January 2016 Investor Letter

Active Asset Allocator 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. We follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. We always invest with the primary trend of the market and do not follow a benchmark. Instead, we manage the market risk for our clients. Our strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. Our active asset allocation approach is best illustrated in the following chart.

Executive Summary

Global stock markets are under increasing pressure. The S&P 500 has fallen -8% in the first three weeks of 2016, while technology stocks are -10% and small cap stocks -11% YTD. The internal structure of the market has also deteriorated with the number of stocks on the NYSE making new lows increasing significantly in recent weeks. In contrast, the Euro, bonds and gold have acted better and are showing positive returns YTD. Together, these account for 80% of the Active Asset Allocator, which has started 2016 +6% ahead of benchmark.

Government bonds continue to attract safe haven capital flows as stock market volatility persists. I expect gold to also step up as a safe haven asset in 2016 and outline a few more bullish developments this month for the metal, including a +27% increase in investment demand in the third quarter of 2015 and a +62% year/year increase in US consumer demand as recently reported by the World Gold Council.

Stock Market Update

2016 is off to a difficult start for investors. The S&P 500 has delivered its worst January month-to-date performance since its inception in 1923. The S&P 500, NYSE Composite and Dow Jones Industrial Average have all declined -8% in the first 10 trading days of 2016. Global equities in euro terms are -9% YTD. US Transportation (-11%), Technology (-10%), and Small Cap stocks (-11%) have fared even worse, increasing the likelihood that a full-scale bear market may now be in force. In contrast, the Euro, bonds and gold have each acted better and are showing positive returns YTD. Together, these positions account for 80% of the Active Asset Allocator. The S&P 500 closed Friday at 1,880, just 13 points above the October 2015 lows. The Index reached an intra-day lower low of 1,857 but stocks rallied into the close to end another difficult week. A lot of technical damage has occurred and it is now all for the bulls to prove.

Back in 2008, when the S&P 500 broke decisively below its 50 week moving average (50WMA), stocks sold off sharply but then rallied one final time to test the underside of the 50WMA before the real damage was done. This time around, we have already had one test of the 50WMA from below. We may get another shortly to reset sentiment, which has turned quite bearish in recent weeks (it looks like that this Tuesday morning), or we could just accelerate lower from here. For a rally to occur, the S&P 500 must hold 1,867. If the stock market spends too much time below 1,867, we could be in for trouble. The 50WMA is currently +9% above where the S&P closed on Friday. (US markets are closed on Monday 18th January in observance of Martin Luther King Day).

Outside of US large cap stocks, a lot of technical damage has already occurred. The Value Line Index (lower left chart), an equally weighted index of 1,700 US companies, formed a bull market top in April 2015 and has already declined -22%. The Russell 2000 Index (lower right chart) of US small cap stocks topped out two months later in June 2015 and has also fallen -22% in the intervening period.

The Dow Jones Transportation Average (DJTA), the oldest running stock index in the US (created in 1884 by Charles Dow), comprises 20 stocks in the transportation sector and is an excellent barometer of the health of the US economy. The DJTA has now fallen -28% since topping out in November 2014. The declining transport stocks and collapsing price of crude oil are discounting much weaker trading conditions in the US in the months/years ahead.

In my October 2015 Investor Letter, I noted that the number of stocks making new highs minus those making new lows had turned positive for the first time in many months and a consistent positive trend would allow me to become more constructive on the stock market. However, I needed to see more data before making that call. Over the following three months, the internal structure of the market deteriorated and the number of stocks on the NYSE making new lows increased significantly. I need to see new highs outpacing new lows before I can turn bullish on equities. In the meantime, I continue to recommend a defensive position in the Active Asset Allocator.

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

Bond Market Update

Government bonds continue to attract safe haven capital flows as stock market volatility persists. German 10-year bund yields have fallen -10 bps in 2016 YTD and have almost halved since peaking in June 2015 at 0.98%. Japanese 10-year bond yields have fully retraced their 2015 move, while UK and US 10-year government bond yields have also started trending lower again. If stock market weakness persists over the next couple of months, pressure will come on central banks to restart quantitative easing (printing money, buying bonds) and government bond markets may now be discounting this increasing probability.

German 10-year bund yield

Japanese 10-year bond yield

UK 10-year bond yield

US Treasury 10-year bond yield

High yield bonds continue to fall and are now -14% off their 2014 highs. Last year's divergence relative to equities provided a timely warning for investors that the market's risk profile was changing. Default rates across high yield bonds should spike before this move lower is done and we are not there yet. I expect more pain to come for high yield fixed income investors.

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

Gold Market Update

Gold in euros returned -0.8% in 2015. A mix of bearish sentiment and apathy continues to surround the sector. The stage is set for the gold bull market to return and there are many positive catalysts, but at the moment, Nobody Cares (This light-hearted presentation by Grant Williams, saved in the Research section of our website, does a very good job of outlining the bullish case for gold and is well worth 28 minutes of your time). I am expecting a trend change in 2016.

In his presentation, Williams refers to the Q3 2015 World Gold Council report on demand trends in the sector. The report highlighted a +27% increase year/year in overall investment demand for gold in the third quarter of 2015, a +33% increase year/year in bar and coin demand and a +62% year/year increase in consumer demand for gold in the United States in the same period. These are very significant numbers and if this trend continues, it won't take long for the bull market in precious metals to return.

“US retail investment demand jumped to 32.7 tonnes generating growth of more than 200% year-on-year. This signaled both a level of interest in gold investment not seen since the global financial crisis, and a level of price awareness on a par with that of Indian and Chinese retail investors. Nowhere was this more clearly demonstrated than in the US, where the US Mint reported rocketing sales of gold eagle coins. Demand for gold was the highest for more than five years: in volume terms, sales hit 397,000oz.”

— World Gold Council, Demand Trends Q3 2015

The +33% year/year increase in gold bar and coin demand is shown on a regional basis in the next table. China and the United States stepped up their purchases significantly in Q3 2015.

Physical bullion ETF's lost additional ounces (-4%) in 3Q 2015 but the trend has slowed significantly since the start of last year. Once investors start accumulating ounces in the main gold ETF's once again, the gold bear market will have finally ended. I am monitoring this situation closely.

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or brian.delaney@secureinvest.ie.

December 2015 Investor Letter

Active Asset Allocator 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. We follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. We always invest with the primary trend of the market and do not follow a benchmark. Instead, we manage the market risk for our clients. Our strategy has returned 12% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. Our active asset allocation approach is best illustrated in the following chart.

Executive Summary

For the first time since 2010, the Active Asset Allocator has run a full calendar year without a single change to the asset mix. While not unprecedented, this is quite unusual and testament to the difficult trading conditions experienced this year. In 2015, regional stock markets were a mixed bag with the US -3%, Europe +4% and emerging markets -10% on average. Despite euro gold delivering a flat performance and EU government bonds +2%, the Active Asset Allocator is on track to deliver another positive year for investors; not quite 12% but positive nonetheless. I expect 2016 to be filled with opportunity for those of a patient persuasion. Until then, Happy New Year to one and all and my sincerest thanks for your continued support.

Stock Market Update

US stocks returned -3% on average in 2015, though the performance varied widely by sector. Large cap technology stocks for example returned +9%, while industrial company shares declined -2%. Stocks in the transportation sector sunk -18%, despite a -31% collapse in crude oil prices. Euro investors can add +10% to these returns due to the fall in the Euro versus the US dollar in 2015.

Despite pockets of strength in US stocks, I remain concerned about the broader outlook based on valuation and the deteriorating technical picture I see. Over the last 20 years, the S&P 500 has broken below its long-term 100 week moving average (100 WMA) on just four occasions. In 2000 and 2008, stock prices collapsed shortly thereafter. In 2011, after a battle, stocks recovered the 100WMA and went on to rally another +70%. In 2015, the S&P 500 has once again broken below the 100WMA and the battle is on. The 100WMA currently stands at 2,006 so a meaningful close below that level could spell trouble. This bull market in stocks is almost 7 years old now and approaching the second longest bull market in history (average: 3.8 years, median 3.6 years). Bull markets typically don't die of old age, but at the same time, they all must eventually end. 2016 is shaping up to be quite an interesting year.

Last month, I reviewed the chart of the Value Line Geometric Index, noting the deteriorating technical picture. Over the past five weeks, there has been no real improvement. This equally weighted index of 1,700 stocks is signalling that the US economy is at the very least, slowing down.

The same pattern is evident in the FTSE All World Index, my global stock market barometer. While some regions have performed well this year, particularly in Europe, due to the weaker currency (Eurostoxx 600 +7%, Germany +9%, France +9%, Italy +13%, Denmark +34%, Ireland +39%), in aggregate, the trend in the Index is down. Many Asian and Latin American stock markets have declined over -10% in 2015.

So, I remain cautious heading into the new year. This stock bull market is ageing and stock valuations are high relative to history. US corporate profits have peaked for this cycle. Margin debt has also peaked and is now in decline. Meanwhile, the Federal Reserve has no real room to cut interest rates to cushion the fall if stock markets roll over. Interesting times indeed.

For more information on our stock market analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or 086 821 5911.

Bond Market Update

There is little to report in fixed income this month. Government bond yields have risen by 10-20 basis points in Germany and by 10 basis points in the United States, but only at the shorter end of the yield curve. This is in response to the Federal Reserve increasing short-term rates by 25 basis points earlier this month. While the Fed controls the short end of the yield curve in the US, the market determines long-term bond yields. Long-term bond yields have hardly budged in the US over the last month, increasing by just 3 basis points. 30-year yields have rallied by 10 bps in the UK and 20 bps in Germany since our last report and have actually fallen 11 bps in Japan over the same period.

The main story continues to be the slow motion deterioration in the high yield/junk bond market. Investors reaching for yield have invested in high yielding fixed income instruments including credit derivatives and below-investment grade bonds. The JNK ETF has already declined -11% from its recent peak compared to just -2% for the S&P 500. Much pain ahead for high yield investors.

For more information on our bond market analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or 086 821 5911.

Gold Market Update

Gold started the year at €978 ($1,183) and is priced today at €976 ($1,062), so despite all the hoopla and bearish calls, euro gold has returned -0.2% in 2015. Gold is of course a core component of the Active Asset Allocator and a zero return hasn't helped much this year but gold will rally in its own good time and when the bull market resumes, the Active Asset Allocator will be ready. The patience of a saint is however required in the meantime. After a four year bear market, I think the wait is almost over.

What could be the spark that reignites the gold bull market? US dollar bulls today are ten-a-penny. Being bullish the USD is very much a consensus trade, particularly since the Federal Reserve has started to raise interest rates, while the ECB continues to talk the euro lower. However, all of this information is already in the price. Long USD and  long US equities are very much the same crowded trade and both may be about to reverse.

Looking back through history, the USD Index declined sharply in the lead up to the 1987 stock market crash. The USD Index fell sharply during the 2001/2 technology bust and again during the 2008 financial crisis.  It would surprise an awful lot of folks if the USD turned lower in 2016 in  tandem with a declining US stock market. This does not have to happen for gold to rise but it may drive new demand into precious metals by US investors if a protracted decline in the USD takes hold.

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or brian.delaney@secureinvest.ie.

August 2015 Investor Letter

Active Asset Allocator 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. We follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. We always invest with the primary trend of the market and do not follow a benchmark. Instead, we manage the market risk for our clients. Our strategy has returned 12.3% per annum net of fees since inception. Our active asset allocation approach is best illustrated in the following chart.

Executive Summary

One by one, the stock market leaders are falling. Apple is the latest casualty, closing below its 200 day moving average for the first time in over three years. The FTSE World Equity Index followed suit this week too. Bonds still look good despite the many top callers and we could see another run to new highs later this year. Meanwhile, action in the gold market is hotting up. The People's Bank of China added another 25 tonnes of gold to their reserves in July, while also announcing a devaluation of their currency this week. The PBOC is making explicit statements linking monetary policy moves to their continuing accumulation of gold for those interested in connecting the dots. The gold market is turning back up and the miners are leading the way, +20-30% in the last week alone.

Stock Market Update

The FTSE All World Index, the benchmark for active global equity fund managers, includes stocks from North America (54%), Europe (23%) and Asia (23%) and provides an excellent read of the overall health of the stock market. The recent deterioration in the trend has us concerned. The stock market today is showing signs of weakness similar to the 2007-2008 experience just prior to the wheels coming off and stocks in aggregate are more expensive today than they were in 2007.

Despite the FTSE All World Index making a higher high in 2015, relative strength (RSI at the top of the chart) has weakened, which means the market is losing upside momentum. Fewer stocks are participating in the market advance. One by one, the market leaders are falling. Apple, the largest company in the world by market capitalization at $650 billion, is the latest casualty, closing below its 200 day moving average for the first time in over three years. The FTSE All World Index is also now trading below its 50 week moving average. We continue to advise caution on stocks, particularly as we head into the more volatile months of August, September and October.

A closer look at the S&P 500 on a sector-by-sector basis shows rotation this year out of the mid-cycle sectors (Materials, Industrials, Energy and Telecom Services) and into the late-cycle defensive sectors of Healthcare, Consumer Staples and Utilities. This is classic behaviour as fund managers switch to defence and prepare to protect their portfolios from the next multi-year move lower in the stock market.

In July 2015 for example, the Materials, Industrials, Energy and Telecom Services sectors declined by an average -4.8%. Year-to-date, they have fallen by a combined -7.3%. All four sectors are now trading below their long-term moving averages, which in turn are  gradually shifting from uptrend to downtrend. In contrast, the late-cycle Healthcare, Consumer Staples and Utilities stocks gained +4.6% in July and are +2.5% year-to-date. The late-cycle sectors continue to trade above their long-term moving averages, which in turn continue to rise in bullish fashion.

So today we have a relatively overvalued stock market, where late-cycle defensive sectors have begun to outperform mid-cycle stocks. We see evidence of deteriorating upside momentum and bonds have once again started to outperform stocks, as evidenced in the chart below. So, we continue to favour a defensive position in the Active Asset Allocator of 20% equities / 30% bonds / 30% gold / 20% cash.

For more information on our stock market analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or 086 821 5911.

Bond Market Update

Calls for the death of the bond bull market are two-a-penny but may yet be premature. US Treasuries rallied +35% in 2014 following a technical breakout clearly evident on the next chart. US Treasuries then corrected during the first 6 months of 2015 but now appear to be setting up for another run higher. A higher high in the coming weeks will confirm the multi-year bull market is still in progress. A lower high may signal that the bull market is ending, though we are not ready to make that call just yet. 

Investment grade corporate bonds have corrected in tandem with government bonds but also look set to turn higher once again. The PIMCO Investment Grade Corporate Bond Fund for example tacked on +16% during the last rally. We could experience a similar move over the next 6-12 months. We have a small allocation to corporate bonds in the Active Asset Allocator and will look to increase this position, depending on how well the credit market holds up on the next correction in stocks.

While government and corporate bonds continue their bullish advance, we continue to avoid high yield (Junk) bonds, which have a strong positive correlation to the stock market. Junk bonds plunged -41% during the last stock market collapse in 2008, offering no protection for investors. Junk bonds are once again leading the market lower. JNK peaked in August 2014, made a lower high in May 2015 and has fallen by -5% so far in the last three months.

For more information on our bond market analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or 086 821 5911.

Gold Market Update

For the first time since 2009, the People's Bank of China (PBOC) reported last month that they had increased their official gold reserves by 60% from 1,054 tonnes to 1,658 tonnes. This week, they reported an additional purchase of approximately 25 tonnes of gold. The following day, the PBOC devalued their currency by 1.9%. For those paying attention and connecting the dots, the PBOC is making explicit statements linking monetary policy moves to their continuing accumulation of gold. The Chinese yuan/renmimbi (RMB) is slowly moving from a fixed to a floating exchange rate. We are witnessing the early stages of the emergence of a new world reserve currency backed by gold that will eventually compete with the mighty USD. The process may gather pace if the USD Index tops out over the next 12 months.

A declining dollar could be the catalyst to kick start the gold bull market again. It is certainly time. Gold has just completed a 50% retracement of the 2001-2011 bull market. Commercial traders who are always short gold to some degree to hedge their annual production have their smallest short position on in many years. 

In the past week, the gold miners have rallied 20-30% off their lows on heavy volume, potentially showing gold the way. It is too early to tell whether a new bull market has begun, but it very possibly has. We should expect at least 5-6 weeks of rising prices for both gold and the miners. 

For more information on our gold market analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or 086 821 5911.