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.

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.

Strategy Performance

Investment Philosophy and Approach

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

Central banks continue to dominate the headlines. The Federal Reserve and Bank of Japan both announced no change in interest rates today but threatened more QE if and when required. The Bank of Japan also announced a new monetary policy framework called "Quantitative and Qualitative Monetary Easing with Yield Curve Control", basically translated as "when in doubt, print more money". On equities, while there are plenty of reasons to be bearish, my Technical Trend Indicator (TTI) remains on a 'BUY'. The trend has started to fade, however, so buyers will need to step up shortly or we will be back to defensive mode for the first time since October 2014.

Turning to the bond markets, this month I note an interesting and potentially concerning development where a divergence is appearing in the technical indicators. The end of the multi-decade bull market in bonds may not be too far away now. I am paying close attention. The outlook for inflation linked bonds is certainly more favourable. Finally on gold this month I highlight the top physically backed gold ETF's on the market and note recent flows into the various funds on a regional basis. I remain defensively positioned for now with 20% equities / 40% bonds / 30% precious metals / 10% cash.

Stock Market Update

Stock markets are in a holding pattern ahead of the Federal Reserve's FOMC press conference this evening (Wednesday 21st September) at 19.30 Irish time. Markets are pricing in a 20% probability of a 0.25% interest rate hike. Janet Yellen does not like surprises so I expect lots of talk about what-if's and maybes but little action from the Fed President. The Bank of Japan also met last night (Tuesday 20th September) and agreed a new framework for strengthening monetary easing called "Quantitative and Qualitative Monetary Easing with Yield Curve Control", basically translated as "when in doubt, print more money". The Japanese central bank is now accumulating 3% of the Japanese equity market on an annual basis with money created out of thin air. The Swiss central bank is pursuing a similar strategy and now holds $120 billion in publicly traded stocks, including $1.4 billion in Apple shares, $1.2 billion in Google and $1.0 billion in Microsoft. When confidence in central bank policy is finally lost, there will be hell to pay but that is a conversation for another day.

In the meantime, despite the growing central bank footprint on global equity markets and the perception that the Fed, ECB, BoE and BoJ are still in control, volatility is on the rise. I expect this trend to continue as we move towards the US Presidential election on 8th November and into 2017. The market reaction to the news in the weeks ahead will determine what changes, if any, are made to the Active Asset Allocator.

The buy signal generated by my Technical Trend Indicator (TTI) in April 2016 is still in place today, albeit the trend has started to fade. Buyers of stocks will need to step up soon or the TTI will flip back to a 'Sell' for the first time since October 2014. A week or two of additional selling will tip the scales back to defensive mode. So, a potentially important inflection point for the stock market is now at hand.

Perhaps markets have started to discount a deteriorating growth outlook for the US economy. The recent ISM Purchasing Managers Index dropped below 50 in August, signalling a contracting manufacturing sector in the US. The ISM Services Sector, which represents two thirds of the US economy, also experienced a sharp decline in August to reach its lowest level since 2010.

........Or perhaps stock market investors are balking at paying a record multiple of earnings for shares of US companies. The S&P 500 today trades at 27 times the average of the last 10 years' reported earnings, adjusted for inflation, a peak only surpassed in 1929 and 2000. The average 'Shiller P/E' over the last 135 years is closer to 17 times reported earnings, and that is just the average. Often times, the P/E multiple has dropped to 10 times earnings, or below.

.......This is at a time when corporate earnings in the United States are actually in decline. S&P 500 GAAP earnings peaked in 2015 and have been falling over the last five quarters. Last time US corporate earnings were at today's levels was in 2007 when the S&P 500 was trading at 1,500, approximately 30% below today's price.

So, the majority of evidence suggests that equities are overpriced today and due a correction at a minimum. However, continued interference by central banks has clouded the picture, which is why I place such a strong emphasis on my understanding of the primary trend of the market. My Technical Trend Indicator has proven to be an excellent navigational tool for would-be investors. Theoretically, there is no limit to the amount of money central banks can print and invest in the stock market. In theory, this could lead to substantially higher prices for stocks at some point in the future, as valuation concerns are trumped by a wall of liquidity flowing into markets from central banks. I do not believe for one second that this outcome is likely, but I can't rule it out for certain. So the TTI leads the way.

I came across a recent study from the folks at Evergreen GaveKal that touched on the issue of central bank intervention and the potential unintended consequences that may arise. The good people at Evergreen GaveKal highlighted the potential impact of negative interest rates on stock market valuations as follows.

“A negative yield on the U.S. 10-year treasury note will be a much bigger problem for managers to worry about than a Shiller P/E of 27 on the S&P 500 Index..... The effect of persistently negative rates on equities’ valuations is almost incomprehensible: with a negative discount rate, any cash flow producing equity is theoretically worth infinity. The chart below shows the net present value of 2,000-year stream of $5 dividends at different discount rates. At a negative discount rate of -3%, this $5 dividend stock would be worth 47,684 trillion trillions. Welcome to the new crazy!”

— Evergreen Gavekal

Now there is something to ponder! For now though, the Active Asset Allocator remains defensively positioned with 20% global equities / 25% fixed interest rate bonds / 15% inflation linked 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

An interesting dynamic is unfolding across government bond markets in 2016. While government bond prices continue to make new highs, a divergence is appearing in the technical indicators. The Relative Strength Index and Momentum Index specifically are making lower highs and not confirming the bullish trend. Is this a temporary pause before another surge higher in bond prices and lower in yields or is the bond market signalling that the multi-decade trend of lower rates is finally coming to an end?

US 10-year and 30-year government bond yields are exhibiting similar characteristics to Eurozone government bonds. Bond yields are still making lower lows but selling pressure has eased and relative strength is improving. If bond yields continue to rise over the rest of 2016 and into 2017, the longer-term trend will turn from down to up, which will be meaningful. Is the market be signalling that the central banks are starting to lose control?

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. If they do not, I will sell the 20% allocation to fixed interest government bonds and book profits on that trade.

Unlike fixed interest government bonds, inflation linked bonds (ILB's) can rally in a rising interest rate environment, so long as inflation expectations increase at a faster rate than central bankers increase interest rates and government bond yields rise. Central banks want inflation and they will get it. The Active Asset Allocator is poised to benefit and the allocation to ILB's will increase in the months ahead.

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 latest report, the total amount of gold held in the world's top 73 gold ETF's reached 2,297 tonnes at 31 August 2016, up 27 tonnes from the previous month. European gold fund ETF's added 33 tonnes, offsetting the 8 tonne decline in North America. Slow and persistent accumulation is characteristic of a bull market.

The top 15 physically-backed gold gold ETF's by assets in tonnes are summarised in the following table. The Sprott Physical Gold Trust and Central Fund of Canada, 9 and 10 on the list, are the ETF's used in the Active Asset Allocator to provide our precious metals exposure.

The precious metals bull market rumbles on. Gold priced in euros has outperformed gold priced in US dollars since 2015 due to relative currency moves over the period. Gold will rise in all currencies over time. I expect gold to break out to new all time highs in the next 1-2 years. Bull market QED.