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.

February 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 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.

September 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

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.

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