Money Managers Live

Balancing Act

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

The first warning shot across the bow of the markets from the Fed came on Wednesday.  Fed Chair Bernanke appeared before Congress on Wednesday and finally signaled that, depending on the data of course, the Fed could start slowing the rate of QE.  The markets immediately reversed and on Thursday the Japanese market, which has been on an absolute tear, fell 7%.  Whether or not this will lead to the long-awaited correction remains to be seen.  The markets have been on a tear due in a large part to the fear investors have of missing out.  That hasn’t gone away yet, but at the same time the pace of the advance was becoming unsustainable (Japan has been an extreme example) and a pause would do some good. Fundamentally the factors that have been pushing the market up remain in place and so any pullback could remain shallow.

Economic data continues to show modest growth with hopes of increasing slowly as the year progresses.  The economy is getting to the end of the deleveraging process and with the Fed’s tip of the hat, we have now officially entered the mode that if the economic figures get stronger the Fed will conversely reign in QE.  Overall, that is a good thing and long overdue.  As I have said for some time it is unfortunate that just as the economy starts to hit “escape velocity” the Fed will have to actually or potentially pull back on QE.  That keeps economic growth in the slow growth mode.  That’s the price of QE at the least and it’s a shame in my opinion.  We would be better off if years ago we took more of the pain upfront rather than shackling ourselves with the pains of unraveling QE now.

This was mostly a psychological move, a sort of trial balloon, by the Fed to see how markets would react.  They will still be providing massive amounts of QE and will be very slow in pulling back.  They will still risk inflation over letting the economy slip.  In a practical sense their actions are nothing more than pushing on a string.  Markets are all about future expectations though and the beginning of the end of QE could be upon us.  Going forward, the Fed will now have to play a skilled balancing act in managing expectations about unwinding it massive balance sheet.  No easy task to say the least.

Equities still remain the place to be but the easy money has been made and it could now be a choppier ride going forward. 

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.

 

One Goes Down While The Other Goes Up

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

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.   

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.

I Heard the Stock Market is Going to Crash!

Written by Dave Young, President and Founder of Paragon Wealth Management

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.

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.

 

Inflation Where Art Thou?

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

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.

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.

Spring Housing Market Update

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

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.

 

Potential Energy

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.   

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.

 

2013 Opportunities and Focus

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

Overall, we currently see a positive year in 2013 for equity markets.  The negative effects of higher taxes and somewhat lower government spending will be offset by improved corporate spending and economic growth as the year goes on.  Companies and consumers have been cautious now for years and that could finally reverse in 2013 resulting in better economic growth.  This could help the market’s current low to medium valuation multiple to expand thereby benefitting stocks overall for the year.  The Fed should stay in continued easing mode as they try to boost inflation.  Government policy wants you to spend not save.  We remain cautious on bonds and are still avoiding Treasuries and long-dated maturities.  The risk for reward is still very unattractive in this area.  There will be the usual ups and downs throughout the year and the now seemingly ever present uncertainty caused by government action and policy will continue to be over the market’s shoulder.

Starting to Look Abroad

It’s has been awhile since we have had a significant position in foreign markets.  We have been waiting patiently since the financial crisis for the emerging markets to reassert themselves and it looks like the time has finally arrived – or at least started to.  The reason this excites us is because the inherent growth story associated with emerging market countries is now coupled with attractive valuations.  The past few years have seen the U.S. market outperform on a relative basis.  In fact, the S&P 500 has returned about 18 percent for the last two years while the MSCI Emerging Markets Index was down over 3 percent.

We are seeing signs that the tide is starting to shift.  Over the last three to six months the emerging markets area has outperformed the S&P 500 on a relative basis.  The deceleration in growth rates for many emerging market economies appears to be stabilizing.  Chinese manufacturing PMI improved for the fourth month in a row in November to the highest figure in seven months.  This adds to the evidence that the Chinese economy is on the mend and starting to recover.  By the way, when I say recover, I mean returning to an 8% growth rate.  Due to their stronger fiscal situations, many emerging market countries have more flexibility in enacting economic stimulus measures.  Recent moves by many countries indicate that they are starting to move more aggressively on this front.  Brazilian policy makers recently cut reserve requirements for lenders to stimulate investment in Latin America’s largest economy.  The recent leadership change in China has heightened speculation that more measures will be introduced to boost consumption. 

Growth Potential

The main reason why emerging markets matter is because of their growth potential. Stronger economic growth turns into strong earnings growth over the long term and that is what ultimately drives stock prices higher.   Over 80% of the world’s population lives in emerging markets and their workforces are young and increasingly educated.  These economies experience a structural change as middle classes emerge with individuals achieving rising levels of wealth.  They are often rich in resources and labor.  Their gross national incomes and per capita incomes are small compared with developed economies.  As these countries open their economies and enact policy reform there is dramatic potential for their incomes to climb.

Compared with developed markets, emerging markets have historically had greater return and volatility.  The volatility rises from the ever present risks inherent with emerging markets:  political uncertainty, regulatory and corporate governance issues, and the dominance of state owned firms.  Because of these factors, investors demand greater return to compensate for the heightened risks.  The higher volatility normally associated with emerging markets will still be a factor going forward.  In addition, the currencies of many emerging market countries could strengthen on a relative basis due to their stronger fiscal situations offsetting some of the possible advantage.

Normally, stocks or sectors with higher growth rates command higher valuations.  Emerging markets currently have higher growth rates and lower valuations.  This spells opportunity.  The current price to earnings multiple for emerging markets is about 11 compared to 14 for the S&P 500.  This is about a 27% difference and indicates some of the relative value that we believe exists in this area.  These low valuations could help to cushion any downside if markets fall and provide more upside if markets rally.  The main reason that valuations in emerging markets have come down is because their growth rates have come down from the lofty levels usually experienced when growth first kicks in. Part of the reason for the slowdown has been from the effects of the worldwide recession which emerging markets are not immune from.  However, part of the slowdown comes as these economies start to develop more domestic demand and transition from relying primarily on exports.   For example, China and India had growth rates of 14% and 10% respectively in 2007.  Those rates have now come down to 8% for China and about 5.5% for India.  By comparison, U.S. GDP growth estimates are currently around 2.5%.  On the whole, we believe the better growth and cheaper valuations of emerging markets offer a compelling opportunity compared to the risks.

Other Areas of Focus

Closer to home, the U.S. sectors we like are healthcare and some of its sub-industries such as healthcare providers and pharmaceuticals.  The financial sector looks favorable as it has gone through years of cutting costs and employees and is no longer burdened by toxic assets.  This could set the area up for better profitability going forward.  We see other intermittent opportunities in technology, homebuilders and energy throughout the year.   As U.S. fiscal contentions could last all year with no quick fixes it might be time to look outside the U.S. for the best relative opportunities.  U.S. valuations are reasonable at current levels considering artificial low interest rates.  Retail investors are still woefully underinvested as they continue to fight the specter of 2008.  This bodes well for equity markets overall and emerging markets in our opinion could be one the best areas of the market.

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 Year In Review

Written by Dave Young, President & Founder of Paragon Wealth Management

2012 continued the volatility that’s characterized markets since the global financial crisis, which will be marking its fifth anniversary in September.  This year's market moves were driven by three primary issues, Europe, the Middle East, and U.S. Politics.

We had a back and forth flow of good and bad news all year out of Europe.  Positive indications for Europe’s economy in the first quarter led to the strongest start for markets in recent memory.  These gains were promptly given back as concerns rose in the second quarter. Markets then rallied in the second half of the year when the European Central Bank announced that it would provide liquidity to governments and financial institutions – to the point that for 2012 as a whole, Europe’s stock market actually outperformed the U.S.

Middle East problems added to the mix this year.  This time it was Syria, Libya, Egypt, Israel and Iran that kept things stirred up.  Problems there always add an element of fear to investors in the U.S. 

Our politicians provided a lot of political theater due to the election year.  Markets rallied from June through October and then sold off into the election.  After a short post election sell off, the markets surprised a lot of nervous investors and rallied through December.

The final act of the year was the drama surrounding the "fiscal cliff".   According to the press the fiscal cliff was the "Big Scary" issue that was going to sink the stock market.  Instead, our politicians came through an hour before year end and voted on a 150 page bill they had three minutes to read.  As usual, it doesn't cut spending, doesn't significantly raise revenue and kicks the can down the road another few months.  The more things change the more they remain the same.

Overall the year was very volatile and very choppy.  The surprise this year was that in the face of all of the negative news most markets moved higher. 

The Outlook for 2013

In the short term, through 2014, there are a lot of reasons to be bullish on stocks.  The US housing market has hit bottom and should be a positive force in 2013.  Growth in the middle class in emerging markets will continue to provide opportunities for investors and for companies selling into those markets.  Huge new oil discoveries should put a cap on the price of oil, which is always a boost for the economy.  Stock valuations are still favorable.  Low interest rates that hurt bonds are very good for stocks.

Over the long term, I have some serious concerns.  The biggest obstacle is going to be the debt that our politicians continue to grow.  We are 16+ Trillion in debt and going further into debt every day.  Forty two cents of every dollar that the federal government spends is still borrowed from our kid's and grandkid's future. Based on current policy, that 16 Trillion dollar debt isn't going to magically disappear.  At sometime in the future it will have to be addressed.  If it isn't then we will experience a real cliff.  That is the one that we will be watching out for. 

Investing is difficult.  It rewards those who have the discipline to stick with their long-term strategy during challenging times. It punishes those who jump in and out and are always chasing what worked most recently.

Always focus on what you can control.  That includes managing your risk by making sure your risk tolerance is set properly.  Following a disciplined, systematic process that has a long term track record.  Stay focused on your strategy and let the long-term results take care of themselves.

We appreciate the opportunity to be your financial advisor.  Please contact us if you have any questions or concerns. 

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 Entitlement Trap

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

I read in the Wall street Journal today that the Tax Foundation notes that almost 70% of Americans take out more from the tax system than they put into it.  Seventy percent!  No wonder the debate about the fiscal cliff is primarily focused on taxes.  It’s a great strategy to distract people’s attention away from the real problem – spending.  Is it inevitable that as democracies age their citizens become accustomed to the resulting prosperity and take it ever more for granted by voting themselves ever more entitlements?   Entitlements are always so very well intentioned and therefore difficult to argue against in a moral sense.  After all, who wants to deny assistance to Sandy/Katrina victims, single parents, the homeless, those who can’t afford college (isn’t that everyone now?), retirees, “working families”, farmers, the unemployed – the list is unfortunately now endless. 

The problem is that eventually the entitlements and spending become unsustainable.  So how do we break this vicious cycle?  The problem is offering entitlements in the first place.  No one ever wants their entitlements cut or taxes raised per se (despite what Warren Buffett says).  We usually want someone else’s benefit to be cut or taxes raised.  The mega rich often support higher taxes on themselves because it won’t materially change their lifestyle but it does create barriers to entry to more people becoming like them.  It entrenches their place at the top.   But I digress, once begun entitlements are hard to end.  Think about it on a personal level, if you get a deduction for a mortgage or tax credit for children do you want those ended or reduced?  No, because it means your refund will go down or tax payment will go up – either way you’re out of more money.  In fact, if offered an entitlement it behooves you to take it because if not than you will be worse off economically on both a relative and absolute level.  You don’t have the option for either a mortgage deduction or a lower rate.

Now let’s say you’re idealistic and want to take a stand against the growth of the entitlement state that will eventually end in great pain.  You decide to take the high road and refuse any entitlement offered by the government.  Great, except for the fact that you will become progressively less well-off as time goes by.  On a relative basis this could become very painful as others who take the entitlements maintain or increase their standard of living – at least until it all comes crashing down.  The more entitlements grow and replace things that people purchased before on their own the more expensive or difficult those things become to obtain in the private market.  Thus if you chose to forgo entitlements it would progressively become harder to maintain your standard of living.

Entitlements are such a catch-22 in that one almost “has” to use them and that eventually they can bring the whole system down.  The only way to avoid their deleterious effect is to not enact them in the first place or to severely limit their use.  However, everyone likes “free” goodies and politicians use this to their own advantage.  It creates the entitlement trap that can eventually bring an economy to its knees.

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. 

Fiscal Cliff...

Written by Dave Young, President of Paragon Wealth Management

So here we are again.   Another saga of politicians making promises, trading accusations and accomplishing nothing of substance.  It's been said that the definition of insanity is doing the same thing over and over and expecting a different result.  So what does that say about our "leaders" in Washington?

It's obvious we have a 16 Trillion and growing problem.   One side believes that the solution is to keep increasing taxes...as long as we only do it to the "rich".  The other side believes that the only solution is to cut government spending.

This impasse brings us to what the media loves to call the "Fiscal Cliff".

What makes the Fiscal Cliff such a great title is that it sounds really scary.  Fear increases attention.  Increased attention translates into more viewership.  More viewership translates into more revenue for the media outlets.  As a result, the media loves scary things, real or imagined.

In reality, if our politicians cannot agree on a solution then that will create a problem.  That problem will be more of a fiscal slide over time rather than the fiscal cliff that has been portrayed.  If the slide occurs it will likely take months to play out before it has any direct effect on our economy.

If it did play out over six months or more then the revenue that would be sucked out of the economy could potentially push us into another recession.  If that recession played out then that would be bad for all investments.

Even though it would take months to play out from a practical standpoint, potential selling could be immediate and more severe if investors act emotionally and start selling just because they are scared. 

In the previous politically induced potential calamities, ie. the European Crisis, the Debt Ceiling Crisis, and the U.S. Treasury Debt Downgrade Crisis... politicians reacted by effectively doing nothing and kicking the can down the road.  In the end, they did what they always do and went back to spending more of other people's money.  

There is a decent chance that they will do nothing.  Not because it is the right thing to do...but because it is politically advantageous.  If they do "something" it will likely not help the core debt problem.  However, just going through the actions of doing something would likely have a positive effect on the markets.

In my opinion, I believe that if the market does sell off because of what the politicians do, I don't think that it would be long lived.  In other words I would expect the losses to be reversed over the following months just like the previous political meltdowns.  On the other hand, if they come to some agreement that is viewed positively by investors then there is a decent chance we could see some upward market movement.  In short, I think that there is more downside for investors by being out of the market right now than there is to stay invested.  Keep in mind, unfortunately, I can't see into the future, and markets are free to do whatever they want.

In the end, the most important thing to do is make sure that your risk tolerance is set at a level that you can live with.  Make sure you are comfortable with your mix of conservative versus growth oriented investments.   If your risk tolerance is set properly, then you should not be stressed regardless of how things play out.  As always, please contact us if you have any questions or concerns.

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.