Money Managers Live

Money Managers Live Top Posts for 2008

photo by Wofgang Staudt

It has been a year since we started this blog, Money Managers Live. It has grown significantly since it began. We started it to comment about the stock market each week and write articles about current events, retirement, investing, building wealth, etc. It has been a good year.

Below are some of our most popular posts from 2008.

January 24:  Why Investors Should NOT listen to Market Forecasts

February 7:  Leave a Legacy by Planning for Retirement

April 15:  Seven Steps for Building Wealth- Avoid Unnecessary Debt

May 29:  What is Happening with the Stock Market?

June 25:  When do I Need to Take an RMD?

July 16:  Is the Media Making our Economy and Stock Market Look Worse?

September 22:  Don't Buy Stuff You Cannot Afford (Saturday Night Live video)

October 2:  The World Turned Upside Down

October 10:  It's a Wonderful LIfe (movie clip)

November 10:  A 'Tsunami' Hit the Stock Market- Now What?

November 21:  History Repeats?

December 18:  What Obama Means for the Stock Market

Feel free to leave comments or questions.

Happy New Year 2009!

     
photo by babasteve

We hope you are having a great holiday season. At year end we want you to know that we appreciate our relationship with you and your trust in us.

Napoleon Hill once said, "Every adversity, every failure, every heartache carries with it the seed of an equal or greater benefit."

2008 gave us one of the most difficult markets in modern history. We're looking forward to 2009 and the opportunities that have been created by this year's extreme selloff.

--Dave Young, president of Paragon

 

Merry Christmas!

   Photo by krisdecurtis

 Merry Christmas from Paragon Wealth Management! We hope you have a wonderful holiday!

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.

Don't Hang Yourself... Look to the future and re-allocate your portfolio accordingly

Written by Dave Young, president

Last week I was look through various stock market charts when my 14-year-old son walked into the room. He asked me what I was looking at.

I thought I would have a teaching moment and began to explain how markets move up and down in cycles. After silently looking at the charts he responded,"If that was my money, I would hang myself!" and walked out of the room.

While I thought his response was a little harsh, I do understand that most investors are very discouraged after such a difficult year.

So how bad has this market been? Consider the following:

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

--Bill Miller, one of the only managers to beat the S&P 500 for the past 15 consecutive calendar years through 2006, is 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 is down an incredible 28 percent through December 5th. He said this is a "once in a 50-year" buying opportunity.

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

--High Yield bonds actual default rates are currently at 3.1 percent. However these bonds are currently priced as if the default rate was 17 percent.

Not to understate the obvious, but investment markets are difficult. They do whatever is necessary to cause the most grief to the largest number of people.

The 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 is aggressively buying. That is often the wrong time to be putting money into the market.

Conversely, when markets are bad and going down, everyone is selling 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 the stage when investors begin effectively "giving away" their investment in order to get out of them.

Historically, this 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 been moving 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 3 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.

Looking forward over the next three to five years investors have a choice:

--Invest in money market funds; bank Cd's, fixed annuities or treasury bonds. These will guarantee returns in the 2 to 4 percent range. Your money is locked up at historically low interest rates for 3 to 7 years with significant surrender charges if you change your mind.

--Invest in a well diversified, strategic portfolio made up of beaten down bonds, stocks and real estate. Our portfolios are currently positioned to capitalize on areas of the market that historically recover the fastest (visit our website www.paragonwealth.com to see examples of recommended portfolios).

This panic has pushed stocks down to the same levels they were 11 years ago. We won't know until after the bear market has ended that it is over, but we do know that returns after previous bear markets have been exceptional.

Looking backwards or following a "rear view mirror investing" strategy, usually causes an investor to invest in the wrong place at the wrong time.

Our portfolios are currently reallocated based on opportunities going forward. When the market finally turns positive we will continue to adjust our portfolios based on which areas are showing the most strength.

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.

History Repeats?

Written by Nathan White, CFA

Stock market chart, originally uploaded by shannongolladay.

There are certain events that happen in your lifetime that you always remember, such as getting married, the birth of a child, etc. Experiencing the worst market decline ever is probably not an event you want to have on your list.

These are definitely historic times.

I thought it would be interesting to post this chart to illustrate the current circumstances in the stock market.

This chart shows how the current market volatility compares with other tumultuous times going back to 1957. You can see that volatility spikes above 2.5 coincide with major market sell-offs and bottoms. In hindsight, these were great buying opportunities as evidenced by the significant rallies that occurred after each spike.

That brings us to the current situation which as you can see is literally off the charts!

Theoretically, a 6 percent standard deviation event is expected to have a 0.0000001973% chance of occurring! Of course that is based upon the theory that markets follow a normal distribution or in my words in a "normal world."

The problem is that real life is often anything but normal. So now we find ourselves in the present "historic" situation where the market decides to destroy all investments and all of the accompanying strategies and models no matter how successful they have been.

I'm a big believer that history repeats itself, but never in quite the same form.

If you are looking for a silver lining to all of this craziness just look at what happens after the volatility spikes and remember that during the spikes people become convinced that the bad times will never end and bad news permeates everything.

Sound familiar?

Volatility Remains

Written by Nathan White, CFA

photo by erik ERXON

How long will the current historic levels of volatility remain?

Investors everywhere seem to be throwing in the towel, and the selling never seems to end. The negative sentiment feeds on itself as selling begets selling.

Opportunities abound, but mean little when everyone wants out. There was an article in The Wall Street Journal last Friday, Nov. 7 about the forced selling at mutual and hedge funds because of redemption request. Even the few hedge funds that are up on the year are receiving redemption requests of a quarter to a third of assets! How's that for gratitude!

I definitely believe it is a good time to buy when people are being forced to sell.

The problem is there is no way to know when it has ended until after the fact. Now is not the time to change your entire portfolio allocation to cash if you need returns better than cash for the long-term.

During extreme periods of volatility such as the current environment, it is very difficult to think long-term. The crowd will extrapolate what is happening in the short-term into the long-term and over do it.

You see that happen on the upside and the downside. Your financial decisions should be based on a long-term view so that when these types of circumstances occur you are not forced into a rash emotionally charged decision.

A 'Tsunami' Hit the Stock Market- Now What?

Written by Dave Young, president

photo by mikebaird 

The stock market just endured the worst October since the crash of 1987.

It was slammed by what Alan Greenspan called a "once in a century credit tsunami." He said it shattered some of the models he has relied on over the past 40 years.

Volatility hit levels I've never seen in my 25 years of investing. The selling was massive, and it affected every asset class. Whether you invested conservatively or aggressively, everyone felt the pain. In previous declines, about 30 percent of stocks move up while the majority moves down. This time, there was nowhere to hide with 98 percent of stocks moving down. Since last October, the S&P 500 has lost about 45 percent of its value.

What do we do next?

In previous panics, it has been a mistake to follow emotions and sell after a crash. It's better to take a deep breath and assess how much downside risk there is versus upside potential.

This is the 34th bear market since 1900. During that period, it is the 5th worst decline in the U.S. market history. Stock prices are down to the levels they were 11 years ago. That means stock prices don't currently account for growth in population, advances in technology and gains in productivity of the past 11 years. Every statistical measure we use to value stock indicates they are screaming bargains.

In the previous bear markets, after hitting bottom and turning positive, the market's average return has been 296 percent over the course of the subsequent bull market.

As the market recovers, these returns usually come in bursts, which is why it is usually a mistake to sell out in the depth of a bear market.

Reasons to be Hopeful

The market hit extreme lows on Oct. 10. Since that time it's moved violently up and down, but has stayed above the Oct. 10 lows. Each time the market has sold off since then it has been on low volume, which is a good sign. Also, 11 of our 12 bottom-watch signals signify we're close to the bottom.

This sell off started as energy prices moved higher. Every time oil prices went up the stock market went down. Higher gas prices gave consumers less to spend, which was negative for the economy. The price of oil has since quietly dropped from $147 to $60. Hundreds of billions of dollars sent overseas for oil are now staying here. This savings should act as a stimulus and be positive for our economy.

The sub-prime lending mess also contributed to the market meltdown.

It evolved into a credit crisis, which almost brought our economy to a halt. Our government throwing $700 billion worth of stimulus into the banking system will likely repair the credit mess. It will take time, but it should fix another problem that brought the market down.

The Longest Presidential Election Ever

We just endured the longest election of all time. Twenty months ago, Barack Obama began telling us how terrible things were and how important it was that we elect him to change them. When he started his campaign, things were actually good and we were in the late stages of a five-year economic expansion. Even though our economy was hitting on all cylinders, he did his best to convince us otherwise. His negative spin negatively affected consumer and business confidence.

Our economy is based on confidence.

If you kill that confidence, you kill the economy. Consumer confidence levels are now at an all-time low. Obama proved if you say something long enough, people will start to believe it. The good news is the election is over and his drumbeat of doom should now turn positive.

I can't see into the future, but based on history, it appears we ar bumping along a market bottom. My general recommendation is to stay invested and move your portfolio into areas of the market that historically come back the fastest when recovery begins. We are currently doing this for our clients. Keeping a long-term focus has always rewarded investors in the past.

Contact us if you have questions or need advice 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!