August 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

Despite expensive valuations, stock markets remain well bid and my technical trend indicator remains on a 'BUY'. In the short-term, equities are overbought and due for a pause or correction. If the bullish technical setup persists as we navigate past the seasonally difficult August to October period, I will add equity exposure to the Active Asset Allocator. For now, I remain patiently in defensive mode. I also am planning to tilt the regional equity exposure away from the US towards Europe, where stock market valuations are more compelling. Stay tuned. 

This month, I added 5% to UK index linked gilts and 5% to US inflation linked bonds in the Active Asset Allocator, lowering the cash position from 20% to 10%. The bond market is pricing in almost no inflation in our future and I believe that is a mistake. The Active Asset Allocator continues to hold a 20% allocation to fixed interest rate bonds but the clock is ticking on this trade and I have one eye on the exit door. On precious metals, the World Gold Council published its Q2 2016 update on Gold Demand Trends and noted a +141% year/year increase in investment demand. it's a bull market folks. I also closed out Trade 7 for Gold Trader on Friday at breakeven. I remain defensively positioned for now with 20% equities / 40% bonds / 30% precious metals / 10% cash.

Stock Market Update

My technical studies triggered a buy signal for the stock market on 15th April 2016 and it  remains in place today. Since this trigger, global stock markets have rallied +4% in aggregate. US equities have gained +4%, European stocks are unchanged while emerging market equities have added +8%. (EU bonds and gold have also rallied over the same period with bonds +4% and gold +9%). I have been reluctant to follow the buy signal for equities to date, largely due to valuation concerns. Today, the S&P 500 trades at 25 times reported earnings. The S&P 500 has traded at a valuation above 24 times reported earnings only 9% of the time since 1928. If we exclude the tech bubble and 2008 financial crisis, when corporate earnings all but disappeared, that number drops to just 2%! We are also entering the historically difficult August to October period where stock markets have suffered significant declines in the past.

However, despite expensive valuations, the market's technical picture has recently improved. The number of stocks making new lows has evaporated while the number of stocks breaking out to new highs continues to increase (lower left chart). This is a prerequisite for another leg higher to develop in what is a maturing equity bull market. Central banks around the world continue to add fuel to the fire with the Bank of Japan, ECB, Swiss National Bank and People's Bank of China being particularly active in 2016 YTD (lower right chart). 

The next chart is quite revealing and one to which I am paying close attention. It shows the performance of consumer cyclical versus consumer staple stocks. Consumer cyclical stocks rely heavily on the business cycle and include industries such as retail, automotive, housing and entertainment. Consumer staples tend to perform better during recessionary periods and include non-cyclical industries such as food, telecom, utilities and healthcare. So when the trend is rising, Cyclicals are outperforming Staples, and stock markets tend to do quite well. When the trend reverses and Staples outperform Cyclicals, markets tend to struggle. The chart took a sharp decline in late 2015 signalling that all was not well for stock markets and true to form, they have struggled so far in 2016. However, Consumer Cyclicals have started to show some relative strength in recent months and may be about to break out above the down-trending 50WMA. This would be quite a bullish development and allow me to become more constructive on the outlook for equities.

In another positive development, a significant 78% of stocks on the NYSE are now trading above their long-term 200DMA, signifying broad participation in this recent stock market rally.

In the short-term, equities are overbought and due for a pause or correction. If stock markets can hold firm over the next couple of months and my technical studies remain favourable, I will increase the equity allocation in the Active Asset Allocator. I also am planning to tilt the regional equity exposure away from the US towards Europe, where stock market valuations are more compelling. Stay tuned. 

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

This month, I added a 5% allocation to UK index linked gilts and a 5% allocation to US inflation linked bonds, lowering the cash position in the Active Asset Allocator from 20% to 10% to fund the purchases. The bond market is pricing in almost no inflation in our future and I believe that is a mistake. Printing money always leads to inflation, eventually. We have experienced 7 years of asset price inflation (rising equity and property prices) and are starting to see increasing signs of wage inflation this year. In the United States, while inflation linked bonds continue to underperform Treasuries, technical signs of a change in trend are at hand. Relative strength (RSI) and momentum (MACD) indicators are improving in favour of inflation-linked bonds and price should follow suit later this year.

Inflation linked bonds are also rallying in the United Kingdom and the recent 15% drop in GBP should accelerate this trend. Falling unemployment, wage inflation and continued loose monetary policy by the Bank of England should provide an additional tailwind.

Central banks have already driven government bond yields to zero or below and are now examining alternative ways to distribute a continuing flow of newly printed money. Accelerated fiscal spending and/or direct payouts to the public (helicopter money) are potentially on the cards. Trends in wage inflation have also started to rise in the US recently. I expect the bond market to start pricing in a more inflationary outlook and inflation linked bonds should be a beneficiary. 

The 35+year bull market in fixed interest rate (rather than inflation-linked) bonds is in its final innings. We could be entering the final blow-off phase, which, when it ends, will unleash pain and chaos across multiple asset markets, but we are not there yet. Rising bond yields, when they do come, will lead to significantly lower prices for long duration fixed interest bonds and equities alike. (Stocks are simply a claim on a future stream of cash flows, discounted at the prevailing market rate. When that interest rate goes up, the present value of a stream of cash flows declines. it is simple mathematics). The Active Asset Allocator continues to hold a 20% allocation in fixed interest rate bonds but the clock is ticking on this trade and I have one eye on the exit door.

To learn more about the full range of investment services available at Secure Investments, please contact Brian by email at brian.delaney@secureinvest.ie or at 086 821 5911.

Gold Market Update

The World Gold Council has published its quarterly report on gold demand trends for Q2 2016 with some interesting highlights. The report details a 15% increase in overall gold demand year/year driven by a +141% increase in investment demand. The main buyers continue to come from India and China, though US investor demand is also on the rise. Gold supply increased +10% with total mine supply +5% year/year.

The increasing appetite for gold is evident in the next chart where you can see that gold is rising at a faster rate than either of the prior two times when gold broke out above its long-term 20-month MA. Investors want in and are increasingly happy to pay higher prices to get their bullion.

Gold outperformed stocks from 2000 to 2011 before entering a bear market that ended last year. Gold has started to outperform the S&P 500 once again this year, a trend that I expect will remain in force for at least the next 2-3 years and perhaps quite a bit longer.

The gold miners are leveraged plays on the price of gold. The index of gold and silver miners has already rallied +192% since the low made on 19th January 2016. The miners are a notoriously volatile sector of the market but for those with patience and an iron stomach, fortunes will be made in this sector before the bull market ends.

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

April 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 just 1.5% each time and has a win rate in excess of 70%.

Executive Summary

Following the worst start to the year for equities in recorded history, we have just experienced one of the sharpest recoveries off the lows since records began. This rally has been so strong in fact that my technical studies have just triggered a buy signal for the stock market for the first time since September 2013. This month, I review the recent improvement in the stock market's technical setup and outline my plan of attack for the weeks ahead. For now, the Active Asset Allocator remains defensively positioned, 20% equities / 30% bonds / 30% PM's / 20% cash.

This month I also explain why I remain bullish on bonds and expect an additional 15-20% upside for the 10 year duration bond ETF I hold in the Active Asset Allocator and provide a brief update on the ongoing bullish developments in the precious metals sector as this bull market shifts into gear.

Stock Market Update

My technical studies have just triggered a buy signal for the stock market for the first time since September 2013. Equity valuations today are approaching an extreme only witnessed near prior stock market peaks and US corporate earnings are now in a declining trend. Despite these cautionary flags, continuous central bank intervention has created the perception that stock market investing is a low risk endeavor and a buy-the-dip mentality on every correction has taken hold. This will not end well. In the interim, price trumps opinion. My Technical Trend Indicator (TTI) is smarter than I am and keeps me on the right side of the prevailing stock market trend. In this monthly update, I consider my plan of attack for the weeks ahead.

“Based on valuation measures having the strongest correlation with actual subsequent market returns across history, equity valuations have approached present levels in only a handful of instances: 1901 (followed by a -46% market retreat over the following 3-year period), 1906 (followed by a -45% retreat over the following year), 1929 (followed by a -89% collapse over the following 3 years), 1937 (followed by a -48% loss over the following year), 2000 (followed by a -49% market loss over the following 2 years), and 2007 (followed by a -57% market loss over the following 2 years). A few lesser extremes occurred in the 1960’s and 1970’s, followed by market losses in the -35% to -48% range.”

— John Hussman, Hussman Funds, 18th April 2016.

In this long-term chart of the S&P 500, I have highlighted the prior instances in 2000 and 2007 when the stock market topped and rolled over, followed shortly thereafter by a bearish cross of the 50WMA below the 100WMA. This coincided with the onset of a bear market in equities and a declining trend in US corporate earnings. In 2016 YTD, we have already experienced a sharp -14% drop in stocks followed by an equally sharp +16% rally. However, there has been no bearish cross yet of the 50WMA below the 100WMA and the S&P 500 currently trades above both trend lines. Meanwhile, US corporate earnings have begun to slide, highlighted in the lower section of the chart below. This should be expected and is consistent with the maturing phase of an ageing equity bull market, which is now over seven years old.

Margin debt, a measure of the degree of speculation evident in the stock market, also appears to have peaked and rolled over. Prior peaks in margin debt have coincided with past peaks in the stock market. So today, we have a combination of stocks that are trading at expensive valuations, a weakening trend in US corporate earnings and a declining trend in margin debt. That's the bad news.

Despite this backdrop, equities have powered ahead in recent weeks. In February 2016, only 15% of stocks on the NYSE were trading above their 200DMA. Today, this figure has jumped to a much healthier 69%. If stock markets can consolidate their recent gains over the next couple of weeks while a majority of stocks continue to trade above the 200DMA, the bulls will remain in control.

In another positive development, the NYSE Advance/Decline Line (lower left chart), which captures the trend of rising stocks versus declining stocks over time, has recently broken out to new all time highs. This suggests that price should follow suit shortly. Volume flowing into advancing versus declining stocks is lagging however and has yet to break out (lower right chart) to new highs. So, we still have some mixed signals here (click on charts to enlarge).

As markets have rallied, stocks making new lows have also all but disappeared, which is another requirement before a bull market can resume.

So from a technical perspective, the outlook for equities has improved, but there are still many reasons for caution. Remember, 2016 started with the worst negative stock market performance in history, so it's only natural that the first rally following this correction should be powerful. The markets are overbought in the short-term and a correction of some degree should now be expected. The extent of the correction will determine when and by how much I will increase the equity allocation in the Active Asset Allocator. Stay tuned, we should find out soon enough.

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 ECB is attempting to stimulate economic growth and generate inflation in the order of 2% annually by printing money, buying bonds, funding some EU country deficits and potentially using some form of "helicopter money" for EU citizens. The road ahead is concerning but we have not yet reached an inflection point where ECB policies trigger an acceleration in the rate of inflation and a path towards higher government bond yields. Draghi has committed to doing "whatever it takes" which means he is willing to drive 10-year EU government bond yields into negative territory. 

The Active Asset Allocator currently holds a 20% allocation in EU government bonds (IEGZ). The regional split of this bond fund is 32% France, 27% Italy, 19% Germany, 17% Spain, 5% Netherlands. The fund has a yield of 1.4% and a duration of 10 years. If ECB policies are successful, the yield on IEGZ should reach zero or negative implying 15-20% upside return potential from here. I plan to increase the allocation to inflation linked bonds (IBCI) and reduce the allocation to fixed interest rate bonds (IEGZ) later in 2016. Of course, the overall allocation to bonds will reduce if/when I increase the allocation to equities in the weeks ahead. Stay tuned.

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

Gold Market Update

Gold closed above the 20-month moving average (20MMA) in February 2016, confirming a new bull market had begun. As long as gold continues to trade above the 20MMA, bull market rules will apply - we buy and hold and do not get shaken out of our position. The 20MMA closed on Friday at $1,170 and should start trending higher shortly.

Silver's bull market kicked off a month later, as this more volatile precious metal closed above its 20MMA in March 2016. Silver's 20MMA closed on Friday at $15.60, so above this price, bull market rules should also apply. 

The one fly in the ointment for both precious metals (silver in particular) is the extent of the speculative long position that has been accumulated by hedge funds and those betting on higher prices for the precious metals. The latest Commitment of Traders report shows an all time record net long position by speculators in the silver market.

Commercial traders (the mining companies and bullion banks) take the opposite side to the speculators and are always net short the metals to varying degrees, depending on price, to hedge their production. The Commercials are often referred to as the "smart money" as they are able to manage the gold and silver price in the short-term, knocking down the price and covering their short trades when the speculators get overly stretched on the long side. We are potentially at this point now, particularly in the silver market. The Commercials do not always win and have been forced to cover at much higher prices in the past. As always, I will be guided by the price action as it unfolds. Above the 20MMA, it's a bull market.

I expect the precious metals bull  market to benefit from an overall declining trend in the US dollar over the next 3-5 years. The USD has been perceived as a safe haven currency since the 2008 financial crisis and has benefited handsomely from significant inflows into various US growth assets, driving price and valuation to extreme levels. As valuations normalize, I expect the USD to decline on a trade weighted basis.

Confirming the bull market in precious metals, the gold and silver miners are rocketing higher. The gold and silver mining index is already +111% from their recent lows. The miners are notoriously volatile. However, for those willing to close their eyes and hold on, I expect BIG rewards here. The miners are too volatile for the Active Asset Allocator but are confirming my bullish view on the sector.

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