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

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 10-20 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).

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. 

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.