Money Managers Live

Green Shoots?

Written by Nathan White, Paragon Chief Investment Officer

 
photo by gaetan lee

The term "Green Shoots" has been used a lot lately in the financial press in reference to signs that the economy is or might start showing signs of life.

Financial markets went to the extreme in pricing a worst case scenario during the sell-off leading the March 9th low. There was so much pessimism from investors, economists and analysts with nearly all becoming convinced that the markets would just continue to get worse ad infinitum. It was about as close as you can get to total capitulation.

Once the vast majority had given in to this mindset the market did what it does best -- reverse course.

The subsequent rally was in large part a realization that the world was not going to end. Now to compound the problems for those who missed out on the rally is the appearance that many leading economic indicators have begun to turn.

Is it possible that the recession, which at 17 months is the longest since WWII, could end sooner than most think?

WEBINAR

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WHEN:  Wednesday, May 27

TIME:  12:30-1:30 p.m. MDT

COST:  There is no cost. It is complimentary

WHERE:  Online (at your home or office) 

TOPIC:  How you should position your portfolio for recovery

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Why Financial Advisors have no Confidence in Washington

Written by Dave Young, President of Paragon Wealth Management

 photo by Seansie

Smoke and Mirrors...

Politics and religion are two subjects we try not to discuss on this blog because we realize they are often more emotional than fact based and can be offensive to some of our readers.

Avoiding politics has been difficult this year because it seems that the center of the financial universe has recently moved from Wall Street to Washington. The continuous daily news updates from Washington have had much more impact on our financial markets than ever before.

I find it interesting that while 60% of Americans approve of how Obama is doing, a recently released poll of financial advisors showed that only 36% of them approve of his performance so far. Even worse, 68% said they have no confidence in his ability to "fix" the ailing economy.

Why is there such a difference between the ways that most citizens see the new president versus most financial advisors? In part, I believe, because financial advisors base their perception more on "the numbers" than "the personality".

For example, last week President Obama held a press conference on the U.S. budget that was recently passed by Congress.

The budget was 3.6 trillion dollars.

Since one trillion (1,000,000,000,000) equals one million times one million -- 3.6 trillion is beyond the grasp of most people's understanding. So they ignore it.

As last week's budget press conference, President Obama's entire focus was that he is taking us into a NEW ERA OF RESPONSIBILITY. That is what they have named this massive spending bill. To make his point, he spent the entire press conference focused on the 17 billion dollars he was going to save through his new polices. No mention was made of the 3.6 trillion dollar budget or the 1.2 trillion dollar deficit that it would create.

The 17 billion dollars in savings that was the focus of the press conference is equal to one half of one percent of the entire budget. That would be like buying a car for $100,000 and then getting excited about saving $500. Never mind that the car cost $33,000 more than you had available to pay for it.

This is why financial advisors, (people that work with numbers) don't have a lot of confidence in what the President is doing. What he does compared to what he says just doesn't add up.

Sources:  May 8, 2009 Investment News, and www.whitehouse.gov.

The Stock Market Drama Continues...Part 2

As seen in Paragon's 1 Quarter 2009 Print Newsletter
Written by Dave Young, President of Paragon Wealth Management

photo by nicknbecka

POLITICS

In stark contrast to his popularity with the general public, a recent Wall Street Journal poll of top Economists gave the president an “F” grade for his performance so far. Every day Obama introduces a new program, makes an appearance on television, and there is news from Washington that affect the markets.

According to the metrics we follow, the selloff in October should have marked the bottom of this bear market.

I believe this bear market would have ended last October if it weren't for the perpetual bad news from Washington.

To recap:

· After the election the market sold off hard and hit new lows on November 20 because of investor fears surrounding a new administration.

· As rumors swirled that Obama would govern from the center and not the left, the market rallied up until the first week of January. Hopes were high that the Obama administration would quickly provide a comprehensive solution.

· The market dropped 4% on inauguration day, which is the most it has ever dropped.

· Obama appeared on TV every day and repeatedly used words such as crisis, catastrophe and Great Depression. Traders began to sell the market short during each TV appearance.

· On February 10, the new Treasury Secretary gave a highly anticipated speech about the administration's new plan to save the banks. The speech was not what the market hoped for or expected, and once again the market sold down to new lows.

· Next, the White House and Congress worked together to jam a $787 billion “stimulus” package (the largest ever) through Congress in four days. Investors were initially optimistic about a stimulus package until they realized it was comprised of one third legitimate stimulus and two thirds social programs. This caused investors to sell stocks again.

· The stimulus bill was followed by a $410 billion omnibus spending bill.

· That was followed by a gigantic proposed budget that will double the national deficit in five years and triple it in 10.

In summary, Obama's enormous spending plans, proposed tax increases, and lack of focus on the economy caused the market to drop 25% from January 1 to March 9.

WHY BE OPTIMISTIC?

Once you hit a certain point you run out of sellers and there is nothing left to bring the market further down. It appears we may have hit that low point on March 9.

The market was down 54% from its peak at that point, and it appeared as though everything negative had been factored in, maybe several times over. With confidence completely destroyed high yield bond portfolios default rates are projected at double what they were during the Great Depression. Another metric shows consumer spending at the same level it would be if unemployment were 30%. (It's actually 8.5%)

Looking forward, not backward, things actually look pretty good.

Imagine you were asleep the past 18 months and just woke up. This is what you would find:

· Six of our eight “bull watch” indicators support the case for a new bull market.

· Six of the 10 leading economic indicators were up in February.

· Housing is more affordable and mortgage rates are lower than they have been for some time.

· Energy is more affordable for consumers and businesses.

· Credit is loosening, and interest rates are extremely low.

· There will be massive global government stimulus forthcoming.

· Abundant amounts of investor cash is on the sidelines.

· This has been called “the sale of the century.” In inflation-adjusted terms, the Dow Industrials it is at that same level it was 43 years ago. In 1966 we didn't have PCs, Internet and our work force was half the size of what it is today.

· Four fifths of top economists in the latest Wall Street Journal survey said now is a good time to buy stocks.

· Investor sentiment has reached negative extremes and started to reverse.

GOING FORWARD

We are holding a significant amount of cash equivalents in our conservative portfolios, and are waiting for tape confirmation that this market has turned before we are fully invested. We are fully invested in our growth portfolios in the areas of the market that have historically performed the best after a bear market. After the 2000-2002 bear market we were close to doubling the return of the market averages by positioning our portfolios in the best places.

As I've mentioned before, this is the 34^th bear market in the past 100 years. The future always looks bleak when the bear market is the worst, and people become irrationally pessimistic.

That is when the naysayers have their day of fame. The media loves to cover them. They always expect things to get worse, and attract a lot of followers.

They have been wrong every time. Not wrong once or twice, but the past 34 times.

Our economic system is very resilient. Our markets and economy have always recovered from difficult times in the past. We've made it through recessions, world wars, a civil war and a depression. I believe in the free market system.

Our market and economy will recover again, in spite of our politicians.

 

Letter from Congress in reply to a blog post

A couple weeks ago we gave Congressman Jason Chaffetz a copy of a blog post that Dave Young wrote for Utah Business Magazine's blog titled, "Stimulus for Utah?" This was his reply. We thought you might find it interesting. It is also written below to make it easier to read.

Dear Dave,

I agree with the points made in your blog post entitled "Stimulus for Utah? Thank you for giving a copy of the article to my staff during our recent ribbon-cutting ceremony at our Provo office. It is heartening to see citizens with an acute awareness of our current economic problems and dedication to solving those problems.

I assure you that no one is more dedicated than I to getting America back on the right track, economically and otherwise. In order to do that something needed to be done, but I have maintained since its inception that the American Recovery and Reinvestment Act of 2009 was not what we needed. This pork-laden bill may end up only putting us in the worse situation.

Your point about the return on investment for Utahans is particularly adept, as is your observation that this bill is hardly a bipartisan one. Our hope now lies in the American people; we have risen from difficulty in the past despite the oft-obstructing attempts of our too-big government to solve our problems from us. Now that the bill is passed it is my hope that Americans like you and me, can collectively solve our current difficulties and usher America into a more stable, prosperous, and responsible economic future.

Sincerely,
Jason Chaffetz
Member of Congress

 

Paragon Wealth Management Webinar/Seminar Schedule
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Thursday, March 19 (12:30-1:30 p.m. MST)
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R.S.V.P.
Shannon Golladay
801-375-2500
shannon at paragonwealth.com

What Obama Means for the Stock Market

Written by Dave Young, president

photo by Bohphoto

When Barack Obama began his race for the White House his rally cry was to get us out of Iraq as soon as possible. That morphed into a call for change from the Bush policies of the previous eight years. Finally, right before the election it moved towards fixing our economy.

If the President Elect does what he originally campaigned on, then some of his pro-regulation, pro-tax policies could damage our economy over the long-term. 

During his campaign he spoke about how important it was to tax those deemed rich, while slightly lowering taxes for everyone else.

Editorials in the Wall Street Journal claim his plan would have a marginal tax bracket of 62%, with all taxes taken into account, on income over $250,000. 

Increased taxes translate into government removing money from the marketplace and then deciding where to reallocate it. This diminishes savings, investments and job creation.

Historically, government reallocation of those funds benefit certain interest groups, but doesn't benefit the broad economy. This negative wealth transfer effectively mutes economic growth.

Historically, when democrats take the white house, the market usually does better than under republicans. 

Usually going into an election, if a democrat is winning, Wall Street expects the worst, and the market sells off in advance. After the democrat gets into office, then Wall Street realizes they aren't going to do what they promised, breathes a sigh of relief, and then the market rallies. The wild card is whether or not Obama will implement what he campaigned.

His most recent statements about the economy give the impression he will promote clean energy, infrastructure and education. If so, stocks in those sectors should benefit. 

We know health care is going to be impacted. It's too early to tell if it will be a positive or negative impact. Previous attempts to socialize medicine were met with health care stocks declining.

So far, the markets have followed their historical election pattern. 

The difference this time was the magnitude of the decline. This year's decline was the worst ever to precede an election. If the market continues to follow historical patterns, then 2009 should be a strong year for the market.

After a decline this severe, I believe it is most important to select those sectors that usually generate the highest returns during a recovery. It is easier and more predictable to pick those sectors than to guess what Obama is actually going to do. 

The average recession lasts 11 months with the shortest being 6 months and the longest being 16. 

This current recession is now 12 months long. The stock market tends to recover three to four months before the recession ends. 

Following previous recessions, the strongest sectors (in order of strength) were Consumer Discretionary, Information Technology, Financials, Industrials, Materials and Consumer Staples. The weakest sectors (in order of weakness) were Utilities, Telecomm, Energy and Health Care. For many, the critical decision is between being conservative or growth oriented over the next eight years. 

Looking forward investors can:

--Invest in money market funds; bank CD's, fixed annuities or treasury bonds. These will guarantee returns in the 2-4% range. Depending on the product, your money is locked up at historically low rates for three to seven years.

--Invest in a well diversified, strategic portfolio made up of beaten down bonds, stocks and real estate. This portfolio should be positioned in the sectors mentioned above to capitalize on areas of the market that historically recover the fastest. This panic has pushed stocks down to the same levels they were 11 years ago. 

We do know that returns after previous bear markets have been exceptional.

Most importantly, investors should reallocate their portfolios based on opportunities going forward. Looking backwards or following a "rear view mirror" investing strategy usually causes an investor to invest at the wrong place at the wrong time. 

Feel free to leave comments or contact us if you have questions or concerns. We can be reached at 801-375-2500.

The Presidential Election is Over!

Written by Nathan White, CFA

 
photo by Anzman

I've never been so glad to have an election over.

The constant political bombardment seems to leave me shellshocked. My view on politics is dour.

I just plead with whoever is in power not to screw things up too much. Is that really too much to ask?

I want politicians to get out of the way, but since that will never happen the best I can hope for is minimum damage.

Overall, I consider myself a "cynical optimist" with the view that hard work and a good attitude along with a realistic view of things can get us through anything in life. However, when it comes to politics I find myself becoming ever more pessimistic (I guess that is the cynical side of me winning outright). I try to be optimistic, but it is becoming increasingly difficult as I get older.

Pleas for President-elect Obama:  the damage to the markets has been done. Please don't make it worse.

We don't need a movie entitled "Hoover/FDR II- the sequel." Just get out of the way!

Are we in a Depression? (Continued)

Written by Dave Young for Paragon's 2008 3rd quarter newsletter.

photo by hamed masoumi

The Problem and its Cause

At the epicenter of the current economic crisis is the subprime lending mess. Over the past few years banks began making loans to borrowers that normally wouldn't qualify for loans. Those loans were then repackaged in blocks by Wall Street and sold to banks to hold as investments. Banks are required to have capital reserves that equal about 10% of the amount that they make loans on. If their capital reserves fall below 10% then they either have to raise capital or liquidate holdings to bring their ratio back to 10%.

Initially, the subprime loans were assigned a value based on estimates of what the banks believed them to be worth. As our economy weakened and housing prices began to decline the actual value of these subprime loans were questioned.

In an effort to strengthen their balance sheets many financial institutions tried to sell their subprime loan portfolios. Because so many were up for sale at the same time and no one knew for certain what they were worth the value of portfolios of subprime loans began to plummet. Banks were stuck because they were being forced to sell these securities and since no one really knew what they were worth, they were assumed to be almost worthless. For example, when Merrill Lynch was forced into a merger it was assumed that their subprime debt was worth an absurd 22 cents on the dollar.

This evolved into a credit crunch.

Because of the subprime debt on their balance sheets banks weren't sure if their capital ratios were in line or not. If those ratios aren't in line then legally they aren't allowed to lend. If they can't lend then consumers can't buy cars and houses, businesses can't borrow to buy inventory or meet payroll, and local governments can't borrow to cover short term needs. In essence, everything comes grinding to a halt.

As a result of this credit crisis, the markets continued their sell off. By way of analogy, credit is to our economy what oil is to an automobile.

The essence of the federal bailout plan was that the government would buy the subprime mortgages from the financial institutions at a deep discount but for more than ridiculous fire sale prices. This in turn would alleviate the banks short term capital needs. Because the government doesn't have the same accounting requirements as the banks, they could hold the subprime mortgages “long term” giving them time to determine what they are really worth and allow the depressed real estate market time to recover. In reality, it is highly probable that the bailout won't cost 700 billion and that the government may actually make money. (That would be a first)

With all of the finger pointing who really is at fault in this mess?

The Clinton administration started it by making a politically popular decision and mandating that consumers all be treated equally regardless of whether or not they actually qualified for their loan. Banks were pressured to make loans that they had historically avoided. Republicans attempted to rein in the liberal lending practices with regulations in 2005 but were stonewalled by democrats.

Once the mandate occurred, then banks and mortgage brokers discovered that they could charge much higher fees if the quality of the loans were subprime. At this point they were incentivized to make the lower quality loans. Wall Street's role was to buy the loans from the banks, repackage them in blocks, and then resale them to other financial institutions. They were the delivery system. Because many of them held them on their books, the balance sheets of Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, AIG, Merrill Lynch and other major players were vaporized as the subprime mortgages became impossible to value.

The other guilty party was the consumer. Hundreds of thousands of loans were irresponsibly taken out by consumers that made purchases and then were unable to make their payments. Contrary to popular opinion there is plenty of blame to go around to all parties involved.

Where do we go from here?

Based on market history we know that this bear market has hit the median numbers in terms of time and decline. The previous 34 bear markets have lasted a median of 363 days and declined 26.9%. Through September 30^th, this current bear has gone on for 354 days and the S&P 500 has declined about 24%.

Unfortunately, even though many of our “bottom watch” indicators have triggered, we don't know for certain if we are at the bottom or not. What we do know is that previous bear markets have often reversed when the news has been the most dire.

We also know that some of the sharpest declines have been followed by the strongest rebounds.

Historically it has been a huge mistake to sell during the depths of a bear market.

As always, if you have any concerns about your investments, please call us at (801) 375-2500 and we will evaluate how your portfolio is invested versus your goals and individual risk tolerance.

Are we in a Depression?

Written by Dave Young for Paragon's 2008 3rd quarter newsletter.

No, and it is ludicrous to even make the comparison.

We are not even officially in a recession yet, let alone a depression. The word depression is used perpetually in the media to describe our economy. These comparisons are irresponsible and only do more to unnecessarily destroy confidence.

Confidence is what makes the economy work.

By way of comparison between today and the Great Depression:

· Unemployment was 25% during the depression, today it is about 6%.

· Our economic output (GDP) shrank by 25% during the depression, over the past year it grew at 3% .

· Consumer prices fell by 30% during the depression, today they are still rising.

· 40% of all mortgages were late by 1934; today only 4% are late.

· In the 1930's more than 9,000 banks failed, in the past two years there have been about 30 failures.

*statistics taken from MarketWatch.

Extraordinary Circumstances

Extraordinary circumstances are driving this bear market. One year ago, according to actual statistical measures, our economy was extremely strong and hitting on all cylinders. Eighteen months ago, the presidential candidates began telling us how bad things were. At that time their mantra of economic weakness was completely untrue.

Since political gain is much more important to most politicians than speaking the truth, they continued their drumbeat of doom.

They told us that we were in recession when we weren't. They told us unemployment was bad when it wasn't. They remind me of the annoying salesman whose strategy is to scare you to death in order to make the sale. Their goal is to convince us that in order to be saved (from whatever) we must elect them.

As I mentioned above our economy is based on confidence. It is plain and simple. When its participants are confident, they spend, they expand and they maximize growth. When they lose confidence and are scared they stop spending, stop borrowing, stop growing and effectively huddle in the corner. That lack of confidence causes the economy to slow or stop growing.

About six months into the campaign the political scare tactics began to work.

They were killing consumer confidence. One year ago in October the stock market started its decent and then six months later we began to see the first signs of economic weakness.

 To be continued. Click here to read more.

Who's the Government Bailing Out?

Written by Nathan White, CFA

photo by KaCey97007

Volatility continues...

"Tread carefully" is the mantra for this market.

One day you are tempted to sell everything and run for the hills, and the next day you can't believe what a great buying opportunity this is.

In this environment you want to identify quality assets and let the price come to you and do it in small increments.

Placing a large bet can lead to quick insolvency and many are tempted to put too much capital at risk. On the other hand if you don't buy anything as the market goes down you are also throwing away tremendous opportunity.

I'm torn on the current government bailout.

It could save us from a market meltdown, but who is to say that the market would meltdown anyway? Maybe then we would be done with this and we wouldn't need a bailout.

On the other hand, a bailout will come at significant cost which will have to be paid no matter what. If it saves the market in the short term it can only come at the expense of long term prosperity.

It is just like selling a call or buying a protective put on the economy or our standard of living -- both protect on the downside, but limit the upside potential.

That may seem desirable in the short term, but we will definitely feel the frustration in the future as we strive to increase our standard of living, and the efforts seem to bear no fruit.

Paragon Wealth Management, a wealth management firm in Provo, Utah, is a provider of managed portfolios for individuals and institutions. Although the information included in this article has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this article 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.

2008 Presidential Election and Your Money

photo by Seansie

Written by Dave Young, President of Paragon

How will the presidential election effect you?

2008 has been a rough year for investors.

Whether you have been invested in real estate or the stock market, both have gone down more than up. The credit crisis and high energy prices have been blamed for most of the damage.

Talking to investors, I get the sense that many are worried about the election.

The data that we track from Intrade, a futures based election trading system, show Obama with a clear 64% to 37% lead over McCain. Unless Obama makes some unbelievably bad mistakes over the next couple of months it is likely he will be our next president. Historically, this tracking service has been much more accurate than traditional polling.

Investors are justifiably concerned because many of Obama's policies are potentially damaging to our economy.

Under the premise that the government knows how to better spend your money than you do, Obama wants to raise taxes significantly. And any economist will tell you that raising taxes is not the way to help a weak economy.

Obama's platform proposes major tax increases.

He is focused on raising more taxes from those taxpayers who already pay 90% of the U.S. tax bill. The bottom line with his program is that if you already pay a lot of taxes then you will pay significantly more. If you don't pay very much in taxes then you shouldn't see much change, you may even pay less. According to a recent Wall Street Journal editorial, Obama would raise the top tax rates from their current 40% to over 60%, including the state and federal taxes.

This is a calculated political bet that there is a majority of Americans that want the more affluent minority to pay all of America's bills. Throw in some anti war rhetoric and a promise of undefined "change" and you have a recipe for a successful presidential campaign.

There is really no benefit to arguing the merits of Obama's platform. We can't control the outcome of the election. But we can control the investment strategies we follow in these uncertain times.

Historically, when democrats take the white house, the market usually does better than under republicans. That was no typo. It's a little confusing though.

Usually going into an election, if a democrat is winning, Wall Street expects the worst, and the market sells off in advance. After the democrat gets in office, then Wall Street realizes they aren't going to do what they promised, breathes a sigh of relief and then the market rallies.

On the other hand, if a republican is winning, the market has positive expectations and rallies in anticipation. But then after the republican gets in, and doesn't keep their promises, then the market sells off in disappointment.

So far this year the market has followed a pattern similar to previous election years when the incumbent party has lost.

If McCain is able to miraculously turn things around then we will likely see a significant rally into the end of the year. If Obama keeps his lead then the market will likely be flat to only slightly up between now and the end of the year, but then next year the market should perform better.

While market forecasts make interesting conversation, I don't put a lot of stock in them, including my own. At Paragon Wealth Management, our investment decisions are all based on quantitative models. We process market data on a daily basis and make our decisions accordingly. Human emotion is removed from the decision process.

Paragon's investment models measure what is actually happening in the market, day by day.

They are designed to react to what the markets are actually doing rather than what we think will happen in the future. For example, whether a democrat or republican wins will affect how health care stocks, energy stocks, tech stocks, financial stocks, defense stocks, etc. all react.

The bottom line is that this election WILL affect the market.

Certain markets and sectors will perform much better than others, depending on the election outcome. It is important to have an investment strategy in place that will adapt to whatever changes take place. In the stock market, change is the only constant that you can plan on.

Visit our website for more information at www.paragonwealth.com.