experience managing portfolios for the past 26 years rather than pure political ideology.  I look at this election from an investment perspective and the potential impact it will have on your portfolio.

Historically, in an election year, the market is usually weak and trending down during August and September.  Then, during October it turns up.   November and December are usually choppy but have an upward bias.  If a Republican or the incumbent wins, the market is usually stronger going into the election.   Historically, over the course of the year, the market ends the year about eight percent higher if a Republican wins rather than a Democrat.

From an investment standpoint it would be nice to know how this election is going to play out.  That is the trillion dollar question.  Most polls show the race very close with Obama having the edge in some swing states.  On the other hand, political pundits make the case that the polls aren't accurate, just like they weren't accurate when they showed Carter six points ahead of Reagan just days before Reagan won that election. 

This election is very close.  It is unlikely to be clear until after the election.  It is a tossup on who will control the Senate.  We do know that Republicans will continue to control the House of Representatives.

If Obama wins a second term and the Democrats maintain control of the Senate, it is unlikely that we will see a meaningful change in direction.  Thus far, their unsustainable path took our national debt from 10 Trillion to a mind boggling 16 Trillion dollars in just four years.  President Obama has promoted an agenda of class warfare and demonized the job creators who currently pay most of the taxes.  This divisive agenda has scared many investors out of the market.  It has created uncertainty for anyone starting a new business or who needs to invest for their future.  Obama's policies have significantly slowed the economic recovery and kept unemployment at historically high levels.

Stocks have moved up against a backdrop of a very low GDP and very high unemployment.  That is hard to understand until you take into account the effects of three years of artificially held super low interest rates, exceptionally strong corporate profits (fueled by layoffs) and relatively low stock valuations.

Regardless of who wins, it will take a few years for the impact of their decisions to play out.  Realistically, if Obama wins then we will not feel the full negative effects of his policies until 2014 or 2015.  Likewise, if Romney wins and does what he has campaigned on, then we won't feel the positive effects until 2014 or 2015.  So, the markets may just meander along or even drift up until then. 

On the other hand, because so many investors invest emotionally and are afraid of Obama's policies, we have to be ready for the possibility that those investors may sell out of the markets because of an Obama victory.  Conversely, a Romney victory could have the opposite effect with investors piling into the market and pushing it up, albeit purely for emotional reasons.

In summary, leading up to and after the election there are compelling arguments to be made for staying invested as well as selling out and going to cash.  It depends on who wins and how investors react.  For us, the investors reaction to the election will be more important than its actual economic impact.  

There is a compelling case for a potential bull market, a bear market or a flat market.  Accordingly, we will be watching the markets intently, following our indicators closely and adjusting our portfolios accordingly.  It's ironic that in order for investors to once again have hope and see real change they might need to elect Romney rather than the official "Hope and Change" candidate.

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.

Election thoughts...

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

How will the markets react to the election?  Do you buy if Romney wins and sell if Obama is re-elected or do the opposite?  Most people’s answer to that questions depends upon their particular political persuasion.  However, if you take off the political glasses what does the choice look like?

There have been a lot of statistics thrown around lately regarding the impact on the markets of who wins the white house.  In today’s WSJ Ahead of the Tape column by Spencer Jakab, a study by Barclays starting in 1929 shows that the market has risen 10.8% annually under Democrats and 2.7% under Republicans.  According to that data we should all want the President to win.  However, “there are lies, damned lies, and statistics” as Mark Twain said.  Economic policies enacted by governments can take years to implement and the consequences (both good and bad) can be felt years down the road. The growing debt burden as the prime example.   Sometimes Presidents preside during booms and their followers reap the aftermath.  Some Presidents take office during bear markets and the markets have nowhere to go but up and some encounter the exact opposite.  Politicians of course will always take the credit for the good and assign blame for the bad.  Trying to separate and assign the real cause and effect is a battle that constantly being waged. 

There is no doubt that the GOP is the more business friendly party in general and that is especially true this time around.  So does that mean that the market will take off if Romney is elected?  It’s hard to say.  On the surface it would seem that a more business friendly administration would result in strong stock market gains.  However, the past four years have seen anemic economic growth but good stock market gains.  I have seen all too many investors sit out the last four years and miss out on the gains because of their political beliefs.  My main point is that it when the entire historical record is examined period by period it shows the futility of trying to time the markets for political reasons.  It is far better to stick with a proper asset allocation through thick and thin despite one’s political beliefs. 

Depending on the election result and market conditions, we are considering making a short-term trade based upon the election results in order to take advantage of the possible emotional reactions many might have to the election outcome.  The WSJ article previously mentioned cites a study we have been looking at that shows the market tends to do well in November if the challenger is elected and can be the second-worst month of the year if the incumbent is re-elected.  The election is too close to call ahead of time to make a decision yet but we are watching and waiting to see if an opportunity develops…

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.