Money Managers Live

Staying Focused

Written by Nathan White, Chief Investment Officer

photo by Rene Ehrhardt

Right now our investment models are favoring areas such as emerging markets and resource-based sectors. Emerging markets are showing good relative strength and are improving based upon confidence that the global economic situation is improving.

Areas such as Brazil and China are benefiting from the commodity demand theme as their middle classes continue to grow. These areas were also less exposed to the credit crisis.

Improving economic prospects along with the increased global demand for commodities directly benefits resource-based sectors of the economy. We have been allocating towards these areas, and now that we are in the summer doldrums we will look for further opportunities to average into these areas on any pullbacks.

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.   

Don't Blink...

Written by Nathan White, Chief Investment Officer

 
photo from iStockphoto

I have always been amazed at how fast markets can move.

If your pieces are not in place before a move occurs you often miss out on the best part of the move.

The hard part about getting your pieces in place before a move is that you must act early and you must pay the price of being wrong for a while. This is the trade-off, and there is no way around it.

Look at the way so many are now scrambling to get in the market now that the sun has appeared through the clouds and the world has not ended. The opposite is just as true after as people clamor to get out of the market after it drops.

If the clouds have parted, how should your investments be positioned?

At Paragon Wealth Management, we favor sectors and asset classes that perform the best after market bottoms. These include areas such as emerging markets, which can benefit from a snap back in demand not only from the U.S. but from domestic demand as well.

In prior periods, many of these markets were wholly dependant upon the U.S. However, with emerging middle-classes in countries such as Brazil and China the potential for growth is amplified. Sectors that get beat up the most in sell-offs often have the most "snap back" potential.

The Material and Financial sectors really took it on the chin during the last six months and have been roaring back with a vengeance after being severely over-sold. Other areas that perform well during recovery periods are Technology and Small-Cap.

It can be very difficult from a psychological standpoint to get back into the market after a low has been established.

People are so shell-shocked by the bear market that no one believes the rally when it first starts. Many (professional and individuals) wait for a re-test or pull-back to get back in only to have the market steadily clime away from them.

Does this sound familiar?

Seminar/Webinar this Thursday, April 23

If you haven't had a chance to listen to Paragon's webinar called, "What is Happening with the Stock Market and Economy," we'd like to invite you to sign up to listen online or watch it live at our office in Provo. The details are below.

When:  Thursday, April 23

Time:  12:30-1:30 p.m. MST

Cost:  There is no cost. It is complimentary

Where:  Online (at your home or office) or live at Paragon Wealth Management in Provo, Utah

Topic:  What is Happening with the Stock Market and Economy? What Should you be doing with your Investments right now?

R.S.V.P.:  Click on this link Paragon Wealth Management to register

Contact:  Shannon Golladay 800-748-4451 if you have questions or need more information

 

Watch Tech...

Written by Nathan White, CFA

One of the areas in the market that looks attractive right now is the Tech sector. In the fourth quarter of 2008 the Tech sector was down 26%, which was about 3.4% worse than the S&P 500. Recently as many sectors and broad indexes have broken their November lows the Tech sector has not reached new lows and is showing good relative strength.

This sector has a good record of leading the market during rallies and is an area that we monitor for clues as to when the market might turn. Many bear market studies show that defensive sectors perform well before a market bottom is reached and the higher beta sectors, such as Technology, perform best after a bottom.

Does the Tech out-performance signal that we've hit a bottom? In the short-term it is too hard to tell, but since Tech usually leads on the upside and downside it is interesting to see it holding up as many sectors have continued to break down. The forward PE of the sector is 13.4 -- a number not seen since before the late 90's tech boom. We currently hold a position in the sector and like the signs it is showing that indicate a good rally could be near.

Stay tuned...

 

 

Paragon Wealth Management Webinar/Seminar Schedule
Are you worried about the stock market and economy? Listen to our free webinars online or at our office.

Thursday, March 19 (12:30-1:30 p.m. MST)
Wednesday, April 8 (6:00-7:00 p.m. MST)
Thursday, April 23 (12:30-1:30 p.m. MST)
Tuesday, May 5 (5:00-6:00 p.m. MST)

R.S.V.P.
Shannon Golladay
801-375-2500
shannon at paragonwealth.com

Investment Strategy Update

Written by Nathan White, CFA
 
Much of our quantitative work indicates that the stock market is setting itself up for an intermediate term rally that would start to develop over the next few months.

This rally could propel the S&P 500 into the 950-1000 range.

Negative sentiment is running wild with nearly everyone giving into the bear. Emotions are running high. This is a contrarian sign.

One catalyst to begin a rally is to get the White House and Congress to stop giving daily speeches and TV appearances!

It is flat out amazing to see the markets sell off every time the President speaks. The recent sell-off in the markets has been caused by all of the uncertainty created by the government.

NO one knows what the rules of the game will be or what to expect and so the markets continue to pull back. The markets are pushing the government to act and create some sort of credible end game to the financial/credit mess. Government inaction is causing the markets to price in all bad scenarios with the banks.

In light of the current choppy conditions, our Top Flight Portfolio still holds some defensive sectors such as Conservative Staples and Health care.

We have steadily been moving the portfolio towards those areas that would do best in a broad market rally such as Technology, Materials and some emerging markets. If a bull trend develops we will increase our allocation to these areas. If the bear trend resumes, we will take off the more aggressive portions of the portfolio.

Stay tuned...

Paragon Wealth Management Webinar/Seminar Schedule
Are you worried about the stock market and economy? Listen to our free webinars online or at our office.

Tuesday, March 3 (6:00-7:00 p.m. MST)
Thursday, March 19 (12:30-1:30 p.m. MST)
Wednesday, April 8 (6:00-7:00 p.m. MST)
Thursday, April 23 (12:30-1:30 p.m. MST)

R.S.V.P.
Shannon Golladay
801-375-2500
shannon at paragonwealth.com

Bonds spreads start to narrow

Written by Nathan White, chief investment officer

photo by epicharmus

Credit spreads are an indicator of the willingness of investors to own "risky" assets. They measure the difference between the yields on various debts versus U.S. Treasuries.

Spreads widen when investors seek the safety of treasuries and narrow when they feel it is "safe" to come out of the woods. One of the signs of the easing of the credit crisis would be a narrowing of the credit spreads. A variety of spreads have begun to contract off the recent historic highs.

Agency bonds have contracted from around 165 basis points to 86. Investment grade corporate credit is down about 98 basis points and high yields have a contracted 434 basis points. Hopefully this trend can continue and would provide some much needed support for the equity markets.

China is Rising

Written by Nathan White, chief investment officer

    photo by Luo Shaoyang 

New for this year, I thought it would be insightful to discuss the rationale for some of our holdings in order to give our clients a better view of where we stand. Our trend model has recently turned bullish on China and since its bottom on October 27, 2008. The MSCI China Index has shown good relative strength versus most markets.

The markets could be signaling an economic recovery in China and so we took a position in anticipation of this scenario. China has not been as damaged from the direct effects of the credit crisis and stands to benefit from fiscal and monetary stimulus. The Chinese central bank has been lowering rate and allowing the yuan to weaken.

China's $586 billion stimulus package includes infrastructure projects, which could have a more beneficial effect in China due to its relatively under developed status than the effect comparative projects would have in developed countries such as the U.S. term, China's foreign currency reserves and net creditor status give it an advantage over net debtor nations such as the U.S. Debtor nations are being forced into saving while creditor nations have the ability to increase consumption. If the markets enter a recovery phase, we look to China to be one of the leaders to the upside.

The Perfect Storm (continued)

Article written for Paragon's 4th Quarter 2008 Newsletter
by Dave Young, president

photo by john-morgan 

Where do we go from here?

It is impossible to know how this market will unfold with absolute certainty. What follows is our opinion based on experience and a study of market history.

So far, the markets have followed the same pattern as previous election years, selling off when the incumbent party loses. 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 election year patterns, 2009 should be a strong year for the market.

After a decline this severe it is most important to buy sectors that have historically generated the highest returns during a recovery. It is easier and more predictable to pick those sectors than to guess what politicians are going to do next or how the economy will unfold.

Recessions average 11 months with the shortest being six months and the longest being 16. The current recession has lasted 12 months. 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. Emerging markets are also usually very strong performers. The weakest sectors (in order of weakness) were Utilities, Telecomm, Energy and Health Care.

The stock market continuously trains investors to be in the wrong place at the wrong time.

When markets are strong and moving up everyone wants in and aggressively buys. That is often the wrong time to put money into the market. Conversely, when markets are bad and go down, everyone sells, and no one wants in. That is usually a good time to invest. Occasionally, you get market conditions that are horrible (like now) and investors are acting irrationally in extreme panic. At this point in the cycle, investors begin to sell at any price. This is when investors begin effectively "giving away" investments in search of "safety".

Historically, this point in the market cycle has been a phenomenal time to invest and buy new positions. Moving up from extreme lows is when fortunes have been made after previous bear markets.

I believe investors are positioning themselves in the wrong place at the wrong time once again. As evidence, simply look at the record amount of money that has moved out of stocks and into cash, money markets, bank Cd's and fixed annuities. At a time when 30-year treasury bonds are paying a record low 2.6 percent yield, in a quest for safety, investors are running as fast as they can to lock in those low yields... at just the wrong time.

We recommend that investors reallocate their portfolios based on opportunities, looking forward, not backwards. Looking backwards and following a "rear-view mirror" investment strategy causes investors to perpetually invest in the wrong place at the wrong time.

We appreciate our relationship with you. We're looking forward to 2009 and the opportunities that have been created by this year's extreme sell off. If you have concerns or would like to meet, please call us at (801) 375-2500.

The Perfect Storm

Article written for Paragon's 4th Quarter 2008 Newsletter
by Dave Young, president

photo by smile my day

2008 delivered the perfect storm to create one of the most difficult markets in modern history.

A severe credit crisis, overseen by inept incoming and outgoing politicians, coupled with the media that constantly emphasizes the worst possible scenario combined to push the S&P 500 to its worst performance since 1931.

It didn't matter whether an investor was invested in stocks, corporate bonds, real estate, municipal bonds, energy, commodities or currencies. They all suffered significant losses in 2008. The 38.5% decline in the S&P 500 put the index below the level it was at 10 years ago.

The meltdown wasn't confined to the U.S. Around the world, 26 of the 32 countries we track recorded their worst losses in history. Likewise, 16 of the 18 global sectors we track also recorded their worst losses ever.

To put this in perspective, consider the following:

--Warren Buffet, considered an icon of wise investing, lost almost half of the market value of his portfolio between the middle of September and the middle of November.

--Bill Miller, one of the only managers to beat the S&P 500 for 15 consecutive calendar years through 2006, was down almost 60 percent year to date through December 3rd.

--Dan Fuss of Loomis Sayles is a renowned bond manager. Bonds are traditionally very conservative and are used to stabilize portfolios. His highly regarded bond fund was down an incredible 28 percent through December 5th. He described this market as a "once in a 50-year" buying opportunity.

--Icon Funds, a value-based mutual fund manager, put a report in December stating that stocks are 60 percent undervalued.

How did we do?

Considering the S&P 500 lost -38.5%, the average U.S. diversified stock fund lost -40%, the NASDAQ lost -41% and the average international stock fund lost -46%, we did relatively well last year. Managed Income, our conservative portfolio, outperformed most bond portfolios except those that are made up of treasuries. Top Flight, our growth portfolio, beat the S&P 500 extending its record of outperformance to eight of the last 11 years.

From an absolute perspective, we didn't perform as well as we would have liked. Even though we beat most benchmarks we still saw our accounts decline in 2008. Both Managed Income and Top Flight suffered their largest declines since their inceptions in 1998 and 2001.

In my 20 years of investing, last year's market meltdown was one of the most difficult I have ever encountered. We weren't able to control downside risk as effectively as we have previously. There were several reasons that we were negatively impacted.

One way we reduce risk is to continuously adjust our equity exposure. When valuations are high we reduce equity exposuree and add cash. When valuations are low we reduce cash and increase equity exposure. As you can see by reviewing our track record, this has historically reduced our downside risk and increased our returns.

The fact that the markets have never reached excessive valuations prior to the 2008 decline made this bear market very difficult to avoid. For example, in the 1987 and 2000 bear markets many market sectors were overvalued which triggered our models to raise cash before those declines occurred. In 2007, with the S&P up only 5.5% on the year, the markets were at fair value. They weren't overvalued by historical standards. As a result there was no reason for us to move to cash like we normally do.

Another way we reduce risk is to move into sectors of the market which usually perform well during declines. This bear market was brutal because most of the safe havens we moved into for protection, like utilities, health care and bonds got beaten up just like the rest of the market. Unlike previous declines, this time moving into conservative sectors provided very little cushion.

There was nowhere to hide in 2008 for investors.

To be continued...

Potential Energy

Written by Nathan White, CFA

 
This chart measures the the amount of selling that has taken place during this historic market downturn.

Focus on the bottom line of the graph, which measures money market assets as a percentage of total market value. At the end of October it was 32.8%, which is higher than 1982 and 2002!

The November figures are not available yet, and will definitely put the figure even higher.

The point of posting this chart is to offer some historical perspective of what happened after these peaks in cash levels. I would liken the large amount of money market assets as a tremendous store of potential energy just waiting to be released at some point into kinetic energy. Now, I don't know at what point all this "potential energy" will be released onto the market and there is nothing to say that it can't keep growing larger.

According to this chart, where would you want to be positioned right now? Remember to think long-term.