November 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

Today just 38% of the 3,100+ stocks on the New York Stock Exchange are trading above their long-term moving averages, while in excess of 1,900 stocks are currently trending lower (<200DMA). The performance of the S&P 500 has been dominated by a handful of names. The largest 10 companies in the Index have a combined market capitalization of $3.5 trillion or 18% of the Index's total market capitalization ($19 trillion). So, just 2% of the companies account for 18% of the Index's daily price movement. Amazon, Facebook, GE, Microsoft and Apple are masking a broader deterioration in market.

Meanwhile in fixed income, as the Federal Reserve busy prepares investors for an interest rate increase, finally, the ECB is considering "all options" to reverse their deflationary course. Further interest rate cuts are on the cards in the EU, a sign not lost on core Eurozone government bond markets. 2 year German bund yields have reached minus 42 basis points. This month, we also consider the impact a US interest rate hike could have on the gold market, provide an insight into our 'cycles' research in the precious metals sector and touch on a new investment strategy currently in research mode that we are very excited about.

Stock Market Update

We continue to operate on the basis that a bear market in stocks began in June 2015 and is in its early stages. We anticipate the August 2015 lows will be breached in the next couple of months and stocks could trade meaningfully lower in 2016. As always, we will be guided by the market's underlying trend and will change our view should we see an improvement in stock market breadth (number of stocks in rising trends versus those in declining trends) and relative strength as measured by the RSI Index, in tandem with a bullish turn in our technical trend indicators. For now however, we maintain a defensive position in the Active Asset Allocator with just 20% global equity exposure.

While the S&P 500 (SPY) and Dow Jones Industrial Average (DJIA) trade today just 2-3% below their all-time highs, this performance is not a true reflection of the market's overall health in the United States. SPY and DJIA are market capitalization weighted indices and their recent strong relative performance has been dominated by just a handful of names. The largest 10 companies in the Index have a combined market capitalization of $3.5 trillion or 18% of the Index's total market capitalization ($19 trillion). So, just 2% of the companies in the S&P 500 account for over 18% of the Index's daily price movement. The performance of Amazon, Facebook, GE, Microsoft and Apple in particular is masking a broader deterioration in the performance of a majority of US publicly quoted companies.

The deteriorating picture is more visible when focusing on the Value Line Geometric Index, an equally-weighted Index of 1,700 US companies. Here, no single  stock dominates the Index, which has fallen -11% since peaking in mid-summer. Note the deterioration in relative strength since 2014 is very similar to the 2007-2008 set up.

Today just 38% of the 3,100+ stocks on the New York Stock Exchange are trading above their 200 day moving average, while in excess of 1,900 stocks are currently trending lower (<200DMA). This is not a healthy picture and one we are watching closely. We have seen an improvement since the August lows when just 20% of stocks were above the 200DMA but we need to see at least 50% of stocks trading and holding above the 200DMA before we can become more constructive in our outlook.

The next couple of months will be interesting. The Federal Reserve will announce next month whether they will finally start the process of normalising interest rates, increasing the Fed funds rate by 25 basis points from zero currently. Increasing interest rates seven years into an economic recovery when signs that economic activity in the US is beginning to weaken and stock market internals are potentially breaking down is a dangerous strategy. The Fed has talked itself into a corner. They have signalled a rate increase, which has been priced into equity, fixed income and currency markets. They must now follow through with that decision or run the risk of losing credibility. A decision by the Fed not to increase interest rates after all their talk will would likely be perceived as a negative signal for investors.

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

While the Fed is busy preparing markets for an interest rate increase, the ECB is doing the opposite. ECB Chair Mario Draghi recently announced he would consider "all options" to reverse the deflationary course on which the Eurozone economies have found themselves. Further interest rate cuts are on the cards, a sign not lost on core Eurozone government bond markets. 2 year German bund yields have reached minus 42 basis points. Could the 5 and 10 year yield follow suit? We think so. The trend towards negative core Eurozone government bond yields is killing defined benefit (DB) pension schemes across Europe whose liabilities are surging higher as yields continue to fall. However, the majority of DB schemes remain under-invested in bonds, supporting the trend still higher in bond prices and lower in bond yields.

While government bonds continue to act well and attract "flight to safety" capital, higher risk bonds are signalling increasing concerns of credit default by high risk borrowers. High yield/junk bonds for example are not confirming the recent highs in stock markets are trading -10% off their recent peak as measured by the Barclays High Yield Bond ETF (JNK). We continue to avoid high yield bonds and emerging market debt in the Active Asset Allocator investment strategy.

Emerging market debt, which tends to correlate well with riskier asset classes, continues to perform quite poorly reflecting the challenging conditions currently facing many of the EM countries. The Market Vectors Emerging Markets Local Currency Bond ETF is now -27% below is 2013 top.

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 typically exhibits a strong negative correlation with the US dollar and tends to struggle (at least in USD terms) during periods of USD strength. Since the USD gold price peaked in 2011 at just over $1,900, gold priced in dollars has fallen -45% while the USD Index has rallied +37%. Today we find ourselves at quite an interesting juncture. The USD Index has formed a third lower peak (red arrows below) when looking back at the chart since 1980. Similar to the mid-1980's and early-2000's experiences, the USD Index formed a sharp peak and reversal each time. The Volcker-induced rally from 1980-1985 was followed by an equally sharp decline fro 1985-1987.

This time round, we have experienced another sharp USD rally, which has now punched through the multi-decade downward sloping trend line. The timing again is interesting as the Fed is potentially set to announce its first interest rate hike in years on 16th December. Markets discount the future and the recent USD rally could be discounting the upcoming Federal Reserve actions. If the USD peaks and reverses on the Fed news next month, it may also coincide with the low in precious metals prices and an end to the four year bear market in bullion.

A note on timing... We have been following the gold market intently for years and have developed a keen understanding of the short and medium term cycles that are characteristic of the precious metals market. Gold typically moves in daily cycles (DC's) of 20-28 trading days per cycle. There are generally 4 or 5 DC's in each medium-term "Investor" cycle (IC). In bull markets, DC1, DC2 and DC3 are strong, followed by selling in DC4 as sentiment is re-set and price returns to the longer-term upward sloping moving average. In bear markets, DC1 and possibly DC2 are positive followed by heavy selling in DC3 and DC4 as the major trend is down and the bear market pulls the gold price lower. Today, we find ourselves approaching the tail end of the current Investor cycle, with potentially significant (positive) implications for gold once the current daily (and investor) cycle completes over the next two weeks. It also happens to coincide with Federal Reserve announcement next month.

Our analysis of gold's daily and investor cycle patterns has also sparked a potentially exciting new investment strategy at Secure Investments. We are still in research mode and will be writing more on this topic in the months to come. Please check the Research section of our website in the New Year for more information. This new investment strategy has a working title "29 Trades". Suffice to say, we are very excited by the research results experienced to date and the potential for this strategy to deliver exceptional returns in a risk controlled way.

29 Trades focuses on capturing the strongest period of each daily cycle, buying the daily cycle low each time and holding for 10-15 trading days, depending on the cycle count. As we know the low each time we enter a trade, we can effectively manage our risk each time. 29 Trades aims to capture +5% profit per trade while risking just 1.5% each time.  The strategy has a near 80% win rate, which is exceptional. Most successful hedge funds operate on a win rate closer to 60%. Did I mention we are excited about our analysis to date. Stay tuned.

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

July 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 12.4% per annum net of fees since inception. Our active asset allocation approach is best illustrated in the following chart.

Executive Summary

Apple, Microsoft, Google, Amazon and Facebook together account for 35% of the Nasdaq 100 Index. Excluding Amazon, which despite its $227 billion market capitalization is losing money, the other four trade at an average P/E multiple of 41 times. Valuations are frothy and market breadth continues to deteriorate, while the Fear Index trades at record lows. Investors haven't been this confident in their outlook since 2007.

Meanwhile, gold has now retraced 50% of its +660% rally from 2000 to 2011 and sentiment is extremely bearish. Gold mining shares have collapsed and calls for sub-$1,000 gold are two a penny. During the 1970's bull market, gold rallied +457% from 1970-1974, corrected -49% from 1974-1976 before rocketing +750% from 1976-1980. What is in store this time around?

Stock Market Update

We began last month's Investor Letter highlighting the sharp -13% correction in the Chinese stock market, noting that "that could be it for the Shanghai stock market for 2015". It certainly appears that way now as the Chinese stock market has continued to plummet, declining -35% in four short weeks from the 12th June market top before a relief rally commenced last week. The reason for the bounce - a government initiative to ban the selling of shares; hardly a vote of confidence for the medium-term prospects of the Shanghai stock market. We anticipate the downward trend will resume shortly. 

Back in the United States, the stock market continues its relentless rise. The pace of the advance however is slowing and beneath the surface, fewer stocks are participating in the rally. The number of stocks trading above their 200 day moving averages, for example, continues to decline, from a peak of 94% in 2013 to just 58% today. Smart money is exiting the stock market while the strong performance of  just a handful of companies give the appearance that all is well. Appearances can be deceiving. 

Just four stocks for example - Apple, Microsoft, Google and Exxon Mobil - represent 10% of the market capitalization of the S&P 500. Together, these four companies trade at a valuation of 20 times annual net earnings. Three of the same four - Apple, Microsoft and Google - together with Amazon and Facebook account for a full 35% of the Nasdaq 100 Index. Excluding Amazon, which, despite its $227 billion market capitalization, made a net loss in 2014, the other four trade at a lofty average price / earnings multiple of 41 times. 

The next chart is one you have seen before and is probably the most important chart that equity investors should focus on at the present time. It is of course the global equity benchmark - the FTSE All World Index. Trillions of dollars of investor capital is invested in stock markets around the world with investment managers trying to beat or match this index every quarter for clients. The index is a proxy for global stock markets and it appears to be running out of steam. Relative strength is deteriorating and the trend is flattening out. The same setup happened in 2007 before the wheels came off in rather dramatic fashion. On average, stocks are more expensive today than they were in 2007.

Our own studies also continue to point to internal weakness in the underlying technical trend of the market. Our Technical Trend Indicator is now on a "Sell" signal for the first time in years, while the Advance/Decline Line, which captures the number of stocks in rising versus declining trends, has failed to confirm the recent highs in the S&P 500, another warning sign.

Our Large Cap Breadth Index is also breaking down. The majority of institutional investor capital typically flows in to the largest market cap stocks and our Large Cap Breadth Index suggests that a trend change is at hand. The six horsemen continue to charge (AAPL, MSFT, GOOG, XOM, AMZN, FB), but fewer stocks are leading the market higher. Our Most Active Stocks Index also suggests that stocks that attract the highest volume each day are starting to turn lower.

Despite the deteriorating technical condition of the stock market, investors appear quite confident about the market's future prospects. The Vix Index, also known as the Fear Index, measures the extent to which investors are concerned about future stock market volatility. When the index is low, investors are unconcerned about market risks; when the index surges higher, market volatility increases and stocks generally decline, sometimes significantly. A glance at the chart below suggests that investors are very confident about the future prospects for the shares they hold. The Vix Index currently trades at record lows. In fact, investors haven't been this confident in their outlook since 2007. Portfolio insurance is cheap and suggests a market of overly complacent investors.

We remain defensively positioned in the Active Asset Allocator holding 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

10 year government bond yields rallied sharply during the second quarter and bond prices fell accordingly. Typically, we hold a 60% allocation to government bonds when the Active Asset Allocator is defensively positioned. However, we have been concerned that a sharp rise in yields could occur over a short time period and have held an underweight 20% position in EU government bonds for some time now (with an additional 5% allocation to inflation linked bonds and 5% allocation to corporates). We will look to increase our bond allocation, particularly in the inflation-linked sector, later this year if real and nominal yields continue to rise. We do not anticipate the recent spike in yields to be the start of a strong persistent uptrend.  Sub-par economic growth and a multi-year debt deleveraging cycle should keep downward pressure on bond yields for some time to come.

A consequence of today's low interest rate environment has been the flood of money into high yield bonds as investors reach for yield to secure a reasonable income. High yield bonds carry significant risks relative to investment grade government and corporate bonds and yields today in this sector of the market are not pricing in the increased risk of default. The same case applies for emerging market debt. Yields are currently at historic lows for both. It will a while yet before we can consider including high yield bonds and/or emerging market debt in the Active Asset Allocator strategy.

High yield bonds have not in fact confirmed the recent highs in the S&P 500, another potential warning flag we are paying close attention to. In a healthy market, high yield bonds should trend higher in unison with other risk assets. This is not the case today.

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

Gold Market Update

Gold has now retraced 50%  of the entire bull market that began in 2000 at $253/ounce and topped in 2011 at $1,923. The 50% retracement level is $1,088, which I referred to in last month's update, was reached as futures trading opened on Sunday evening. Gold didn't spend long at that price and rallied back above $1,100 within minutes. Today (Wednesday 22nd July) gold is revisiting those Sunday night lows as I write. 

The last major bull market in gold occurred during the inflationary 1970's. Gold began that decade at $35/ounce and went on to rally +457% over the next five years. Then on 14th August, 1974, President Gerald Ford signed a bill lifting Executive Order 6102, which had banned gold ownership by US citizens. Gold rallied sharply in anticipation of this event and topped shortly thereafter at $195.

Next followed the big correction, similar to what we have experienced over the past three years (in USD terms). From 1974 to 1976, gold plunged -49% from $195/oz to $100/oz. Banks and economists in 1976 were queuing up with doomsday forecasts. Citibank called for $60 gold and encouraged gold holders to sell their metal in light of a strong recovery under way in the United States.

For the few that held on, what followed next was a sight to behold. Over the next four years, gold rallied +750% before topping out in January 1980 at $850/oz. Inflation was of course a significant problem in the 1970's and the Federal Reserve was behind the curve for years before Paul Volcker took charge on 6th August 1979, hiking interest rates to double digits and eventually killing inflation and the gold bull, dead.

Roll forward to today and we have quite a different set of economic and monetary circumstances to deal with, though much more problematic in our view. We expect gold will once again protect investors from the badly misguided policies of central banks around the world. It is just a question of timing.

The current gold bull market began in 2000 at $253/oz and rallied +660% for twelve years in a row before topping out in 2011 at $1,923. Over the next four years, gold has fallen by -44% in USD terms to an intra-day low this week just under the 50% retracement level of $1088. Sentiment in the gold sector is extraordinarily bearish and gold mining stocks have collapsed by -82% since 2011. By comparison, the miners fell by "just" -67% during the 1974-1976 gold price decline.

Relative to the metal, gold miners are now cheaper today than at any other time since the gold bull market began fifteen years ago. The mining companies have issued a lot of shares in the intervening period and have been poor capital allocators, but still, the level of bearishness in this sector is extreme. Either the entire industry is about to go out of business (bullish for gold as supply stops) or these shares, when they turn, have a LOT of upside.

For gold, we have experienced the multi-year rally from 2000 to 2011 and now the sharp correction from 2011-2015. What should follow is the final leg of the bull market, perhaps from 2015-2020. It should be a sight to behold. We are keenly watching for the turn but also may cut back our gold allocation if we don't like what we see in the near-term. When the gold miners turn higher, fortunes will be made in this sector. 

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.

January 2015 Investor Letter

Model Portfolio Update

Executive Summary

Despite being defensively positioned for much of the year, the Active Asset Allocator delivered a strong performance in 2014, +15.6%, outperforming the average multi-asset fund by +3.1%. Buy-and-hold equity investors have been spoiled in recent years as all news has been treated favourably. That trend is about to change and many will be caught wrong-footed. We anticipate another strong year for the Active Asset Allocator in 2015 as we navigate what we expect will be increasingly turbulent waters.

The Active Asset Allocator is defensively positioned today 20% equities / 50% bonds* / 30% gold. (Bonds now include euro government, corporate, inflation linked and absolute return bonds). We increased the allocation to gold in December 2014 from 20% to 30% and gold has since rallied +9% in euro terms.  

Equity Market Update

Is history about to repeat? January 2015 has started out in quite a volatile fashion with government bond yields falling (and bond prices rising), crude oil prices tumbling, high yield bonds topping out and the US dollar rallying sharply. The same trends occurred in 2008 before the stock market fell out of bed. 

In our December 2014 Investor Letter, we began with a 6 month chart of the S&P 500, questioning the sustainability of the recent break out to new all time highs, given the many risks that we see on the horizon. Our cautious stance has so far been proven correct. Shortly after breaking out to new 52-week highs, the S&P 500 rolled over and plunged -10%. We then witnessed a sharp bounce in what we noted at the time had all the hallmarks of a short-covering rally, followed by more selling in the first week of January 2015, which is where we find ourselves today. Heightened stock market volatility will be a prevailing theme this year. Be prepared.

Last month, we also discussed the plunging price of crude oil, which we expect will drive many financial trends all over the world in 2015. We highlighted the strong positive correlation between European equities and Brent crude and noted that crude oil was either about to have a snap back rally (unlikely) or European equities were in trouble. Let's take a look at the updated chart today.

In a little over a month, Brent crude has fallen another -30% or $21/barrel, while the German Dax Index has dropped -5% or almost 500 points. This divergence has a long way to run before it resolves itself either by crude oil rallying sharply or European equities entering a bear market. For now, we continue to be positioned defensively in the Active Asset Allocator.

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

Bond Market Update

Following the strong performance by government bonds in 2014, we have begun to shorten the duration of the bonds we hold in the Active Asset Allocator, making the portfolio less sensitive to changes in interest rates. We also started to increase the allocation to inflation-linked bonds and corporate bonds. We will likely keep the allocation to corporate bonds relatively low as they are positively correlated to risk assets. 

Government bond yields around the world continue to decline and credit spreads (the difference between risky high yield bonds and lower risk government bonds) continue to widen. We witnessed the same phenomenon in early 2008 as investors started pricing in the increased global macro risks at that time. The credit spread ratio on the chart below has not yet reached 2011 or 2008 levels, but it is still rising and the slope is getting steeper. We are watching this chart closely, particularly now that the down-sloping trend line from 2009 - 2014 has been broken.

High yield bonds have not confirmed the recent highs in the S&P 500, which is another red flag we are monitoring closely for now. Should equities and junk bonds rally to new highs together, we will move back to a more constructive asset allocation, but for now, continued caution is warranted in our view.

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

Gold Market Update

Gold has historically performed best during periods of US dollar weakness relative to other currencies. What we can see clearly in the following chart is that since 2011, gold has struggled while the USD Index (faded blue line), a proxy for the US dollar, has rallied sharply. Gold got ahead of itself in 2011 and too many bulls crowded the long side of the precious metals market. Those late to the party have now been well and truly shaken out of their positions. Sentiment has reached a negative extreme and it is our view that the three year bear market in gold may have ended in December 2014.

Look closely at the chart below. You will see that the US dollar has rocketed higher over the last few months but gold has refused to decline. This is quite a change in behaviour for the precious metal and a clear signal that the gold bull may be about to return. We recently increased the allocation to gold in the Active Asset Allocator from 20% to 30% to capture what we expect will be rising gold prices in the months ahead.

When gold recaptures the longer-term 20 month moving average, we will become more confident that the gold bull market is back. Capital should come flooding back into the precious metals sector when the trend higher resumes.

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

December 2014 Investor Letter

Model Portfolio Update

Executive Summary

2014 is shaping up to be another good year for our Active Asset Allocator investment strategy. We have been able to maintain our 12% annual return since inception and are on target to beat our benchmark despite our strategy's lower risk profile. Stock markets have been strong all year and have returned 15%-18% YTD. However, bonds have done even better +19%, justifying our overweight position. Long duration bonds are +25% this year, an incredible performance. We are making a number of changes now to the bond allocation in our AAA model to reduce the interest rate sensitivity of the bonds we own, including:

• Reducing the allocation to 5+ Year EU government bonds from 30% to 20%
• Adding 5% allocation to EU aggregate bonds
• Adding 5% allocation to EU inflation linked bonds
• Reducing the allocation to absolute return bonds from 30% to 20%
• Adding 10% allocation to gold

We are increasing the allocation to gold from 20% to 30% ahead of what we expect will be a strong period for precious metals in the months ahead. Our Active Asset Allocator is now positioned 20% equities / 50% bonds* / 30% gold. (Bonds now include euro government, corporate, inflation linked and absolute return bonds).

Equity Market Update

The S&P 500 has put in a powerful rally to recover from the sharp -10% correction in October. The move so far has been straight up without correction. In fact, coming off a six month low, for only the second time since 1928, the S&P 500 traded above its 5-day moving average for 30 consecutive days, before ending that streak on 1st December. That is an impressive move and has all the hallmarks of a short covering rally. The bulls appear to have regained the upper hand for now. However, if the majority holding a short position against the S&P 500 have been carried out, we may have a vacuum below current price. Short sellers are a necessary part of any functioning market and have the effect of slowing down a stock market in decline, as the shorts must always buy to cover their initial sale. When the stock market trades like it has done for the past few weeks and the shorts get run over, often the real move (lower in this case) only occurs afterwards. It doesn't always have to happen this way of course, but we are not out of the woods yet. Let's take a look at some charts to see how stock markets around the world are setting up today.

It has been a roller coaster year for US equity investors. The S&P 500 returned +9% through September before falling out of bed in October and giving up all the gains for the year. Stocks then rocketed out of those October lows and the S&P 500 is now back to +10% YTD. A strong US dollar versus the Euro has added another +10% for unhedged Euro investors. If you have been able to withstand the volatility, 2014 is turning out quite well. However, the US stock market has used up a lot of energy to get to where it is today. The bulls are now fully committed, the bears have covered and the Fed has pulled $1 trillion of financial support. So, who is left to buy? We should find out shortly.

While US large cap stocks continue to make new highs, albeit on declining volume, European markets are lagging. The Eurostoxx 600 Index (above left) and the German Dax Index (above right) have failed so far to make new highs along with the S&P 500. It is the same story for the small cap sector with the Russell 2000 in the US making a series of lower highs and lower lows in 2014. These divergences could be signalling that equity markets are running out of steam and due for a pause/consolidation. Also, Brent crude has historically had a strong positive correlation with European equities and Brent crude is now plummeting. Either crude oil is about to have a snap back rally or equities are about to roll over.

Spain and Italy have traded in a wide range since the 2008 financial crisis. While stock markets in the US and many across Asia have tripled or more since the 2009 lows, Spain and Italy trade at less than half their prior peaks today... six years into the current equity bull market.

The outlook for Europe is challenging as we head into 2015. The region is forecast to grow by only 1%, versus 2.5%-3.0% for the US, and deflationary risks are rising. We expect EU equity markets to struggle next year. However, the Euro has fallen by -10% versus the US dollar in 2014, which should benefit export-oriented companies in the region and further Euro weakness in 2015 could prove a catalyst for EU stocks. Much will depend on the ECB.  

There is precedent here. The set up across many EU stock markets today looks similar to that of Japan in late-2012. The Nikkei had traded in a wide range between 7,000 and 11,000 from 2009-2012 but then broke higher in November 2012. The catalyst was Japanese central bank money printing. The Nikkei went on to double in JPY terms over the next 24 months while the Japanese Yen collapsed by -40% versus the USD. While we don't expect a similar outcome for Eurozone stocks this time, it cannot be ruled out. We are watching the EU currency and stock markets closely for clues.

For now, we remain defensively positioned in our Active Asset Allocator investment strategy.

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

Bond Market Update

Our Active Asset Allocator investment strategy has been overweight bonds all year and while equities have returned 15%-18% so far in 2014, the bonds we hold are +19% YTD, while longer duration bonds are +25% over the same period. Today, a passive 5+ year EU government bond fund - a good proxy for our model portfolio bonds - has a duration of 10 years and a yield of 1.5%. While yields can fall further, there really is limited room left for yields to decline (and bond prices to rise). We do not expect a dramatic rise in interest rates for the foreseeable future, particularly as deflation grips the Eurozone, but believe it is prudent to start reducing the interest rate sensitivity of our bonds now. As a result, we are making the following changes to the model portfolio:

• Reducing the allocation to 5+ Year EU government bonds from 30% to 20%
• Adding 5% allocation to EU aggregate bonds
• Adding 5% allocation to EU inflation linked bonds

We are also reducing the allocation to  absolute return bonds from 30% to 20% and increasing the allocation to gold from 20% to 30% ahead of what we expect will be a strong period for precious metals in the months ahead.

We would like to include an allocation to emerging market debt in our AAA model but today is not the time, as emerging market debt has already rallied sharply over the past 18 months and offers no real margin of safety.

The same is true for high-yield (a.k.a. junk) bonds. Investors are reaching for yield in a zero interest rate world and will pay a heavy price when the market turns. It could in fact be turning now. The Barclays High Yield Bond Index below is rolling over and has not confirmed the recent highs in the S&P 500. Risks are rising, buyer beware.

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

Gold Market Update

The volatility in precious metals has picked up sharply in recent weeks. Buyers and sellers are battling it out, which is often a signal that an intermediate-term trend change is at hand. Last Friday, gold fell $36 from $1,200 to $1,164. Then, following the Swiss referendum over the weekend, where the Swiss voted against a proposal to back the Swiss Franc with gold, on Monday morning gold fell another $22 to $1,142. The gold bears were sure gold would fall sharply following news from Switzerland, but the reverse happened. We experienced a dramatic $80 rise in the gold price back above $1,200, which is where we find ourselves today. Too many bears were crowding the short side of the market and were forced to cover.

An interesting set up is now occurring in the gold market. The USD gold price has made a series of lower lows over the past three years, but selling pressure is easing, as can be seen in the chart above (RSI and MACD indicators). The public today still believes it makes little sense to invest in gold at exactly the time when it is needed most. Sentiment will turn and when it does, gold prices will move substantially higher. 

For brave souls, the gold miners have enormous potential. Gold mining companies today trade at the same price relative to gold as they did when the gold bull market began over a decade ago. Mining is a notoriously difficult business but with crude oil prices falling - a major input cost in the mining business - and gold prices set to rise, certain gold miners offer incredible value today.

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