September 2018 Investor Letter

Strategy Performance

 
AAA Performance.jpg
 

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +9% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
AAA Asset Mix.jpg
 

Gold Trader focuses on capturing the strongest and weakest parts of gold's daily cycle, buying daily cycle lows, selling daily cycle highs and holding for 10-20 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5%-6% profit per trade while risking 2%-3% each time, has a win rate in excess of 70% and is structured so that profits are TAX FREE for investors.

Executive Summary

This month I discuss stock market valuations particularly in the US and highlight some technical signs that suggest the equity bull market is running out of steam. Amazon for example has now outrun one of the market leaders of the dotcom mania, as the vertical ascent of its share price continues. While US equities remain in a bull trend, European and emerging market equities are lagging badly. Something has to give. In fixed income, as the US yield curve is close to inverting, I note that both fixed interest and inflation-linked bonds are set to rally once more. Meanwhile in precious metals, speculator and smart-money commercial trader positioning have reached extremes not seen since the bull market began in 2001. Gold and silver are preparing to launch.

Stock Market Update

US stocks are expensive. The Wilshire 5,000 captures the market capitalisation of all equity securities trading in the United States. Historically comprised of approximately 5,000 names, currently there are just under 3,500 equities listed in the Index. The Wilshire 5,000 Index has a market capitalisation today of approximately $29 trillion. The Index sports a trailing price/ earnings ratio of 26 times and a price/book ratio of 2.7 times, historically at the extreme end of the valuation range. The size of the US economy by comparison is approximately $20 trillion. So, the Wilshire 5,000 is now 1.4 times the size of the US economy, the most elevated since records began in the 1970's. As the Federal Reserve increases interest rates and withdraws billions of dollars from the financial system each month, it will be fascinating to watch the knock on impact on both equity securities and the US economy.

 
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As I watch Amazon, Apple, Microsoft and Google continue to rip higher week after week, I am reminded of a quote from Scott McNeely, CEO of Sun Microsystems back during the dot com mania of the late 1990’s. Sun Micro was one of the tech darlings back then and eventually reached a peak valuation of 10 times revenues, an incredible multiple, even for a high margin tech software company. A couple of years after the tech bust, McNeely made the following comment:

At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64?
— Scott McNeely, CEO Sun Microsystems

Sun Micro rallied from approximately $5 in 1997 to $64 in 2000, a thirteen fold increase, before falling all the way back to $5 again a couple of years later.

 
SUNM.jpg
 

Amazon, by comparison is a low margin online retailer. AMZN had revenues of $178 billion in 2017 so not trading at the same lofty multiple of revenues as Sun Micro. The same cannot be said for its share price performance however. AMZN has rallied from $100 in 2010 to over $2,000 in 2018, a twenty-fold increase. What could possibly go wrong?

 
amzn.jpg
 

While stocks are expensive, momentum remains positive and there has been scant evidence of any material selling pressure to date. The majority (68%) of US equities continue to trade above their long-term moving averages. So long as this trend persists, stocks should not experience a significant decline. However, if this trend reverses and market breadth starts to deteriorate (a drop on the next chart below 50) a more substantial correction would likely occur. I don't think we are too far away from that happening. Continued caution is warranted.

 
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Turning to Europe, stocks have been consolidating below multi-decade resistance for the last 24 months. I have written that a break out above 415 on the Eurostoxx 600 Index would be a bullish development and I would take a position in EU shares in the Active Asset Allocator if a break higher was confirmed. European shares have so far failed to muster the strength to break out and now appear to be losing strength and at risk of breaking down. I have marked on the next chart key periods when the Relative Strength Index (RSI) has traded below 50. Each time coincided with a sharp break lower in the Eurostoxx 600 Index. The RSI is at 40 today and EU shares are at risk of correcting.

 
$Stoxx600.jpg
 

Germany has been the strongest performing economy in the Eurozone and the German stock market has also led since the bear market lows of 2009. The Dax Index should lead the charge higher if the STOXX Europe 600 is to break out to new all-time highs. The current head-and-shoulders topping pattern in German equities is concerning however and suggests that the next break could be lower. 

 
$dax.jpg
 

Following a strong breakout to new all time highs in 2017, emerging market equities have reversed sharply lower in 2018 and are now threatening to undo much of the good work they achieved last year. Emerging market equities typically trade inversely to the US dollar and the recent rally in USD has driven the recent correction in EEM. EEM now trades below $42 and under the resistance zone marked on the chart. EEM will require a resumption in the USD decline before an uptrend can resume. If EEM cannot get back above $42, this will be considered a failed breakout and a bearish development for the medium-term prospects for emerging markets. 

 
eem.jpg
 

China makes up 31% of the EEM ETF and therefore has a big influence on the overall direction and performance of the Emerging Markets ETF. The Shanghai Stock Exchange Composite Index is currently trading a touch under 2,700, down -25% from the January 2018 highs and -48% from the highs of 2015. The Index has not yet reached long-term support, which suggests EEM may have more downside ahead. Support for $SSEC would come in closer to 2,400, approximately -11% below current levels. I think we will get there and we will see then if China and the broader Emerging Markets Index can find a foothold and begin a longer-term rally. A break below long-term support would result in a more painful move lower for China and EM stocks and also potentially signal that the US dollar has more room to run higher. 

 
$SSEC.jpg
 

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

 
bond yields.jpg
 

US 10-year yields are currently trading at 2.88%, while shorter-term 2-year yields have surged higher, more than doubling over the last 12 months to 2.64%. The difference between 2 and 10 year yields has reached 24 basis points. The US yield curve is close to inverting. Typically, investors demand a higher rate of interest when locking up funds longer term, unless of course they are concerned about the future. Then demand for long-term debt drives bond prices higher and yields lower. When long-term bond yields drop below short-term bond yields, the yield curve inverts. It is a sign that all is not well in the financial system and we are almost at that point today. Once the yield curve inverts, and then normalizes, it signals recessionary times ahead and pain for equity investors. The conundrum today is that US stock markets are hitting all-time highs in many cases. Which market is correctly predicting the future, stocks or bonds? We are about to find out.

 
$YC2YR.jpg
 

Inflation-linked bonds (ILB's) in the US, EU and UK continue their steady climb higher. Unlike fixed interest rate government bonds where price moves inversely to changes in nominal interest rates, inflation-linked bond (ILB) prices are sensitive to changes in real interest rates, rather than nominal interest rates. This means that inflation linked bonds will rise in price and provide a hedge for investors against unexpected increases in inflation. Interest rates and government bond yields can rise, but as long as inflation rises at a faster rate, inflation linked bonds will increase in value. ILB's are under-owned and offer an excellent form of diversification and protection to investors in a rising interest rate and rising inflationary environment. ILB's are playing an increasingly important role in the Active Asset Allocator.

 
inflation bonds.jpg
 

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Gold Market Update

The gold cycle has proven quite challenging to read this year due to an investor cycle (IC) that has extended 8 months versus the more typical 5-6 month range. The IC finally bottomed in mid-August and I think a new IC is now underway. The recent market action looks and feels similar to the ICL of December 2015. Back then, gold spent four weeks building a based before launching higher. That is the pattern I am looking to repeat this time around. During the recent decline in precious metals, Gold Trader has been stopped out a couple of times but is currently positioned long in anticipation of a new IC emerging. Time will tell.

 
gold ICs.jpg
 

Sentiment readings in the precious metals sector and current positioning by speculators and commercial traders certainly suggests a new IC is due. The Commodity Futures Trading Commission (CFTC) publishes a weekly report that summarises the current positioning of speculators and commercial traders across a broad range of commodities that trade on the Exchange.  The latest Commitment of Traders (COT) report shows that large speculators are currently holding a huge short position in gold of 213,259 contracts, 200% more than they held a few months ago and one of the largest short positions on record. Commercial traders - the miners and bullion banks - who are usually always net short to hedge their production, are 6,525 contracts net long today. Are you kidding me!! To give readers an idea of how extreme this position is, the last time the Commercials were net long gold was all the way back in 2001 when gold was trading at $250, before the bull market started. This is an extremely bullish setup for gold. 

 
Gold COT.jpg
 

The setup is even more bullish in the silver market. Commercial traders are net long 14,613 silver contracts for what I believe is the first time ever, while the large speculators are net short 28,974 silver contracts, another extreme reading. While the COT charts are not a timing tool, the scene is set for the next leg higher in gold and silver to unfold.

 
Silver COT.jpg
 

In my last investor update, I included a quote from Charles Gave of GaveKal Research. I found his article incredibly thought-provoking and believe his conclusion is worth repeating here again. Gave concluded:

Now, most people tell me that the renminbi cannot become a global currency as it has a closed capital account. The answer to that objection is simple: China has just to offer a conversion in gold to anybody who has too many renminbi. And indeed it is headed in that direction. In recent years the Chinese have bought all the gold they can lay their hands on, as have the Russians. So, the real economic struggle between the US and China may not be fought out over trade or technology, but end up as a monetary war. In this regard, watch gold as any significant rise in its price versus the US bond market will be a defeat for Washington; any fall in this ratio should be seen as a victory. In recent years we have been in a stalemate. I doubt that this situation will last.
— Charles Gave, GaveKal Research

The performance of gold priced in USD versus US long duration zero coupon bonds has suddenly became a lot more interesting. As Charles noted, in recent years, we have been in a stalemate, but he doubts that situation will last much longer. I hold a similar view. Gold appears to be forming a rounded bottom versus US Treasuries. I expect this chart will resolve in higher prices for gold versus US bonds and victory for China over the US longer-term.

 
gold vs bonds.jpg
 

At Secure Investments, I advise individual clients on their pension and non-pension fund investment portfolios. To learn more about my Active Asset Allocator and Gold Trader  investment strategies, please get in touch at brian@secureinvestments.ie or 086 821 5911. If you are reading this via LinkedIn, why not visit Secure Investments and subscribe to get exclusive content for free. No spam, ever. Just great stuff.

Disclaimer

The information contained herein should not be taken as an offer of investment advice or encourage the purchase or sale of of any particular security or investment. It is provided for information purposes only. Secure Investments and its content providers makes no representation or warranty of any kind with respect to the services described, analysis or information obtained arising from use of the pages on this website. Information provided is obtained from sources deemed to be reliable and is provided solely on a best efforts basis. Secure Investments and its content providers do not guarantee the completeness or accuracy of such information and do not accept any liability for any loss or damage arising out of negligence or otherwise as a result of use or reliance on this information, whether authorised or not. The use of the website is at the user's sole risk. Not all recommendations are necessarily suitable for all investors and investment policy must be tailored to suit the circumstances of the individual. We recommend that readers consult their professional adviser before acting on any advice or recommendation on this website. The value of any investment may fall as well as rise and you may not recover the full amount originally invested. Past performance or simulated performance is no guarantee of future investment returns. The value of your investment may be subject to exchange rate fluctuations which may have a positive or adverse effect on the price or income or the securities.

May 2018 Investor Letter

Strategy Performance

 
performance table.jpg
 

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +10% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
AAA Asset Mix.jpg
 

Gold Trader focuses on capturing the strongest and weakest parts of gold's daily cycle, buying daily cycle lows, selling daily cycle highs and holding for 10-20 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5%-6% profit per trade while risking 2%-3% each time, has a win rate in excess of 70% and is structured so that profits are TAX FREE for investors.

Executive Summary

This month, I examine a potential buying opportunity for the Active Asset Allocator in European equities and explain how the German stock market will likely trigger a move. I highlight the ongoing dominance of the FAANG stocks, which continue to drive the broad market averages higher and will likely continue to do so for the remainder of this bull market. I also discuss current stock market valuations and some technical indicators that are breaking down. These include an increasing number of stocks making new lows vs those making new highs and an increasing number of stocks trading below their long-term moving averages. 

In bonds, I cover the outlook for government bond yields in the US and Europe, while also discussing the possibility that the Federal Reserve in the US is potentially trapped and unable to raise short-term interest rates without popping the stock and bond market bubbles. I argue there is still some room for EU government bonds to rally in a risk-off move in the stock market, which is why the Active Asset Allocator currently holds a mix of cash, bonds and gold for capital preservation. On to gold, I highlight an upcoming investment opportunity for precious metals and also discuss an excellent research report from the folks at GaveKal - "The Upcoming Monetary War, with Gold as an Arbiter". 

Stock Market Update

Let's start this month's Investor Update with some potentially positive news. European stocks, as measured by the Eurostoxx 600 Index, have traded in very broad range for the last 20 years. The Eurostoxx 600 Index hit a resistance zone of 400-415 in 2000, 2007 and again in 2015, failing to break out on each occasion. We are still below that resistance line today but getting close again. The Index traded at 403 in January 2018 and is back at 392 this week. While there is a negative divergence appearing on the Relative Strength and Momentum indicators, suggesting that the current rally is losing strength, if the Eurostoxx 600 can break out and hold above 405-415, that would be a significant bullish development. In that instance, the Active Asset Allocator would take a long position in European shares, with a closing stop below resistance.

 
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If the Eurostoxx 600 is going to break out to new all-time highs, it will likely be led higher by Germany, the strongest market in the region. The German economy grew by +2.2% in 2017, its fastest pace in over five years while its fiscal surplus reached 1.2 percent of GDP, the most since the country’s reunification. Despite momentum slowing somewhat in the first quarter of 2018 due to a contraction in manufacturing output, expectations for another year of solid growth remain on track. All of this positive news has not been lost on the German stock market, which has already more than doubled since 2012. The Dax could be setting up to break out to new all-time highs, or a head and shoulders topping pattern may be in the process of forming. We will know soon enough. If the Dax can break and hold above 13,597 it will likely coincide with a break out to new all time highs in the Eurostoxx 600 Index. The Active Asset Allocator is on watch.

 
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In another positive for the stock market, the tech giants, which have led from the front for the last 9 years, continue to charge. Apple($985BN), Amazon ($775BN), Microsoft ($760BN), Google ($770BN) and Facebook ($550BN) are the five largest companies by market capitalisation trading on the New York Stock Exchange. Together, they are valued in excess of $3.8 trillion. They are the generals of Wall Street, have led from the front and their performance will drive this bull market until its conclusion. While a few of them stumbled following their 1Q 2018 earnings reports last month, they rallied hard last week and have continued to outperform the S&P 500 to varying degrees. The equity bull market will continue until these giants reverse lower. The FAANG stocks are a very crowded trade, but so far, the longs have been rewarded.

 
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Despite the good news and the appearance of relative strength of the broad market indices, a closer inspection reveals some potential signs of weakness. In a healthy bull market, the majority of stocks rise in a bullish trend, with the majority making new 52-week highs compared to those making new lows. As a bull market ages, the rising trend loses momentum and fewer stocks participate until the end, when the market runs out of steam and new lows start outpacing new highs and the market rolls over. You can see this trend in play in the chart below, which captures the number of stocks on the New York Stock Exchange, making new highs minus those making new lows.

As we turned from bull market to bear market in 2007/2008, the trend in stocks making new highs deteriorated versus those making making new lows. The same pattern was evident before the sharp stock market corrections in 2011 and 2015 and the same pattern is evident again today. We do not have to see a stock market collapse from here, but we could. Unless new highs start outpacing new lows again, I expect at least a sharp correction to unfold shortly. I lowered the equity allocation in my Active Asset Allocator strategy from 20% to 0% on 2nd March 2018 and am patiently waiting before I make my next move.

 
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On a similar note, the following chart measures the percentage of stocks in the S&P 100 Index trading above their 200 day moving average. In a bull market, you should expect to see the majority of stocks participate in the advance, but today, just over half the market is in rally mode. This can change. The stock market could simply be pausing for breath before the next move higher, but the weakness is concerning. We are in year ten of this bull market. The previous few ended with a similar drop off in market breadth before price gave way and the broader indices followed lower.

 
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Regular readers will know of my concerns for the stock market given where we are in the current cycle. John Hussman of the Hussman Funds articulates these concerns much better than I ever could and has the data to support his bearish leanings. Hussman has not played the bull market in stocks at all well in recent years, but his analysis is well worth reading. In his latest market comment - Comfort is Not Your Friend - Hussman imparts the following words of wisdom.

Markets peak when investors feel confidence about the economy, are impressed by recent market gains, and are comforted by the perception of safety and resilience that follows an extended market advance. So several features generally go together: 1) extreme optimism about the economy and corporate earnings, 2) depressed risk-premiums, and 3) steep market valuations. Poor subsequent market returns ultimately follow, though not always immediately.

In contrast, markets trough when investors are frightened about the economy, are terrified by recent market losses, and are paralyzed by the perception of risk and fragility that follows an extended market decline. So several features generally go together: 1) extreme pessimism about the economy and corporate earnings, 2) steep risk-premiums, and 3) depressed market valuations. Strong subsequent market returns ultimately follow, though not always immediately.

The chart below illustrates this regularity. The areas shaded in red are rather comfortable periods, featuring an unemployment rate below 5% and within 1% of a 3-year low, an S&P 500 price/revenue ratio above 1.15, typically reflecting a period of strong recent market gains, and an ISM purchasing managers index above 50, reflecting expectations for an expanding economy. Notably these periods of comfort were followed by S&P 500 total returns averaging zero over the following 3-year period, with deep interim losses more often than not.

In contrast, the areas shaded in green are rather uncomfortable periods, featuring an unemployment rate above 5% and within 1% of a 3-year high, an S&P 500 price/revenue ratio below 1.15, typically reflecting a recent period of dull returns or market losses, and an ISM purchasing managers index below 50, reflecting expectations of a contracting economy. Notably, these periods of discomfort were followed by S&P 500 total returns averaging 15.3% annually over the following 3-year period.
— John Hussman, Hussman Funds
 
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I think we've got some green bars to look forward to in the next three years when the US unemployment rate crosses back above 5% (and within 1% of a 3-year high), the S&P 500 Price/Sales ratio falls below 1.15 (from 2.16 times currently) and the ISM Purchasing Managers Index declines to below 50. For the full Hussman Market Comment, please follow the link. However, the stock market has to top first, before those green bars come in to view.

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

 
bond yields.jpg
 

A chart comparing the relative performance of the S&P 500 to the US 10-year government bond yield suggests that the trend of falling equity prices and rising government bond yields is set to continue (in the US). If the blue support line gives way, this head-and-shoulders top formation should break down and the trend lower should accelerate. This is a significant problem for folks investing in and managing balanced portfolios. Historically, government bonds have acted as a shock absorber whenever stock markets have taken a plunge. With bond yields already on the floor, there is less room for them to fall (and bond prices to rise) when capital flows out of riskier assets. I still think there is some room for EU government bonds to rally in a risk-off move in the stock market, which is why the Active Asset Allocator currently holds a mix of cash, bonds and gold for capital preservation.

 
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The US Federal Reserve Chairman, Jerome Powell, would desperately like to raise short-term interest rates to provide a cushion for the 'next time down'. He can't raise rates too quickly or he will prick the debt and equity bubbles and lead the US economy into recession. He is also hesitant to boost short-term interest rates faster than the market has already discounted because he will invert the yield curve. Inverted yield curves (when 2 year yields > 10 year yields) ALWAYS signal a recession is not far away. If long-term yields continue to rise, Powell has a little more room to raise short-term rates, but not much. Today, 2 year yields in the US have surged to 2.6%, up from just 0.6% 12 months ago, while 10-year yields have reached 3.0%. The spread between 2 and 10-year yields has narrowed to just 43 basis points. Once the yield curve starts to steepen again, recession will be upon us.

 
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Unlike fixed interest rate government bonds where price moves inversely to changes in nominal interest rates, inflation-linked bond (ILB) prices are sensitive to changes in real interest rates, rather than nominal interest rates. This means that inflation linked bonds will rise in price and provide a hedge for investors against unexpected increases in inflation. Interest rates and government bond yields can rise, but as long as inflation rises at a faster rate, inflation linked bonds will increase in value. ILB's are under-owned, yet well placed to protect investors in a rising interest rate and rising inflationary environment. ILB's are playing an increasingly important role in the Active Asset Allocator.

 
Screen Shot 2018-05-13 at 10.20.40.png
 

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Gold Market Update

Medium-term investor cycles (IC's) in the gold market generally last 6 months, though they can run a little shorter (July-December 2017) or a little longer (December 2016-July 2017). Today, gold is approaching the end of its current IC. Investor cycle lows (ICL's) are usually accompanied by heavy selling in the gold market. However, during bull markets, the selling does not have to be that strong. We are approaching a time now where gold should be seeking out a low and if its the start of a new IC, strong gains lie directly ahead. If gold tops early and fails to rally, then the ICL will likely be postponed to early June. The second half of 2018 should be a lucrative time for precious metals investors.

 
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I came across an interesting article from the folks at GaveKal Research entitled "The Upcoming Monetary War, with Gold as an Arbiter". (I posted another article from GaveKal Research last week. Special thanks to Charles Gave who gave permission to share). This is the second article and it is well worth a read. Charles Gave discusses the potential for conflict between the US and China, but he cogently argues that the fight will be less about trade and more about the struggle for dominance between the US dollar and the renmimbi. 

Any currency has three basic functions: it should be a medium of exchange, a unit of account and a store of value. To be elevated to reserve currency status it must also be fully convertible and accessible at any time without constraint. The nation controlling such a currency should control the sea lanes and have the largest financial market, such that in times of stress it can lend money to others. It should be technologically dominant, so that it has the best weapons and runs the highest margin businesses. It should also be a cultural power, such that it educates the children of the global elites. It also helps to be dominant in agriculture. On this score card, the US dollar is starting to face certain problems...
— Charles Gave, GaveKal Research

Gave argues that since the 9/11 attacks, the US has pulled back on allowing unconstrained global access to the USD. The US is exerting its power to freeze assets of certain misbehaving countries (Iran, Russia), while only allowing the well-behaved access to USD reserves. This is a dangerous game the US is playing, particularly given the trajectory of ever-increasing US budget deficits in the years ahead, which will need to be financed. China seems set on de-dollarizing the world according to Gave. China has recently offered renmimbi swap lines to multiple central banks, so as to provide emergency lending in times of crisis. China has also recently launched crude oil (and gold) futures contracts traded in renmimbi. Gave notes that China is planning to become the world's biggest financial market by 2047, when Hong Kong reverts to mainland control, with Singapore playing a complimentary role, just as London has in recent decades to New York.

 
WTI Volume w Yuan.jpg
 

The punchline to the article: 

Now, most people tell me that the renminbi cannot become a global currency as it has a closed capital account. The answer to that objection is simple: China has just to offer a conversion in gold to anybody who has too many renminbi. And indeed it is headed in that direction. In recent years the Chinese have bought all the gold they can lay their hands on, as have the Russians. So, the real economic struggle between the US and China may not be fought out over trade or technology, but end up as a monetary war. In this regard, watch gold as any significant rise in its price versus the US bond market will be a defeat for Washington; any fall in this ratio should be seen as a victory. In recent years we have been in a stalemate. I doubt that this situation will last.
— Charles Gave, GaveKal Research

The performance of gold priced in USD versus US long duration zero coupon bonds suddenly became a lot more interesting. As Charles notes, in recent years, we have been in a stalemate, but he doubts that situation will last much longer. I hold a similar view.

 
Gold vs Zeros.jpg
 

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

At Secure Investments, I advise individual clients on their pension and non-pension fund investment portfolios. To learn more about my Active Asset Allocator and Gold Trader investment strategies, please get in touch at brian@secureinvestments.ie or 086 821 5911. If you are reading this via LinkedIn, why not visit Secure Investments and subscribe to get exclusive content for free. No spam, ever. Just great stuff.

Disclaimer

The information contained herein should not be taken as an offer of investment advice or encourage the purchase or sale of of any particular security or investment. It is provided for information purposes only. Secure Investments and its content providers makes no representation or warranty of any kind with respect to the services described, analysis or information obtained arising from use of the pages on this website. Information provided is obtained from sources deemed to be reliable and is provided solely on a best efforts basis. Secure Investments and its content providers do not guarantee the completeness or accuracy of such information and do not accept any liability for any loss or damage arising out of negligence or otherwise as a result of use or reliance on this information, whether authorised or not. The use of the website is at the user's sole risk. Not all recommendations are necessarily suitable for all investors and investment policy must be tailored to suit the circumstances of the individual. We recommend that readers consult their professional adviser before acting on any advice or recommendation on this website. The value of any investment may fall as well as rise and you may not recover the full amount originally invested. Past performance or simulated performance is no guarantee of future investment returns. The value of your investment may be subject to exchange rate fluctuations which may have a positive or adverse effect on the price or income or the securities.

March 2018 Investor Letter

Strategy Performance

performance table.jpg
 

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +10% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
AAA Asset Mix.jpg
 

Gold Trader focuses on capturing the strongest and weakest parts of gold's daily cycle, buying daily cycle lows, selling daily cycle highs and holding for 10-20 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5%-6% profit per trade while risking 2%-3% each time, has a win rate in excess of 70% and is structured so that profits are TAX FREE for investors.

Executive Summary

On 2nd March 2018, I lowered the allocation to equities in the Active Asset Allocator from 20% to 0%, moving to a fully defensive position. Stock markets appear to be setting up for a failing rally, a lower high following the surge to new all time highs in January 2018.

Just like in July 2007 when the implosion of two Bear Stearns hedge funds signaled the start of the Great Financial Crisis of 2008, today we are seeing similar implosions in volatility ETF's and crypto currencies. The canaries in the coalmine are starting to sing. Volatility is on the rise and I expect this trend to continue as we progress through 2018. If I am wrong and we are simply undergoing another correction in an ongoing bull market, European equities should break out to new all time highs. If that happens, the Active Asset Allocator will take a position in European shares. So far in 2018, cash has been the better position, outperforming equities, bonds and gold.

Stock Market Update

In January 2018, Jeremy Grantham, Chief Investment Strategist of GMO discussed the potential for a near-term melt-up in the stock market. Two weeks later, billionaire hedge fund manager Ray Dalio was interviewed at the World Economic Forum in Davos, Switzerland and said when asked about markets: "if you're holding cash, you're going to feel pretty stupid". Then the following week, this happened..... and the S&P 500 dropped 12% in 10 trading sessions. Even the best get it wrong sometimes.

 
xiv.jpg
 

XIV was one of a collection of exchange traded funds (and notes) that permitted investors to bet on the future direction of volatility in the stock market. In the case of XIV, you made (a lot of) money as long as volatility continued to decline. It worked beautifully over the last two years and leveraged short volatility traders in XIV made out like bandits, until last month. XIV made an all time high on 11th January 2018 at 146.44. It dropped -12% to 129.35 on 1st February and then, three days later, it hit 5.50, down -96%. It turns out, stock markets can be volatile. Billions were lost on these short volatility ETF's and this is just the tip of the iceberg.

Central bank money printing has distorted markets to an extreme degree. By driving interest rates to zero, central bankers have forced conservative investors to reach for yield in all sorts of exotic and risky financial instruments. Chris Cole of Artemis Capital wrote an excellent in depth report covering the extent of the short volatility trade. 

The Global Short Volatility trade now represents an estimated $2+ trillion in financial engineering strategies and share buybacks that simultaneously exert influence over, and are influenced by, stock market volatility. Volatility is now an input for risk taking and the source of excess returns in the absence of value. Like a snake blind to the fact it is devouring its own body, the same factors that appear stabilizing can reverse into chaos. The danger is that the multi-trillion-dollar short volatility trade, in all its forms, will contribute to a violent feedback loop of higher volatility resulting in a hyper-crash.
— Chris Cole, Artemis Capital

Whether it plays out as Cole suspects remains to be seen, but so far he is on track. Volatility as measured by the Vix Index, bottomed at 8.92% on 4th January 2018 and has been moving higher in recent months. 

 
$vix.jpg
 
An annual volatility of 9% implies a daily volatilty of about 0.6%, which is like saying that a 2% market decline should occur in fewer than 1 in 2000 trading sessions, when in fact they’ve historically occurred more often than 1 in 50. The spectacle of investors eagerly shorting a volatility index (VIX) of 9, in expectation that it would go lower, wasn’t just a sideshow in some esoteric security. It was the sign of a market that had come to believe that stock prices could do nothing but advance in an upward parabolic trend, with virtually no risk of loss.
— John Hussman, Hussman Funds

Another consequence of too much money chasing too few investment opportunities has been the epic rise and rise of crypto currencies. While blockchain is revolutionary and will likely be disruptive to many markets and industries over the next 5-10 years, the crypto currencies may be getting a little ahead of themselves, until recently at least. There are currently 1,548 different 'crypto coins' listed on the Coin Stats app. Following the initial coin offering (ICO) frenzy of 2017, perhaps a dose of reality is setting in here too. The market capitalisation of these crypto currencies peaked at over $900 billion in December 2017 but has fallen to just $360 billion today.

 
bitcoin.jpg
 

They say equity bull markets don't die of old age. Instead, they require an event or a catalyst to prick the bubble. In July 2007, two Bear Stearns hedge funds imploded, which signaled the start of the Great Financial Crisis of 2008. In 2018, have the recent implosion of short volatility trades and the collapse in price of many crypto currencies signaled the start of the unwind of the 'Everything Bubble'? If so, what comes next will be a sight to behold. 

On 2nd March 2018, I lowered the allocation to equities in the Active Asset Allocator from 20% to 0%, moving to a fully defensive position. Stock markets appear to be setting up for a failing rally, a lower high following the surge to new all time highs in January 2018.

 
$spx.jpg
 

We could simply be experiencing just another run of the mill correction in an ongoing bull market, but I am concerned something more sinister is at hand. If you examine the S&P 500 priced in euros, while price continues to rise, relative strength is deteriorating, suggesting the rally is losing steam.

 
$SPX in euros.jpg
 

I noted in previous updates that I would buy a position in European equities on a break out to new all time highs on the Eurostoxx Index (as long as that breakout held). So far, there has been no break out and EU equities are falling in tandem with the rest of the stock market. So, cash remains the better position for now.

 
$stoxx600.jpg
 

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

 
bond yields.jpg
 

During the last interest rate rising cycle in the US, the Federal Reserve hiked rates +4.25% over 29 months from 1.00% in April 2004 to 5.25% in August 2006. The stock market traded sideways for another 12 months but topped out in 2007 and then collapsed. Stock markets are more expensive today than they were in 2007.

 
Fed Funds.jpg
 

From 2004-2006, the Fed kept increasing short-term interest rates until the yield curve eventually inverted. This is shown in the chart below, which measures the difference between 2 and 10 year US Treasury yields. When 2-year yields rise and 10-year yields drop, the yield curve flattens and eventually inverts. An inverted yield curve is often a precursor to recession, and it certainly did not disappoint in 2008. As recession hit and stock markets plunged, the Fed wasted no time dropping short-term rates to zero and firing up the printing presses, which led to a sharp steepening of the yield curve again as the crisis unfolded.

 
$YC2YR.jpg
 

This time around, the Federal Reserve has raised rates just +1.50% over 29 months from 0.00% in November 2015 to 1.50% today and the yield curve is 60 basis points from inverting. The Fed has adopted a very cautious approach to interest rate normalisation due to the mountain of US debt currently outstanding: $20 trillion in 2017 versus just $9 trillion in 2008.

 
US Total Public Debt.jpg
 

We may get one or two more +0.25% rate increases in 2018, which could invert the yield curve, but I think we are already approaching the end of this interest rate rising cycle in the US, unless of course inflation starts to accelerate. Then all bets are off.

In Europe, unemployment rates are generally higher than in the US and economic growth rates are generally lower, there is more excess capacity in the system and ECB Chair Mario Draghi is still buying hundreds of billions of euros worth of bonds of all varieties. So, there is still a firm bid under the EU government bond market, even before any form of stock market sell off begins.

 
ILBs.jpg
 

Inflation linked bonds are also behaving reasonably well, though adverse currency movements in GBP and USD have impacted returns to a certain degree. So for now, I remain comfortable with the bond allocation in the Active Asset Allocator. 

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Gold Market Update

Gold is starting to get more attention in the financial press. With equities severely overpriced and bond market yields at multi-decade lows, precious metals offer one of the few pockets of value in the market today. Gold has traded sideways for nearly five years now and is starting to form a much more constructive pattern of higher highs and higher lows on the charts, since bottoming in 2015 at $1,045. A break above $1,400 can't come soon enough.

 
$gold.jpg
 

If you are following my Gold Trader strategy you will note that gold kicked off a new investor cycle in December 2017 and the first daily cycle delivered a solid +10% rally from trough to peak, ending DC1 +6.2%. Generally second daily cycles also deliver strong returns, +7.7% from trough to peak, on average. This time around however, DC2 was a dud: +3% trough to peak and -2% peak to trough so far.

 
Gold Cycle Count.jpg
 

Gold only rallied for 4 days and spent the rest of the cycle chopping sideways, which is not particularly bullish action. We may just have to wait for the next investor cycle before getting a break out above $1,400. It's coming but we just need a little more patience. My longer-term projections for gold remain unchanged.

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

January 2018 Investor Letter

Strategy Performance

performance table.jpg

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +10% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

AAA Asset Mix.jpg

Gold Trader focuses on capturing the strongest and weakest parts of gold's daily cycle, buying daily cycle lows, selling daily cycle highs and holding for 10-20 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5%-6% profit per trade while risking 2%-3% each time and has a win rate in excess of 70%.

Executive Summary

Happy New Year folks. 2017 closed with the Active Asset Allocator returning a modest +1.2% for the year, Gold Trader +12% (tax free) in a year when gold, priced in euros returned -0.4% and Gold PowerTrader +22% (tax free). We enter 2018 with US equities surging higher, the US dollar accelerating lower, EU government and inflation-linked bonds holding steady and precious metals coming to life. I cover my expectations for each asset class in more detail in this month's Investor Letter. 

US equities may be entering a melt-up phase according to one highly regarded US investment strategist, but with the USD plunging, risks are running high. I outline a possible long entry in European stocks if the correct set up presents and also reiterate my $1,900 price target for gold by 2019. 2018 looks like it will be a very eventful year and I look forward to discussing the markets in detail with you all in the months ahead. For now, the Active Asset Allocator maintains an allocation of 20% global equities / 20% EU government bonds / 15% inflation linked bonds / 5% EU aggregate bonds / 30% precious metals / 10% cash.

Stock Market Update

I find myself in an interesting position for an investor from the value school. I recognize on one hand that this is one of the highest-priced markets in US history. On the other hand, as a historian of the great equity bubbles, I also recognize that we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market.
— Jeremy Grantham, Co-Founder & Chief Investment Strategist, GMO, 3 January, 2018

Are we entering the 'blow-off' phase of this equity bull market, which could last another year or two? Jeremy Grantham thinks it's a distinct possibility. In his latest 'Viewpoints' entitled "Bracing Yourself for a Possible Near-term Melt-Up", he discusses the potential for a final acceleration higher in equities and also quantifies the possible move - a minimum of +60% over 21 months (from the start of the acceleration point) - based on his study of prior bubbles. Grantham concludes that the S&P 500 could melt-up for another 9 to 18 months to a range of 3,400 to 3,700. Grantham also points out that +60% is a minimum based on past bubbles. Some ran +100% before topping out and then collapsing. Exhibit 1 below highlights Grantham's analysis of past bubbles.

 
Bubbles.jpg
 

The S&P 500 is certainly showing signs of acceleration, particularly since Trump's election in November 2016. Corrections have been shallow with each dip being bought aggressively. This rally has been powerful, triggering record readings in the relative strength and momentum technical indicators. Grantham's analysis is interesting, though I think we are already 14 months into this acceleration phase. Since November 2016, the S&P 500 has rallied +32% in USD terms.

 
$SPX LT.jpg
 

The sharp move higher in US equities has been exacerbated by a -15% plunge in the USD over the same period. The dollar is in trouble. I am of the firm view that the USD formed a multi-year top coincident with Trump's appointment to the White House and is in for some rough sledding in the years ahead. New all time lows lie somewhere in the US dollar's future. I expect 71.33 will be broken on the USD Index (see below chart) as the United States gradually loses its position as holder of the world's reserve currency. (I expect gold will explode higher, delivering bitcoin-like performance when the decline in the USD accelerates, but that is a few steps ahead of us yet.)

 
$USD.jpg
 

Priced in Euros, the performance of the S&P is still positive, but note the diverging relative strength and momentum indicators on the chart below. 

 
$SPX in EUR.jpg
 

It is the same story for the global equity benchmark, the FTSE All World Index; higher highs in price but on falling relative strength and momentum. Either the acceleration picks up strength shortly or a correction begins.

 
$FAW in euros.jpg
 

The VIX Index, a measure of stock market volatility and investor confidence, made a new multi-decade low in November 2017 reaching 8.48 but has since reversed higher. Have we reached peak investor complacency? There is certainly no fear about.

 
$Vix.jpg
 

On the positive side, new highs in the stock market continue to outpace new lows, though the relative trend has weakened over the last 12 months.

 
$NYHL.jpg
 

Also, the percent of NYSE stocks trading above their long-term 200-day moving average remains a very healthy 73%. Significant stock market declines do not generally occur until this percentage falls below 50%. My Technical Trend Indicator also remains in bullish mode. 

 
$NYA200R.jpg
 

In my last Investor Letter, I highlighted a potential low-risk opportunity to invest in European stocks. I discussed the valuation discount that European stocks trade at compared to US companies and highlighted the fact that Eurozone stocks account for just 11% of the global equity index (17% if you include the UK), compared to 55% for the US.

 
$Stoxx600.jpg
 

European stocks, as measured by the Eurostoxx 600 Index, have traded in very broad range for the last 20 years. The Eurostoxx 600 Index hit a resistance zone of 400-415 in 2000, 2007 and again in 2015, failing to break out on each occasion. We are still below that resistance line today but getting close again. The Index traded at 390 in October 2017 and is back at 398 this week. There is a negative divergence appearing on the Relative Strength and Momentum indicators, which is interesting given the strength of stock markets in general. I am watching this closely. If we get Grantham's melt-up in stock markets over the next few months, the Eurostoxx 600 will break out above a 17-year resistance zone, which will be a significant and bullish event.

If the Eurostoxx 600 Index can close at a new all time high and turn resistance into support, the Active Asset Allocator will take a position in European shares. The risk will be modest. Above 400-415 and I am a buyer. A meaningful close back below 400 and I would close out the position. I will let the charts be my guide.

Emerging market equities are also performing well and recently broke out to new all time highs, when priced in Euros. Emerging market equities have historically delivered strong performance in times when the USD has been weak and I expect this trend of USD weakness to continue in 2018 and 2019. 

 
EEM in Euros.jpg
 

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

 
bond yields.jpg
 

In Germany and the UK, 2, 5 and 10 year yields have edged higher by 10 basis points since my last Investor Letter in October 2017. 30 year yields have remained unchanged in Germany and have actually fallen by 10 bps in the UK. Japanese yields haven't budged in the last three months either. The most significant change has taken place in the United States where 2 and 5 year yields have rallied 50 basis points following recent interest rate hikes by the Federal Reserve. US 10 year yields are 20 basis points higher than last October, while 30-year yields in the US are unchanged.

This has resulted in a sharp flattening of the yield curve, generally a precursor to recession. The gap between 2 and 10 year yields has declined to just 55 basis points. Another 50 basis points hike in the Fed Funds rate will tip the yield curve into negative territory. This happened in 2000 and 2007 in advance of the last two recessions. With the Fed Funds rate at just 1.5% today, the Federal Reserve has limited room to cut rates in the event of another recession hitting, which is why they are so keen to hike short-term rates now while they still can. 

 
$YC2YR.jpg
 

I continue to maintain a 20% allocation to long duration government bonds in the Active Asset Allocator. Bonds have held up well to date, despite the risk-on rally in global equities. Should stock markets roll over in the months ahead, safe haven government bonds will likely attract new capital inflows. Alternatively, if we experience a breakout in EU equities to new all time highs, I will reduce the allocation to bonds and cash in favour of equities, at least for a trade.

Inflation-linked bonds also remain in broad multi-year rising trends. UK and US inflation-linked bonds have been impacted by adverse currency movements in recent months. The sharp declines in USD and GBP should lead in time to rising inflationary pressures in both countries, which should feed through to rising prices from inflation-linked bonds. 

 
inflation linked bonds.jpg
 

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Gold Market Update

Gold ended 2017 at $1,303, +13% for the calendar year in USD terms, but flat when converted back to euros. I expect that to change this year. Gold is waking up from a four year bear market. The USD is in trouble and I expect gold will accelerate higher in 2018. During the last major bear market in the USD (2001-2008), the USD Index fell -43% from 126.21 to 71.33. During that period, Gold rallied over +600% from $250 to $1900. I think the USD started another major bear market in 2016 and has years to run. Trump will run the US like he ran his companies - badly! Debts and deficits as far as the eye can see - both USD bearish. 

Last August, I set out my forecast for the gold price over the next few years. I expected a break above the downward sloping 4-year resistance line, followed by an eventual move to $1,900 by 2019. Gold is starting to gain some momentum now and I see no reason to adjust my price target. Once $1,923 is breached, I think we could see some really wild (bitcoin-like) action in precious metals prices.

 
$gold LT.jpg
 

Silver is a more volatile precious metal than gold and generally rallies and declines at a much faster rate than gold. I see an inverse head and shoulders pattern on the silver chart and I expect a strong break out higher shortly. The Central Fund of Canada currently holds a 63% allocation to gold bullion and a 37% allocation to silver bullion and is ideally placed to take advantage of the move in precious metals that I see unfolding.

 
$Silver.jpg
 

Finally, a note on Gold Trader. While gold priced in euros returned -0.4% in 2017, Gold Trader ended the year +12% and Gold PowerTrader returned +22% for investors, TAX FREE! I have spent the last couple of months reviewing my trades for 2016 and 2017 and have made some refinements to the strategy, which I think will improve performance in 2018. I widened the stop loss from 2% to 3% last year, which resulted in an improved win rate per trade, up from 63% to 75%. I have also noticed that on average, I have entered trades 7 days too early, so I will be exercising more patience on each trade this year.

I entered Trade 19 on 18th December at 1,258 and this trade is still live. Gold closed today at 1,340 and I think we could still have 1-2 weeks of rising prices before the first daily cycle peaks and roles over. Stay tuned.

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

October 2017 Investor Letter

Strategy Performance

performance table.jpg

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +10% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
AAA Asset Mix.jpg
 

Gold Trader focuses on capturing the strongest and weakest parts of gold's daily cycle, buying daily cycle lows, selling daily cycle highs and holding for 10-20 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5%-6% profit per trade while risking 2%-3% each time and has a win rate in excess of 70%.

Executive Summary

The stock market continues to climb higher on record low volatility. If this trend continues, European stocks will break out above 17 year resistance levels to new all time highs. If this breakout occurs (and holds), the Active Asset Allocator will take a position in European shares. The risk will be modest. Above 400-415 on the Eurostoxx 600 Index and I am a buyer. A meaningful close back below 400 and I will close or significantly reduce the position. I will let the charts be my guide. Apart from valuation concerns, stocks continue to exhibit bullish characteristics. I have pointed out a few areas of concern in recent Investor Letters, including a decline in the number of stocks making new highs versus new lows and have highlighted another area of potential weakness/divergence in this month's investment update. It is worthy of continued observation in the months ahead. For now, Active Asset Allocator maintains an allocation of 20% global equities / 20% EU government bonds / 15% inflation linked bonds / 5% EU aggregate bonds / 30% precious metals / 10% cash.

Turning to precious metals, Sprott Asset Management has agreed to acquire the common shares of Central Fund of Canada Limited (CFCL) and the rights to administer and manage CFCL’s assets. Upon completion of the transaction, all CFCL Class A shares will be exchanged for units in a new Sprott Physical Gold and Silver Trust. US$300 million in value is expected to be realized for CFCL class A shareholders, relative to 9% pre-announcement net asset value (“NAV”) discount. Good news for existing holders of Central Fund of Canada shares. The 7-9% discount has reduced to 2% and will be eliminated once the deal closes. Also please note, a Gold Trader performance update will follow shortly.

Finally, for the history buffs amongst you, I posted an article in the Research section of the website entitled "The 1929 Parallel", written by John Kenneth Galbraith and published in the January 1987 issue of The Atlantic Magazine. The article is interesting both for its content and the timeliness of its publication in January 1987.

Stock Market Update

The combination of central banker-applied brute force (buying everything in sight) and deity-like central banker pronouncements has dampened market volatility and frisky free-lancing, but at the same time it has encouraged risk taking (in market positioning, not it business formation). We have thought, and still think, that confidence in central banks and policymakers has been unjustified and thus could erode or collapse at any time. Since the major financial institutions which comprise the financial system are still way overleveraged and opaque (in fact with record amounts of debt and derivatives at present), such a break in confidence could happen abruptly and without warning. Investors should come to grips, intellectually and viscerally, with the likelihood that most fiscal and monetary policymakers’ knowlege of the world is somewhere between “close to nothing” and “way less than zero,” and that their pronouncements and policies usually range from “silly but harmless” to “dumb and dangerous.
— Paul Singer, Elliott Capital Management

Paul Singer, who runs one of the world's largest and most successful hedge funds, is certainly no fan of central bankers and the controlling influence they exert over financial markets, that's for sure...... and who could blame him. Since the start of 2016, the ECB has expanded its balance sheet by 57% or €1.55 trillion. They are adding another €250 billion in 2017. Not to be outdone, the Bank of Japan has expanded its balance sheet by 34% to $4.6 trillion. Notably however, the Federal Reserve has signaled its intention to start withdrawing liquidity from the banking system this month in a significant shift in policy away from Quantitative Easing (QE) to Quantitative Tightening (QT). They are starting slowly at a rate of $10 billion/month in October and increasing to $50 billion/month in 2018, market permitting.

Despite Singer's reservations, stock markets around the world are climbing steadily higher. Money flows where it's treated best and so far, stocks continue to attract record inflows, particularly into passive, indexed tracking funds. This bull market has now become the second largest in history with the S&P 500 returning +275% since March 2009 in USD terms. Only the decade-long run of the 1990's has done better, +400%. US stocks now account for 52-55% of the global equity benchmark, depending on the benchmark you follow. 

The recent climb higher has come on record low volatility. The next chart shows the Dow Jones Industrial Average. The volatility of the weekly price moves is captured in the lower half of the chart. If you look closely, you will see that volatility has reached a multi-decade low. A rise in volatility does not necessarily have to coincide with a collapse in stock prices (1996-2000 for example), but it could (2008-2009).

 
 

In 2017 YTD, global equities have returned +3.7% in euro terms. Stock markets have navigated the historically volatile month of September with ease. If they continue to trade in bulletproof fashion in October, we may see a run higher into the end of the year. Apart from valuation concerns, stocks continue to exhibit bullish characteristics. I have pointed out a few areas of concern in recent Investor Letters, including a decline in the number of stocks making new highs versus new lows. I have also highlighted another area of potential weakness/divergence below. Here is a chart of the FTSE World Index, the global equity benchmark, priced in euro terms. The Index made a higher high in 2017 but on weaker relative strength (RSI) and falling momentum (MACD). This suggests the uptrend is weakening, which usually occurs towards the end of significant moves. It is worthy of continued observation in the months ahead.

 
 

A similar divergence occurred in the US Treasury bond market before a sharp decline in prices in 2016....

 
 

While stocks continue higher, a declining number are trading above their long-term 200-day moving average. 81% of stocks were above their long-term trend in late 2016. Today, just 70% are in confirmed uptrends. Below 50% and the stock market would get into difficulty.

 
 

What if I'm wrong? What if stock markets melt up for two more years, or longer? Central banks have already printed trillions and that money is sloshing around the system. What happens if money continues to flow into equities each month with no regard for valuation? I don't expect it will happen but it might. We are operating in unprecedented times. So here is my plan.

European stocks in aggregate trade at a valuation discount to US companies. Many European stocks are household names (Siemens, SAP, Unilever, Total, Allianz, Anheuser Busch Inbev) yet are under-owned relative to their US counterparts. Eurozone stocks for example account for just 11% of the global equity index (17% if you include the UK), compared to 55% for the US.

European stocks, as measured by the Eurostoxx 600 Index, have traded in very broad range for the last 17 years. The Eurostoxx 600 Index hit a resistance zone of 400 in 2000, 2007 and again in 2015, failing to break out on each occasion. We are approaching that resistance zone again today. The Index reached 390 this week. The market may be strong enough to break through this time. A confirmed break above a 17-year resistance zone would be significant, and quite bullish for EU stocks.

If the Eurostoxx 600 Index can close at new all time highs and turn resistance into support, the Active Asset Allocator will take a position in European shares. The risk would be modest. Above 400-415 and I am a buyer. A meaningful close back below 400 and I would close or significantly reduce the position. I will let the charts be my guide.

 
 

The current asset mix of the Active Asset Allocator is 20% global equities / 20% EU government bonds / 15% inflation linked bonds / 5% EU aggregate bonds / 30% precious metals / 10% cash. If we get the breakout in European equities, I will make the following trades:

Equities: Sell 10% Global Equities, Buy 30% EU Equities

Bonds: Sell 10% EU government bonds, Sell 5% EU aggregate bonds

The revised asset mix would be: 10% global equities / 30% EU equities / 10% EU government bonds / 15% inflation linked bonds / 30% precious metals / 5% cash.

One final comment. Passive fund flows are dominating the industry. Almost $500 billion flowed into passive funds in 2016 according to Morningstar, while $200 billion flowed out of active funds last year. That is almost three quarters of a trillion dollars... In one year! One of the unfortunate side effects of this trend has been that the industry is losing talented and thoughtful leaders in active management and none come more talented than Hugh Hendry, of Eclectica Asset Management. Hendry closed his Global Macro Fund last month after suffering a tough period of sub-par performance. His Fund returned -10% YTD through 31 August. Hendry was interviewed recently on the Adventures in Finance podcast. Well worth a listen.

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

 
bond yields.jpg
 

While 2 and 5 year UK and US bond yields have risen a little in recent months, 10 and 30 year bond yields remain firmly in downtrends across the world. We could be getting close to a break out higher in longer-dated government bond yields in some regions, but not yet.

Inflation-linked bonds meanwhile remain in broad multi-year uptrends. UK and US IL bonds were adversely impacted in recent months due to currency movements, but the longer-term trends remain intact. The Active Asset Allocator may tilt the exposure towards inflation hedging via ILB's, precious metals and an increased EU equity allocation and away from deflationary hedges (cash and fixed interest rate bonds) if markets start pricing in a more inflationary bias. I do not see that happening quite yet, but the trend may be turning in that direction.

 
 

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

 

Gold Market Update

As noted in a recent Market Alert, Sprott Asset Management agreed to acquire the common shares of Central Fund of Canada Limited (CFCL) and the rights to administer and manage CFCL’s assets for C$120 million in cash and stock. Upon completion of the transaction, all CFCL Class A shares will be exchanged for units in a new Sprott Physical Gold and Silver Trust. US$300 million in value is expected to be realized for CFCL class A shareholders, relative to 9% pre-announcement net asset value (“NAV”) discount. Good news for existing holders of Central Fund of Canada shares. The 7-9% discount has reduced to 2% today and will be eliminated once the deal closes.

After a sharp -12% decline this year, the US dollar is attempting a long-overdue bounce. I am not expecting much of a rally, rather a consolidation around current levels before the next leg lower. 

 
 

US dollar trends typically last years once they get going. Following the Plaza Accord in 1985, the USD fell sharply and remained in a downtrend for 10 years. The USD Index then rallied from 1995-2001 before the next sharp decline from 2001-2008. Following a choppy move higher from 2008-2016, the USD Index has reversed sharply lower in the first nine months of 2017. I believe this is the start of a multi-year trend lower.

 
 

Gold is waking up to the USD reversal. From 2001-2008, the USD Index fell -43% from 126.21 to 71.33. During that period, Gold rallied over +600% from $250 to $1900. I think we could see something similar this time around. Gold has broken its multi-year downtrend and is now back-testing the prior resistance zone. I expect resistance to become support as gold builds the energy to launch higher over the next 12 months.

 
 

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

August 2017 Investor Letter

Strategy Performance

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +10% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
 

Gold Trader focuses on capturing the strongest and weakest parts of gold's daily cycle, buying daily cycle lows, selling daily cycle highs and holding for 10-20 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5%-6% profit per trade while risking 2%-3% each time and has a win rate in excess of 70%.

Executive Summary

Since my last report published on 17th May (apologies for the delay in getting this one out), global equities have declined -1.1% in euro terms, Eurozone government bonds have rallied +0.4% and gold priced in euros has fallen -4.8%. Currency moves have negatively impacted Active Asset Allocator returns in recent months with the USD falling -6% and GBP falling 4% versus the Euro during that time. All is not lost however and this month I highlight my bullish expectations for precious metals for the second half of 2017 and beyond. I think gold is on the cusp of a significant move higher.

This month I also review Bob Farrell's 10 rules of investing and discuss how they apply to the markets (particularly the stock market) today. Farrell is a stock market veteran who cut his teeth on Wall Street during the 1950's and experienced many of the equity booms and busts that followed over the next five decades. Farrell crafted his 10 rules of investing based on those experiences and lessons learned.  For now, I remain defensively positioned in the Active Asset Allocator with 20% equities / 40% bonds / 30% precious metals / 10% cash.

Gold Trader Trade 14 (-2.6%) and Trade 15 (+0.6%) closed in July. Trade 16 is open and +1% so far. Click here to view the August 2017 Investor Letter.

Stock Market Update

I was reminded recently of Bob Farrell and his 10 rules of investing, wisdom he accumulated over an illustrious career on Wall Street spanning five decades. Farrell joined Merrill Lynch in 1957 as a technical analyst after completing a Masters degree at Columbia Business School where he studied under Benjamin Graham and David Dodd, authors of the investment bible 'Security Analysis'. Farrell witnessed many bull and bear markets throughout his career and crafted his 10 rules of investing based on those experiences and lessons learned. This month, I review Farrell's 10 rules and see how they apply to markets today.

1: Markets tend to return to the mean over time. Trends in one direction or another eventually exhaust themselves and price moves back to test the long-term moving average. This generally happens every few years. The epic bull run in stock markets has swung from oversold in 2009 to overbought today. Even in strong bull markets, investors should expect the long-term moving average to be tested every couple of years. Today, the S&P 500 is 20% above its long-term moving average, while the Eurostoxx 600 is 7% above its long-term trend. 

2: Excesses in one direction will lead to an opposite excess in the other direction. Markets that overshoot on the upside will also overshoot on the downside. The New York Stock Exchange publishes data for margin debt at the end of each month. Margin debt represents the extent to which investors borrow to invest in the stock market. Bull markets breed (over)confidence and confident investors borrow to invest in the stock market. Margin debt surged on three occasions since 1995 coinciding with the last three bull market peaks. Today, NYSE margin debt has never been higher. Ever!

3: There are no new eras – excesses are never permanent. There are always hot stocks and sectors of the market that attract speculative capital. Some lead to speculative bubbles but they never last. Today, internet sensations Facebook, Amazon, Netflix, Google and the cryptocurrencies Bitcoin and Ethereum fall into this category. They are attracting a lot of hot money but chasers will be punished, eventually. It always happens.

4: Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. Bullish and bearish trends generally last longer than expected. However once the trends end, they are followed by sharp reversals. The Shanghai Stock Exchange Composite and Nasdaq 100 indices are two examples of exponentially rising stock markets followed by sharp reversals. In China, this occurred in 2008 and again in 2015. In the US, the Nasdaq bubble popped in 2001 and again in 2008. Another appears not too far away.

5: The public buys the most at the top and the least at the bottom. The average investor is most bullish at market tops and most bearish at market bottoms. When the marginal buyer turns into the marginal seller, a bear market begins and endures until panic sets in, the speculative buyers have been forced to sell and investor sentiment turns pessimistic. This roller coaster of sentiment and emotion is what defines a market. 

6: Fear and greed are stronger than long-term resolve. Human emotion is the enemy when it comes to investing in the stock market. Successful investing requires discipline, patience and a cool head. Sharp declines lead to fear; sharp rallies lead to overconfidence and investor complacency. The Vix index is an excellent barometer that captures fear and greed in the stock market. Low readings in the Vix Index go hand in hand with investor confidence and limited demand for insurance to hedge against stock market declines. Spikes in the Vix Index coincide with periods of sharp selling in the stock market as panic sets in. Today, the Vix index is trading near ALL TIME LOWS.  

 
 

7: Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names. Stock market breadth and volume are important indicators of underlying strength of a stock market advance. When participation is broad, stock market rallies have endurance and momentum and are difficult to stop. When participation is confined to just a few large-cap stocks, rallies have less credibility, momentum and strength. Today, stock market breadth remains quite firm. The Advance/Decline line (lower left chart) continues to make new highs, signalling that the majority of stocks remain in an uptrend. However, initial signs of deterioration are showing up in the number of net new highs being made on the NYSE. This occurred just prior to every correction in the past. 

8: Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend. The typical pattern in a bear market decline involves a sharp sell-off, an equally sharp reversal higher and then a long, slow grind lower until valuations become compelling once again. The reflexive rebound separating each decline is designed to keep the believers invested and encourage 'falling knife' catchers. 

9: When all the experts and forecasts agree – something else is going to happen. If everyone's optimistic, there is nobody left to buy. Excessive bullish sentiment can be damaging to your financial health. If often pays to adopt a contrarian investment strategy and take a more defensive position when the herd becomes overly confident about the market's future prospects. 

10: Bull markets are more fun than bear markets. This is true for most investors and fund managers who have long-only investment mandates and are typically fully invested all the time.

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

 
 

German 10-year bond yields have rallied 6 basis points since my last report while US 10-year treasury yields have fallen 7 basis points. Bonds continue to hold their own and are preparing for their next leg higher (and lower in yields) as the bull market in equities finally rolls over and a sharp equity bear market begins. The secular low in bond yields still lies somewhere in the future. 

Meanwhile, the trend in inflation-linked bonds remains steadily higher, albeit at a relatively modest pace. Currency has impacted euro-denominated returns in 2017 YTD, as weakness in GBP and USD in particular have not fed through to higher inflation-linked bond prices in local currency terms. A weakening currency will lead to rising input costs, particularly in a country like the US, which is the world's second largest importer of goods and services ($2.7 trillion in 2016). Rising input costs are inflationary. I expect the inflation-linked bond allocation in the Active Asset Allocator to make a more meaningful contribution to performance over the next few years.

 
 

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Gold Market Update

Gold is setting up for a big move, so let me lay out my expectations for what I believe will happen over the remainder of 2017 and beyond. Gold's first task is to break above $1,300, which I expect will happen in August or September. A break above $1,300 would be significant for a number of reasons. Gold made a series of higher lows in 2017 since the washout decline to $1,124 in December 2016. Gold trading above $1,300 adds support to the view that the bear market in precious metals (2011-2016) has ended and a new bull market has begun confirmed by a rising trend in the gold price.

 
 

A break above $1,300 would also be significant as it would confirm a break out of the longer-term triangle consolidation that has been in place since gold topped at $1,923 in 2011. Once we get a good close above $1,300, I expect a sharp run higher towards $1,400 or $1,500 before the next consolidation. $1,500 represented strong support in 2011 and 2012 before it gave way in 2013, so I expect gold will take some time to get back above that level. After $1,500, I expect gold will challenge and ultimately exceed the all time highs above $1,900, probably in 2019. Once gold clears $1,900, I believe the bubble phase in precious metals will begin and gold will have a monster move higher in an epic bull market that will be a sight to behold..... but let's not get ahead of ourselves. $1,300 in August/September, $1,400-$1,500 by year-end and $1,900 in 2019, which is 50% above today's gold price.

 
 

I expect the bull market in precious metals will go hand in hand with a currency crisis in the world's reserve currency, the US dollar. I have shown the following chart on a number of occasions in previous reports. It is a chart of the USD Index from 1980 to today (red and black line) and USD gold (blue). The USD Index has made a series of lower highs and lower lows over the last 37 years. After it's run higher in 2014/2015, the USD Index appears now to have topped and started another multi-year decline, which should ultimately break to new all time lows in the years ahead. 

 
 

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

May 2017 Investor Letter

Strategy Performance

performance table.jpg

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
AAA Asset Mix.jpg
 

Gold Trader focuses on capturing the strongest and weakest parts of gold's daily cycle, buying daily cycle lows, selling daily cycle highs and holding for 10-20 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5%-6% profit per trade while risking 2%-3% each time and has a win rate in excess of 70%.

Executive Summary

Over the last couple of months, Facebook, Apple, Amazon, Netflix and Google together have added $260 billion in market capitalisation. Meanwhile, the other 495 companies in the S&P 500 have lost a similar amount. Market leadership is narrowing to just a handful of names, a trend that often occurs at the tail end of a bull market. Smart investors are taking note. Paul Singer recently raised $5 billion to take advantage of opportunities when investor confidence becomes impaired and volatility spikes. Warren Buffett is sitting on 22% cash in his investment company Berkshire Hathaway. We are getting close.

Bonds have had a quiet couple of months but as long as 3% on the 10-year US Treasury and 1% on the 10-year German Bund hold, I continue to believe that the final low in yields of this multi-decade bull market lies somewhere in our future. The price action in gold could provide the clue to the timing of the turn (lower in stocks, higher in bonds and gold). Gold Trader is looking to catch the top of gold's fourth daily cycle before the final descent into a medium-term low in June. Once next month's low is in place, I expect a powerful move higher over the Summer, possibly to $1,500, as the stock market finally rolls over.

Stock Market Update

Paul Singer's hedge fund Elliott Management raised $5 billion in 24 hours last week to take advantage of a potential major investment opportunity set that could emerge "when investor confidence is impaired, recent correlations and assumptions don't work and prices are changing rapidly". Singer, one of the most successful hedge fund managers of all time, is expecting a sharp rise in volatility and some unpleasant consequences for investors in the not too distant future. He is not the only one. Warren Buffett is currently holding 22% cash - nearly $100 billion - in his investment company Berkshire Hathaway. Two titans of the investment industry are on edge and concerned about the outlook for global markets.

Back in May 2013, Paul Singer penned an excellent article describing the moral hazard that has been created by the Federal Reserve. (The full article is available in the Research section of my website at the following link: In the Wilderness). In the article, Singer lambastes the Federal Reserve for the dangerous policies they have pursued and the unintended consequences that have yet to be felt from their reckless and irresponsible actions.

If you look at the history of Fed policy from Greenspan to Bernanke, you see two broad and destructive paths quite clearly. One path is the cult of central banking, in which the central bank gradually acquired the mantle of all-knowing guru and maestro, capable of fine-tuning the global economy and financial system, despite their infinite complexity. On this path traveled arrogance, carelessness and a rigid and narrow orthodoxy substituting for an open-minded quest to understand exactly what the modern financial system actually is and how it really works. The second path is one of lower and lower discipline, less and less conservative stewardship of the precious confidence that is all that stands between fiat currency and monetary ruin. Monetary debasement in its chronic form erodes people’s savings. In its acute and later stages, it can destroy the social cohesion of a society as wealth is stolen and/or created not by ideas, effort and leadership, but rather by the wild swings of asset prices engendered by the loss of any anchor to enduring value. In that phase, wealth and credit assets (debt) are confiscated or devalued by various means, including inflation and taxation, or by changes to laws relating to the rights of asset holders. Speculators win, savers are destroyed, and the ties that bind either fray or rip. We see no signs that our leaders possess the understanding, courage or discipline to avoid this.
— Paul Singer, Elliott Management, May 2013.

One of the consequences of continuous central bank intervention in capital markets has been the emergence of the short volatility trade as investor confidence levels ratchet up once again. A tremendous amount of capital has been placed on bets that volatility will remain suppressed for the foreseeable future. This, at a time when the Vix Index (below) is trading at multi-decade lows. Over the past 13 trading days, the S&P 500 has traded within a range of 1.01%, the least volatile 13 days in history! Volatility spikes and rapid changes in price are what Paul Singer is preparing for.

 
 The Vix Index is a measure of the volatility of S&P 500 index options and is considered a prescient gauge of investor confidence (when the Vix is low) and fear (when the Vix spikes higher).

The Vix Index is a measure of the volatility of S&P 500 index options and is considered a prescient gauge of investor confidence (when the Vix is low) and fear (when the Vix spikes higher).

 

Another direct consequence of continuous central bank intervention has been the reach for yield as investors are forced out of low risk cash and into higher risk investments in the search for income and a reasonable investment return. Total assets in Rydex Money Market Funds have now also fallen to multi-decade lows.....

 
 

.... at a time when stock market valuations and margin debt as a percentage of nominal GDP have rarely been higher.

There is also a potential negative divergence now appearing in the S&P 500 where price is breaking out to new all-time highs but relative strength and momentum indicators are failing to confirm the move. This signals that the rally could be nearing its final stages.

 
 

In his 1st May Weekly Market Comment, John Hussman showed a simple chart of the S&P 500, marking all days since 1960 where the opening level of the Index was 0.5% above the prior day's closing price and the Index was within 2% of an all-time high. On some occasions, these conditions occurred shortly before the final bull market high, while on others (August 1987 and October 2007), they occurred just a few days before or after the final market top. Food for thought.

 
 

Stock markets have enjoyed a very strong multi-year rally since 2009, and since bottoming versus gold in 2011. The S&P has handily outperformed precious metals over the last six years, following gold's strong relative performance versus US equities from 2000 until 2011.  I believe the trend is now turning once again in favour of gold. I think gold will put in a meaningful low over the next 4-6 weeks (see Gold Market Update for more information), which I expect will coincide with a top in the stock market. After that, things should start to get interesting.

 
 

European stocks (lower left chart) trade at a valuation discount relative to US stocks and the market is pricing in quite a depressed level of earnings growth for EU companies. So, there is a margin of safety priced in to EU stock markets. Chinese stocks (lower right chart) continue to face significant headwinds and the chart of the Shanghai Stock Exchange Composite Index suggests that the downward trend will persist for some time yet. I will be tilting the regional equity bias in the Active Asset Allocator towards Europe following the next meaningful correction, but for now, I continue to recommend caution and maintain a defensive position in the Active Asset Allocator of 20% equities / 40% bonds / 30% precious metals / 10% cash. 

Eurostoxx 600.jpg

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

The trend remains down for government bond yields across the world. Inflationary pressures are probably greatest in the United States and eventually that will be reflected in the US Treasury market. However, as long as the US 10-year yield remains below 3.0%, I think the final low in yields of this multi-decade bull market lies somewhere in our future. 

 
 

Debt, demographics and delusional central banks are combining to perpetuate this bull market in bonds. Despite the recent rise in yields, Eurozone government bond yields also remain in a multi-year downward trend. As long as 10-year German bund yields remain below 1.0%, the bond bull market remains intact.

 
 

It has been a quiet couple of months for inflation-linked bonds but the longer-term trend remains up for this under-owned asset class. Inflation-linked bonds offer attractive diversification benefits for multi-asset portfolios and perform well at times when equities and fixed interest rate bonds are struggling. I will likely increase the allocation to ILB's in the Active Asset Allocator over the course of the next 12 months.

 
 

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Gold Market Update

I closed Trade 12 of the Gold Trader strategy last week for a 2% gain (+4.4%YTD). I am looking to place another short position for Gold Trader to catch the top of gold's fourth daily cycle before the final descent into a medium-term low in June. Once next month's low is in place, I am expecting a powerful move higher over the Summer, coinciding with a top and decline in the stock market.

 
 

I am pretty excited about the prospects for Gold Trader. The strategy looks to capture 5-6% per trade while risking just 2-3% each time and has a win rate in excess of 70% based on over 10 years of data. Profits are tax-free to the client and fees are performance based. No gain, no fee. Please get in touch if you are interested in learning more.

I expect gold to bottom next month near $1,170. The possibility remains for a fast and sharp drop below the December 2016 low of $1,124 to shake out the bulls, which would provide the fuel for the next rally. Either way, once gold gets going, I expect a strong move higher towards $1,500. Gold Trader will be searching for a long position next month to get on board the move. 

 
 

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

March 2017 Investor Letter

Strategy Performance

 
 

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
 

Gold Trader focuses on capturing the strongest and weakest parts of gold's daily cycle, buying daily cycle lows, selling daily cycle highs and holding for 10-15 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5% to 6% profit per trade while risking 2% each time and has a win rate in excess of 70%.

Executive Summary

The strong rally in growth assets and sharp decline in interest rates have pulled forward future expected returns to such a degree that a passive portfolio of stocks and bonds is now priced to deliver little more than 2% per annum over the next decade, down from 9% per annum in 2009. Despite this prognosis, many are bullish on the outlook for stocks this year. The USD also looks vulnerable. The US Dollar Index peaked in 1985 and 16 years later in 2001. Prior declines in the USD Index have coincided with bear markets in stocks. 16 years later in 2017, are we about to see currency and equity cycles turn lower again?

Inflation-linked bonds have quite attractive risk and return characteristics and often perform well at times when equities and fixed interest rate bonds are struggling; namely during periods when inflation is rising and/or economic growth is falling. Inflation-linked bonds can therefore provide attractive diversification benefits for multi-asset portfolios without impacting expected returns. The Active Asset Allocator currently holds a 15% allocation to inflation-linked bonds. Meanwhile on gold, this month I look at some of the developing bullish trends for precious metals in 2017. I remain defensively positioned for now with 20% equities / 40% bonds / 30% precious metals / 10% cash.

Gold Trader closed Trade 11 for a win and is now looking to enter Trade 12, a short position to catch the top of daily cycle 3 and the drop into the next daily cycle low. 

Stock Market Update

While historical returns on a traditional portfolio of 60% equities / 40% bonds are near all-time highs, forward-looking expected returns are near all-time lows. The strong rally in growth assets in recent years and sharp decline in interest rates have pulled forward future expected returns to such a degree that a passive portfolio of stocks and bonds is now priced to deliver little more than 2% per annum over the next decade, down from 9% per annum in 2009. Active asset allocation will become a key driver in delivering attractive returns for investors and the Active Asset Allocator is well positioned in this regard. Two asset classes which remain significantly under-owned that should outperform in a rising inflationary world are inflation-linked bonds and precious metals, discussed in more detail later in this report.

For now, the stock market continues its ascent, still untroubled by the many potential time-bombs ticking quietly away in the background. The Sell-signal triggered by my technical studies last October, shortly before the US election result, was negated in December, so the bullish trend continues for now. An ageing bull market, now the third longest in history, and record overvaluation in stocks however are holding me back from moving to a fully invested position at this time. The risks are just too high and I think the current rally is running on fumes. A couple more weeks of additional selling in the stock market will tip the scales once again back to full defensive mode. 

 
 

John Hussman of Hussman Funds provides an excellent weekly analysis of trends in the stock market and captures the extent of the current overvaluation in equities better than anyone else. His chart (below left) measures the market value of equity plus book value of debt (enterprise value) of US companies relative to their gross value-added; a variation on the price/earnings multiple. His chart shows that valuations today are more expensive than in 2007 and within a hair's breath of their all-time extremes in 2000. The percentage of bullish newsletter writers from the latest Investors Intelligence Survey is also back near all-time highs.

Newsletter writers at optimistic extreme.

US corporate earnings have stopped falling in the short-term, perhaps on the back of expectations that Donald Trump will get his tax reform and infrastructure spending plans approved. However, US earnings are still at the same level as they were in 2007 when the S&P 500 was trading in the 1,500's, 33% below yesterday's closing price. At current prices, the stock market is all risk, no reward.

 
 

A bell doesn't ring at the top, but Trump's recent failure to get his healthcare reform legislation through the House of Representatives could mark an important tipping point. The Trump rally may have finally ended and if that proves to be the case, stock market volatility should start to accelerate. The Vix Index, a measure of volatility in the stock market,  appears to confirm this view, bottoming at 9.97 on 1st February 2017 and has been creeping higher in recent weeks. 

 
 

The performance of the US dollar has also caught my attention. US dollar bulls are ten-a-penny these days and the long dollar trade is quite lopsided. You have to buy US dollars before you can buy US equities and money has been piling into both markets in recent years. If we are close to the end of the bull run in equities, money will flow out of US stock markets and US dollars at the same time. While euro-based investors have enjoyed the double benefit of rallying US stock markets and a rising USD versus EUR, the trend in both looks set to change. The US Dollar Index peaked in 1985 and 16 years later in 2001. Prior declines in the USD Index have coincided with bear markets in stocks. 16 years later in 2017, are we about to see currency and equity cycles turn lower again?

 
 

For now, I continue to maintain a defensive position in the Active Asset Allocator of 20% equities / 40% bonds / 30% precious metals / 10% cash. 

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

 
 

Inflation-linked bonds have quite attractive risk and return characteristics and often perform well at times when equities and fixed interest rate bonds are struggling; namely during periods when inflation is rising and/or economic growth is falling. Inflation-linked bonds can therefore provide attractive diversification benefits for multi-asset portfolios without impacting expected returns. Inflation-linked bonds tend to perform well when rising interest rates are driven by rising inflation expectations. They also represent quite an attractive alternative to fixed interest rate bonds in the current environment when nominal bond yields have already plunged to zero or below. While investors require nominal bond yields to fall deeper into negative territory to generate a positive return, inflation-linked bond returns, as the name suggests, are linked to the prevailing rates of inflation of countries issuing the bonds. If inflation happens to be higher than the nominal bond yield, then the real yield (nominal bond yield minus inflation) will simply be negative. Real yields can move to a negative extreme in a world of high inflation. The Active Asset Allocator currently holds a 15% allocation to inflation-linked bonds.

 
 

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Gold Market Update

According to the World Gold Council, overall demand for gold increased +2% in 2016 from 4,216 tonnes to 4,309 tonnes. ETF inflows accounted for the majority of the growth, offset by jewellery demand and a reduction in central bank purchases. Demand for physical bars and coins was relatively stable over the calendar year. Gold prices ended the year +8% in USD and +12% in EUR having been +25% in USD for the year to 30th September 2016. Investment demand increased +70% to its highest level since 2012, while annual ETF inflows were the highest since 2009. 

Investment demand soared +70% in 2016. Global gold bar and coin demand was broadly stable. China increased demand by +25% while the demonetisation experiment in India led to a -17% reduction in the demand for gold.

Central banks bought 384 tonnes of gold in 2016, a third less than in 2015 and 32% below their average purchases of the past five years. Mounting pressure on central bank currency reserves was the culprit for the reduced demand. Russia, China and Kazakhstan were the main buyers in the market.

After a five year bear market, the gold bull looks like it has turned the corner. Gold has been in a declining trend relative to the S&P 500 since 2011. The double bottom over the last 12 months could signal the tide is turning in favour of gold relative to US stocks. The pattern is similar to that formed in 1999-2000, shortly before an epic bull run began.

 
 

The monthly gold chart looks bullish. Gold traded above the 20 month moving average for the majority of the bull run from $250 in 2001 to $1,923 in 2011. Today gold is trading at $1,255, above the 20MMA of $1,212. Gold still needs to navigate daily cycles 3 and 4 of the current investor cycle (we are currently mid-way through daily cycle 3) before the next big move higher. I expect the next investor cycle to kick off in May 2017 and if gold holds together until then, the move could be significant.

 
 

The silver chart looks more bullish than gold's. Silver broke above the 20MMA last year and has re-tested the trend line from above a couple of times since. Silver is leading the way and this is another positive for the precious metals market. The Active Asset Allocator currently holds a 20% allocation to the Central Fund of Canada (CEF), which currently holds a 61% allocation to gold bullion and 39% allocation to silver bullion. CEF trades at a -5% discount to the net asset value of the bullion held in the fund. This discount has narrowed from -8% at the start of the year.

 
 

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

February 2017 Investor Letter

Strategy Performance

performance table.jpg

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
AAA Asset Mix.jpg
 

Gold Trader and Gold PowerTrader focus on capturing the strongest and weakest parts of gold's daily cycles, buying daily cycle lows, selling daily cycle highs and holding for 10-15 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5% to 6% profit per trade while risking 2% each time and has a win rate in excess of 70%.

Executive Summary

Wishing all Secure Investments readers a healthy and prosperous 2017! The Active Asset Allocator returned +8.9% in 2016. A full two thirds of this performance came at the start of the year during a period of heightened volatility and declining stock prices. By the end of February 2016, the 30% allocation to bonds had contributed +1% to the strategy's performance while the 30% allocation to precious metals had contributed +5%. The 20% allocation to global equities impacted performance by -1%. So, the AAA was +5% by the end of February versus -4% for the average multi-asset fund.

From March through October 2016, the AAA added another +5% with +2% coming from the allocation to global equities and +3% from precious metals. By the end of October, the AAA was +10% YTD versus +2% YTD for the average multi-asset fund. Following Trump's election victory on 8th November, money flowed out of safe haven assets and into stocks, leading to a run higher in equities in the last two months of the year and a selloff in bonds,  gold and the Euro. All in all, I am satisfied with the performance of the strategy in what was quite a difficult year to navigate. Many hedge funds delivered negative or very modest positive returns in 2016.

For Gold Trader followers, the December 2016 low marked the end of the last Investor Cycle (IC) with a new IC starting on 16th December. The first daily cycle (DC1) of this new IC peaked at $1,219 on 17th January and then dropped into a low (DCL1) on 27th January 2017 at $1,190. DC2 is now underway and I think it could be quite powerful; a $50-$100 move could be on the cards over the next four weeks. Gold Trader entered a long position yesterday (1st February 2017) at $1,204 with a stop on a close below the recent low of $1,190.

Stock Market Update

2016 began with an -16% plunge in global equities. Over the course of the year, stocks recovered so that by the time the US Election rolled around, the FTSE All World Index had crept back into positive territory. Then along came the Donald.... Following Trump's election victory, money flowed out of safe haven assets and into stocks, leading to a run higher in equities in the last two months of 2016. The US dollar also rallied sharply versus the Euro (the euro fell from $1.12 to $1.04), thereby putting quite a gloss on global stock market returns for the year in euro terms.

 
 

Historically, post-election years have not been as kind to investors and I expect 2017 will be no different. The current bull market, 8 years old in March 2017, is already the third longest in history and twice as long as the average of the last 100 years. Still holding on to second place for now is the 1921-1929 stock market bubble, which ran a few days over 8 years; while in first position is the nine year and five month run from October 1990 to March 2000, culminating in the epic internet bubble. We are getting close to the apex of this multi-year run and I believe the next bear market is just around the corner. Stock valuations have returned to prior peaks, investor confidence is back, while short interest - those betting on falling stock prices - has fallen sharply. One of the most successful hedge funds in recent years, Horseman Capital, recently scaled back their significant short position on equities after losing -24% in 2016. The bears are throwing in the towel, potentially, just at the wrong time. When investors take short positions on the stock market, they become natural buyers during stock market declines (as they cover their positions). However, when short sellers cover their trades during a rising market, there are fewer buyers around when stocks eventually turn lower and the declines can become bumpier and much more violent.

 
 

An interesting development that has occurred since the US election is the jump in confidence among CEO's and consumers, which hasn't yet, but may flow through to rising retail sales and economic growth in the months ahead. However, the key problem that trumps all others is that stocks are trading at 25 times reported earnings (which peaked in 2015) versus a long-term average of just 17 times. Stocks have traded at single digit P/E multiples in the 1940's, 1950's, 1970's and 1980's and could do so again when the next bear market arrives. In the meantime, stocks have only been this expensive on two occasions previously since 1860: the last few months of the roaring 1920's just prior to the Great Depression and at the tail end of the internet bubble in the late 1990's!

 
 

As frustrating as it has been to sit with a 20% allocation to cash (and as much as 30% for new Secure Investments clients), I continue to advise caution for now. The stock market has run 11 months without any meaningful pullback, which is very unusual. A 5% correction typically occurs every 7 months during a bull market. In the next few weeks I will outline some of the areas where I see opportunity in 2017 across equities, bonds and precious metals. 

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

 
 

I think the rise in global government bond yields has just about run its course for now. I am looking for a rally in Eurozone government bonds, which coincides with a decline in global stock markets over the next three to six months. German 10 year government bond yields have rallied 0.50% over the last 7 months and have now reached short-term overbought levels but remain in a multi-year downward trend. Technical indicators suggest that the rally is losing strength. 

 
 

More broadly, Eurozone government bonds have rallied over 60% in recent years, so a -21% pullback is healthy. The next chart suggests that the Euro bonds are now oversold and the next move higher is just around the corner. I will be paying close attention whether bonds can break out to new highs later this year (bullish) or not.

 
 

US 20-year Treasuries have also corrected sharply, falling -18% and have now also reached an extreme oversold position. The longer-term uptrend is still in place for US Treasuries.

 
 

Inflation-linked bonds continue to hold up better than fixed interest rate bonds and I expect ILB's to continue to price in a gradual increase in inflation expectations over the next couple of years. 

 
 

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Gold Market Update

Gold is at quite an interesting juncture. For the first time in five years, gold has broken the trend of lower highs and lower lows. Gold bottomed at $1,045 in December 2015 and then rallied over $300 to a new 52-week high of $1,378 just seven months later. A sharp correction followed but gold managed to dig in and make a higher low in December 2016 at $1,124. 

For Gold Trader followers, the December 2016 low marked the end of the last Investor Cycle (IC) with a new IC starting on 16th December. The first daily cycle (DC1) of this new IC peaked at $1,219 on 17th January and then dropped into a low (DCL1) on 27th January 2017 at $1,190. DC2 is now underway and I think it could be quite powerful; a $50-$100 move could be on the cards over the next four weeks. Gold Trader entered a long position yesterday (1st February 2017) at $1,204 with a stop on a close below the recent low of $1,190.

 
 

Gold priced in euros has held up much better than USD gold, providing a natural hedge for euro-based investors. I expect USD will play catch up now so we could see gold and the US dollar rally together this Spring, which would be great news for our Active Asset Allocator strategy. There is not much to do for now but wait and see how this plays out. Sitting through a bull market is tough to do but I expect our patience will be handsomely rewarded over the next three years. 

 
 

Gold spent the majority of the time above the long-term 20-month moving average (20MMA) during the last major bull market (2001 to 2011). Gold broke below the 20MMA in 2012 and remained in a downtrend for the next four years but then turned higher once again in 2016. Gold closed below the 20MMA briefly on the recent correction but has now regained this bull market trend line. I am looking for an acceleration higher as this bull market gathers steam and broadens in popularity.

 
 

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

December 2016 Investor Letter

Strategy Performance

 
 

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
 

Gold Trader and Gold PowerTrader focus on capturing the strongest and weakest parts of gold's daily cycles, buying daily cycle lows, selling daily cycle highs and holding for 10-15 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5% to 6% profit per trade while risking 2% each time and has a win rate in excess of 70%.

Executive Summary

Stock markets are back in rally mode following the US and Italian election results. I believe this is the final "blow off" phase to a market top which could peak at any stage between now and March 2017. Stock market valuations have once again reached an extreme only experienced in 1929, 1972, 1987, 2000 and 2007. Donald Trump's election success has been compared to that of Ronald Reagan who won the race to the White House in November 1980. Following Reagan's win, the S&P 500 rallied +14% in just a few weeks but topped out in November 1980 and then tumbled -22% over the next year. That was when stocks were trading at single digit P/E multiples. Today, they are four times more expensive.

Government bond yields are rising, particularly in the US where Trump's policies will be viewed as potentially quite inflationary. US Treasuries have declined -8% since the US election result. Eurozone government bonds have held up better, falling just -4% during the recent Trump-inspired inflation scare (but -7% since August). Euro government bonds have now reached an oversold extreme and I expect a rally in EU government bond markets to get underway shortly, likely coinciding with a top in equity markets. While the Federal Reserve has backed away from its position as lender of last resort, the ECB continues to buy everything not nailed down and has recently extended its QE programme to December 2017. 

Gold has also declined recently in tandem with other safe haven assets. Despite the recent correction however, gold priced in euros has still rallied +12% year-to-date. Based on my reading of the gold cycles, we are getting very close to the end of the current investor cycle for gold and I expect a turn higher shortly, possibly coinciding with an interest rate hike by the Federal Reserve on December 14th.  I remain defensively positioned for now with 20% equities / 40% bonds / 30% precious metals / 10% cash.

Stock Market Update

Trump's election victory has led to an +4% rally in the USD, an +8% rally in US stocks and an -8% drop in 30-year US Treasuries. 30-year Treasury yields jumped 50 basis points from 2.6% to 3.1% over the last four weeks. More broadly, global stock markets have added +5% in Euros, Eurozone government bonds have declined -4% and gold in euros has fallen -5%. What was initially considered bad news for investors ahead of the US election transformed into good news, literally overnight. The Active Asset Allocator lost -2.2% in November but has returned +8.4% year-to-date. In this Investor Update, I review the short-term impact of the Trump effect on equities, bonds, currencies and precious metals and examine what may be in store for investors in 2017. 

Will a Trump presidency make America great again? He has promised tax cuts, infrastructure spending and regulatory reform, all of which could boost US GDP over the next two years, but at a significant cost of ballooning government debts and budget deficits. His protectionist policies on trade and immigration will negate the aforementioned positives to a certain degree. Of course this is all speculation for now as Trump and his team have yet to execute on their plan. Let's take a closer look at some of Trump's proposed policies and their likely potential impact.

The headline rate of corporation tax in the US is 35%. However, the average tax rate of the largest 50 companies in the S&P 500 is just 24%. So, stock markets may be overestimating the positive impact of Trump's tax reform plan. On infrastructure spending, Trump is planning to spend $100 billion/year on much-needed repairs to America's transportation network. Spending billions of dollars on America's rail infrastructure, roads, bridges and tunnels makes sense and should provide a timely boost to US GDP growth. However, the Trump team must execute. The Obama administration attempted a similar strategy in 2009 in the midst of the Great Financial Crisis. "The American Recovery and Reinvestment Act of 2009" was put in place at a cost of $800 billion to save and create jobs and invest in infrastructure, education, health, and renewable energy. The impact on job creation and GDP growth was considered relatively modest in the following years. Asset prices benefitted handsomely of course but this was largely a result of four rounds of quantitative easing rather than Obama's fiscal policy decisions.

Many are comparing Trump's recent victory to that of Ronald Reagan who won the race to the White House in November 1980. Reagan beat incumbent President Jimmy Carter on a platform of policies quite similar to those now being proposed by Donald Trump. Following Reagan's election victory,  the S&P 500 took off (see chart below) rallying +14% in just a few weeks (compared to just +8% so far since Trump's win). However, that was it for the stock market rally back then. Stocks topped in November 1980 and then dropped -22% over the next 12 months. That was when stock market valuations were trading at single digit P/E multiples. Today, stocks are four times more expensive. 

 
 

Back in 1980, the US national debt amounted to $908 billion and US GDP was $2.86 trillion (32% debt/GDP). Today, the US national debt is $19.6 trillion while US GDP is only $18.7 trillion (105% debt/GDP). It is going to be much more difficult for the Trump administration to grow the US economy by more than 2%/year during his time in Office. So far, the stock market has given Trump the benefit of the doubt, but I can't help but feel that 2017 is shaping up to be quite a different proposition, for reasons I will explain next.

The Dow Jones Industrials Average is a price-weighted index of 30 of America's largest publicly quoted companies including many household names like Disney, JP Morgan, Caterpillar, MacDonalds, Proctor & Gamble, Exxon Mobil and Goldman Sachs. Following the Great Financial Crisis of 2008, the Dow kicked off a new bull market, fueled to a large degree by central bank money printing on a scale never before witnessed. The rise over the next 9 years has been a sight to behold - a triple from those March 2009 lows. Times have changed however. QE has ended in the US, bond yields have rallied 100 basis points and the USD has added +10% versus the Euro since May 2016. US corporations are facing multiple headwinds at a time when corporate earnings are declining.

From a technical perspective, we are now at an interesting juncture. Take a look at the chart below. Multi-year support broke for the first time in 2015 but stocks recovered strongly for the remainder of the year. 2016 started with another sharp 15-20% correction before the bulls regained control once again. The DJIA has now rallied all the way back to the major multi-year support trend line and has broken out to new all time highs this week. Is this the start of a new multi-month rally or a bull trap? Chartists and traders around the world are watching this setup very closely. We should find out shortly.

 
 

A similar pattern is unfolding on a shorter time-frame in the S&P 500 - a break of support in October 2016 followed by a sharp rally that has just broken out to new all-time highs. In a world dominated by computer-driven algorithmic trading, these chart patterns matter. 

 
 

When the S&P 500 is trading at a P/E multiple of 25 times earnings and those earnings peaked in 2015 and have been declining ever since, the chart patterns matter even more. The last time US corporate earnings were at current levels was almost 10 years ago, back in 2007 when the S&P 500 was trading at 1,500, -32% lower than today's level.

 
 

Margin debt, which measures the extent to which investors borrow to invest in the stock market, also looks like it may have peaked. Notice that margin debt as a percentage of GDP peaked at similar levels in 2000 and 2007 coincident with the previous two stock market bubbles.

 
 

The recent break higher in the stock market has looked convincing and has reversed the sell signal in my technical studies, which triggered in October. Portfolio managers under performance pressure are chasing this move in fear of underperforming benchmarks as we approach the end of the year. I believe the recent breakout will not be sustained and, similar to last year, we will get a sharp reversal at some point between now and March 2017. So I continue to recommend a defensive position in the Active Asset Allocator with an asset mix of 20% global equities / 40% EU bonds / 30% precious metals / 10% cash.

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

 
 

US Treasuries have been hit hardest during the recent correction in government bonds. The 10-year Treasury yield rallied 110 basis points from 1.4% in August to 2.5% today, sending Treasury prices falling over -10%. 30-year Treasury yields increased 1% from 2.1% to 3.1%, resulting in a capital decline of -15%. (the Active Asset Allocator strategy has no exposure to US Treasuries).

Eurozone government bonds held up better, falling just -4% during the recent Trump-inspired inflation scare (but -7% since August). Euro government bonds have now reached an oversold extreme and I expect a rally in EU government bond markets to get underway shortly, likely coinciding with a top in equity markets. While the Federal Reserve has backed away from its position as lender of last resort, the ECB continues to buy everything not nailed down and has recently extended its QE programme to December 2017.

Government debt in the Eurozone continues to grow at a faster rate than GDP. The ECB must hold interest rates below the rate of inflation so that these debts can be serviced and inflated away over time. While EU fixed interest rate bonds are approaching the end of their multi-decade bull market, the outlook for Inflation linked bonds (and gold) is brighter. Although fears of deflation continue to reverberate around the world, the echo is starting to fade. We are moving towards an environment of rising inflation. The Active Asset Allocator will continue to transition from fixed interest rate bonds to inflation-linked in 2017.

 
 

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Gold Market Update

Despite the recent correction, gold priced in euros has still rallied +12% year-to-date. Based on my reading of the gold cycles, we are now getting very close to the end of the current investor cycle for gold and I expect a turn higher shortly, possibly coinciding with an interest rate hike by the Federal Reserve on December 14th. 

 
 

The Federal Reserve last raised interest rates a year ago on December 16th 2015. Gold closed at $1,071 that day. In a shakeout move, gold dropped $20 the following day before then shooting higher by +30% over the next 6 months. I expect something similar this time round. Also, inflation wasn't a concern for the Fed last year but with Trump in the White House in January 2017, the narrative is changing.

 
 

Another difference between then and now is that USD gold looks to be making a higher low for the first time since 2011. A higher low is bull market action and will confirm a change of character for the gold market. If gold can form a low in the $1,100's, the next target will be a higher high in 2017 above $1,378. I think we will get it. A higher low followed by a higher high will get more involved in the precious metals market, a necessary development to drive gold prices higher.

 
 

Gold priced in euros has been holding up reasonably well since June 2016. Euro gold has not made a lower low despite the +7% rally in the USD over the same period. 

 
 

The time has come for gold to show its hand. If the bull market is back, gold should rally sharply over the next 6 months. If gold disappoints, something else is at hand and I will cut back exposure in the Active Asset Allocator

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.