October 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

My Technical Trend Indicator has triggered a Sell Signal for the first time since October 2014. This, at a time when equity valuations are stretched, US corporate earnings are declining and fund managers are fully committed, holding their lowest allocation to cash in over 20 years. The bull market is ageing and stock market leadership is narrowing. Investors also must contend with the fact that 86% of recessions in the United States have occurred either in the year of or the year following an election.

Government bond yields have backed up in recent weeks but I expect the trend lower to resume shortly, particularly if coupled with a bout of selling in equities. Meanwhile gold is consolidating ahead of another big move which I expect will start next month. Gold has returned +19% year-to-date for Euro investors. I expect strong double-digit annual returns for the precious metals over the next 3-5 years. Gold Trader closed out Trade 9 with a small profit this week and will look to enter another long position in 5-15 trading days at the end of the current daily cycle, which should also coincide with the intermediate cycle low (ICL). I remain defensively positioned for now with 20% equities / 40% bonds / 30% precious metals / 10% cash.

Stock Market Update

The current bull market in stocks, now the third longest in history, has run 7 years and 5 months, from March 2009 to August 2016 (2,193 on S&P 500). In second place is the bull market of the roaring twenties (1921-1929) which lasted 8 years and 2 months. It was followed by a spectacular -88% collapse in the Dow Jones Industrials Average and the Great Depression. The 9 year rally from 1991 to 2000, which culminated in the technology bubble and subsequent bust, with the S&P 500 falling -53% and NASDAQ plunging -83%, remains in top spot and will likely never be surpassed in either duration or valuation terms.

 

So, unless the current bull market is set to break records, it is probably in its final inning or may have already topped out. Stock market performance in US election years has tended to be positive (2000 and 2008 being notable exceptions). Post-election years however, have not been kind to investors. 9 of the last 14 recessions in the United States for example, have started in the year following an election, with 3 others beginning during an election year. Taken together, 86% of all recessions in the United States over the last century have started either in the year of or the year following an election. Adding fuel to the fire, my Technical Trend Indicator has just triggered a Sell Signal for the first time since October 2014.

 
 

This, at a time when equity valuations are stretched, US corporate earnings are declining and fund managers are fully committed, holding their lowest allocation to cash in over 20 years.

 
 

There is a growing complacency that Hillary Clinton will win the race to the White House on November 8th (Paddy Power has already paid out on a Clinton victory). Odds are against Trump, but if he causes an upset, expect a post-Brexit type reaction in equity, bond and currency markets. Irrespective of who wins the Presidential Race, 2017 should be quite a challenging year for investors. The Active Asset Allocator will look to navigate volatile markets and take advantage of opportunities as they arise. However, today I remain in defensive mode 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

 
 

The US budget deficit increased by $150 billion from $440 billion to $590 billion in the year ending September 30th 2016. Over the same period, the total gross federal debt of the United States increased by $1.4 trillion. The trend is similar in Europe, the UK, Japan and China. Despite record government debt-to-GDP ratios across the developed world, calls for fiscal stimulus are growing to replace the increasingly ineffectual monetary policy madness that has become the norm in recent years. Fiscal stimulus means more debt, higher taxes and slower GDP growth. This should drive interest rates and government bond yields lower, not higher in the months ahead. So, while bond yields have moved higher in recent weeks, particularly in the US and UK, following a near vertical plunge in 2016, I expect the trend lower in bond yields to resume shortly. I don't think the bond bull is dead yet.

In the Eurozone, the ECB is running out of government bonds to buy and will likely relax its minimum purchase requirements next month. There is still plenty of demand for EU bonds, which should keep a lid on EU government bond yields for the foreseeable future. The Active Asset Allocator currently holds a 20% allocation in fixed interest government bonds along with 15% in inflation linked bonds and 5% in EU aggregate bonds. The 20% allocation is the most sensitive to interest rates changes and one I am most focused on near-term. I expect government bonds to rally on the next stock market decline.

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 looks like it still has some work to do before making its next big move higher. Gold Trader avoided the $70 drop in gold earlier this month and entered a long position at $1,260 with the expectation of capturing the start of a new medium-term investor cycle. The rally never really got going, so Trade 9 was closed this week at $1,267, booking a small profit. Gold Trader will look to enter another long position in 5-15 trading days at the end of the current daily cycle, which should also coincide with the intermediate cycle low (ICL). Gold should finish the year with a strong move higher and deliver another solid performance in 2017 as the bull market reignites.

 
 

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