March 2017 Investor Letter

Strategy Performance

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

Gold Trader focuses on capturing the strongest and weakest parts of gold's daily cycle, buying daily cycle lows, selling daily cycle highs and holding for 10-15 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

The strong rally in growth assets and sharp decline in interest rates have pulled forward future expected returns to such a degree that a passive portfolio of stocks and bonds is now priced to deliver little more than 2% per annum over the next decade, down from 9% per annum in 2009. Despite this prognosis, many are bullish on the outlook for stocks this year. The USD also looks vulnerable. The US Dollar Index peaked in 1985 and 16 years later in 2001. Prior declines in the USD Index have coincided with bear markets in stocks. 16 years later in 2017, are we about to see currency and equity cycles turn lower again?

Inflation-linked bonds have quite attractive risk and return characteristics and often perform well at times when equities and fixed interest rate bonds are struggling; namely during periods when inflation is rising and/or economic growth is falling. Inflation-linked bonds can therefore provide attractive diversification benefits for multi-asset portfolios without impacting expected returns. The Active Asset Allocator currently holds a 15% allocation to inflation-linked bonds. Meanwhile on gold, this month I look at some of the developing bullish trends for precious metals in 2017. I remain defensively positioned for now with 20% equities / 40% bonds / 30% precious metals / 10% cash.

Gold Trader closed Trade 11 for a win and is now looking to enter Trade 12, a short position to catch the top of daily cycle 3 and the drop into the next daily cycle low. 

Stock Market Update

While historical returns on a traditional portfolio of 60% equities / 40% bonds are near all-time highs, forward-looking expected returns are near all-time lows. The strong rally in growth assets in recent years and sharp decline in interest rates have pulled forward future expected returns to such a degree that a passive portfolio of stocks and bonds is now priced to deliver little more than 2% per annum over the next decade, down from 9% per annum in 2009. Active asset allocation will become a key driver in delivering attractive returns for investors and the Active Asset Allocator is well positioned in this regard. Two asset classes which remain significantly under-owned that should outperform in a rising inflationary world are inflation-linked bonds and precious metals, discussed in more detail later in this report.

For now, the stock market continues its ascent, still untroubled by the many potential time-bombs ticking quietly away in the background. The Sell-signal triggered by my technical studies last October, shortly before the US election result, was negated in December, so the bullish trend continues for now. An ageing bull market, now the third longest in history, and record overvaluation in stocks however are holding me back from moving to a fully invested position at this time. The risks are just too high and I think the current rally is running on fumes. A couple more weeks of additional selling in the stock market will tip the scales once again back to full defensive mode. 

John Hussman of Hussman Funds provides an excellent weekly analysis of trends in the stock market and captures the extent of the current overvaluation in equities better than anyone else. His chart (below left) measures the market value of equity plus book value of debt (enterprise value) of US companies relative to their gross value-added; a variation on the price/earnings multiple. His chart shows that valuations today are more expensive than in 2007 and within a hair's breath of their all-time extremes in 2000. The percentage of bullish newsletter writers from the latest Investors Intelligence Survey is also back near all-time highs.

Newsletter writers at optimistic extreme.

US corporate earnings have stopped falling in the short-term, perhaps on the back of expectations that Donald Trump will get his tax reform and infrastructure spending plans approved. However, US earnings are still at the same level as they were in 2007 when the S&P 500 was trading in the 1,500's, 33% below yesterday's closing price. At current prices, the stock market is all risk, no reward.

A bell doesn't ring at the top, but Trump's recent failure to get his healthcare reform legislation through the House of Representatives could mark an important tipping point. The Trump rally may have finally ended and if that proves to be the case, stock market volatility should start to accelerate. The Vix Index, a measure of volatility in the stock market,  appears to confirm this view, bottoming at 9.97 on 1st February 2017 and has been creeping higher in recent weeks. 

The performance of the US dollar has also caught my attention. US dollar bulls are ten-a-penny these days and the long dollar trade is quite lopsided. You have to buy US dollars before you can buy US equities and money has been piling into both markets in recent years. If we are close to the end of the bull run in equities, money will flow out of US stock markets and US dollars at the same time. While euro-based investors have enjoyed the double benefit of rallying US stock markets and a rising USD versus EUR, the trend in both looks set to change. The US Dollar Index peaked in 1985 and 16 years later in 2001. Prior declines in the USD Index have coincided with bear markets in stocks. 16 years later in 2017, are we about to see currency and equity cycles turn lower again?

For now, I continue to maintain a defensive position in the Active Asset Allocator of 20% equities / 40% bonds / 30% precious metals / 10% cash. 

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

Bond Market Update

Inflation-linked bonds have quite attractive risk and return characteristics and often perform well at times when equities and fixed interest rate bonds are struggling; namely during periods when inflation is rising and/or economic growth is falling. Inflation-linked bonds can therefore provide attractive diversification benefits for multi-asset portfolios without impacting expected returns. Inflation-linked bonds tend to perform well when rising interest rates are driven by rising inflation expectations. They also represent quite an attractive alternative to fixed interest rate bonds in the current environment when nominal bond yields have already plunged to zero or below. While investors require nominal bond yields to fall deeper into negative territory to generate a positive return, inflation-linked bond returns, as the name suggests, are linked to the prevailing rates of inflation of countries issuing the bonds. If inflation happens to be higher than the nominal bond yield, then the real yield (nominal bond yield minus inflation) will simply be negative. Real yields can move to a negative extreme in a world of high inflation. The Active Asset Allocator currently holds a 15% allocation to inflation-linked bonds.

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, overall demand for gold increased +2% in 2016 from 4,216 tonnes to 4,309 tonnes. ETF inflows accounted for the majority of the growth, offset by jewellery demand and a reduction in central bank purchases. Demand for physical bars and coins was relatively stable over the calendar year. Gold prices ended the year +8% in USD and +12% in EUR having been +25% in USD for the year to 30th September 2016. Investment demand increased +70% to its highest level since 2012, while annual ETF inflows were the highest since 2009. 

Investment demand soared +70% in 2016. Global gold bar and coin demand was broadly stable. China increased demand by +25% while the demonetisation experiment in India led to a -17% reduction in the demand for gold.

Central banks bought 384 tonnes of gold in 2016, a third less than in 2015 and 32% below their average purchases of the past five years. Mounting pressure on central bank currency reserves was the culprit for the reduced demand. Russia, China and Kazakhstan were the main buyers in the market.

After a five year bear market, the gold bull looks like it has turned the corner. Gold has been in a declining trend relative to the S&P 500 since 2011. The double bottom over the last 12 months could signal the tide is turning in favour of gold relative to US stocks. The pattern is similar to that formed in 1999-2000, shortly before an epic bull run began.

The monthly gold chart looks bullish. Gold traded above the 20 month moving average for the majority of the bull run from $250 in 2001 to $1,923 in 2011. Today gold is trading at $1,255, above the 20MMA of $1,212. Gold still needs to navigate daily cycles 3 and 4 of the current investor cycle (we are currently mid-way through daily cycle 3) before the next big move higher. I expect the next investor cycle to kick off in May 2017 and if gold holds together until then, the move could be significant.

The silver chart looks more bullish than gold's. Silver broke above the 20MMA last year and has re-tested the trend line from above a couple of times since. Silver is leading the way and this is another positive for the precious metals market. The Active Asset Allocator currently holds a 20% allocation to the Central Fund of Canada (CEF), which currently holds a 61% allocation to gold bullion and 39% allocation to silver bullion. CEF trades at a -5% discount to the net asset value of the bullion held in the fund. This discount has narrowed from -8% at the start of the year.

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.

March 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. 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 my clients. My strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

Executive Summary

Equity bull market or bear? The moment of truth has arrived. Following a -21% decline from the May 2015 top to the January 2016 low, stocks have staged a rally back to the now down-sloping 50-week moving average (50WMA). What was once support is now resistance. This month, I examine price action, volume and volatility trends to examine whether stocks have the required strength to break out to new highs or whether new lows are around the corner. 

Bonds are off to another good start in 2016, despite 30% of all global government bonds now sporting a negative yield. I examine the bullish case and highlight my key concerns for fixed income investors. I also provide an update on the unfolding bull market in precious metals. The Active Asset Allocator remains defensively positioned with euros, bonds and precious metals accounting for 80% of the asset mix.

Finally, a note on 29 Trades, a new investment strategy at Secure Investments. I have been following the short-term (daily) and medium-term (investor) cycles of the gold market for over 10 years and have identified specific patterns, a rhythm, to the market that repeats with regularity as the daily and investor cycles ebb and flow. 29 Trades has emerged from many hours of analysis and has the potential to deliver exceptional returns over time for investors in a risk controlled way. Please get in touch for more information.

Stock Market Update

The moment of truth has arrived for the stock market. Either the top is in and this bear-market rally is about to roll over, or the past 10 months have been nothing more than a sharp correction in an ongoing bull market. We should find out soon enough. The Active Asset Allocator remains defensively positioned for now with an asset mix of 20% equities, 30% bonds, 30% gold, 20% cash.

We began 2016 with a waterfall decline in the stock market, the worst start to the year in recorded history. At the January 2016 low, stocks had declined -21% from their May 2015 peak. The market then experienced a powerful and impressive rally over the last 4 weeks, back to the now down-sloping 50-week moving average (50WMA). The FTSE All World Index, the global stock market barometer, closed the week just 6 points below the 50WMA.

In the United States, the Nasdaq Composite, Russell 2000 Small Cap Index and Value Line Geometric Index continue to trade below their long-term MA's. However, in a bullish development this month, the S&P 500, Dow Jones Industrials, Transports and Utilities Indices have all recaptured the 50WMA.

On another positive note, new highs on the NYSE are now outpacing new lows for the first time in almost a year (lower left chart) while 51% of NYSE stocks are now trading above the 200DMA compared with just 16% at the beginning of 2016 (lower right chart). Both are requirements for a sustained stock market rally to take hold. It is too early to tell whether the recent buying power has been driven by aggressive short-covering or large institutional players taking new positions. The stock market should reveal its hand shortly.

Volume flowing into advancing stocks relative to declining stocks has picked up in March but not yet to a significant degree. The recent turn is notable. If this trend in rising volume persists and follows price to new highs in the months ahead, the bulls will have regained control and I will move to a fully invested position in the Active Asset Allocator. Stay tuned.

Volatility is also rising and tracing out a pattern of higher highs and higher lows. The VIX Index surged to 32 in January 2016, a new high for the move, before declining back to 14 this month, a higher low. The pattern of higher highs and higher lows is signalling a increase in investor concern and demand for portfolio insurance. If volatility picks up in the next few weeks, it should coincide with lower stock prices. Conversely, a break to new lows for the VIX will signal the all clear for stock markets as we head into the summer months.

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

Bond Market Update

Over 60% of global government bonds today yield less than 1% and almost 30% of global government bonds now have negative yields. While difficult to comprehend, it makes some sense given that global economic growth expectations are deteriorating, inflation is benign, and central banks have cut short-term rates to zero or below.

In January 2016, the Japanese central bank announced an interest rate cut to -0.1%. In March, the ECB followed suit with a rate cut to -0.4%. A couple of weeks later, the Federal Reserve lowered market expectations for further interest rate increases this year due to a weaker global growth outlook and volatile market conditions. 

As long as central banks continue to drive short-term rates lower and use newly printed money to buy government bonds, the bull market in bonds should continue. A period of stock market volatility should also provide an additional source of demand. I see two key risks for fixed income investors: (i) a policy change by key central banks to step back from quantitative easing, and (ii) an unanticipated rise in inflation. I rate the probability of a central bank policy reversal as near zero. An inflation scare is a potentially higher probability event given the trillions of dollars of newly printed money that has been pumped into the system and the law of unintended consequences. I am watching closely for signs. In fact, inflation-linked bonds have started to rally in the US, UK and EU, coincident with the recent bottom in commodity markets. If this trend persists, I will increase the allocation to inflation-linked bonds in the Active Asset Allocator from 5% to 10% and reduce the allocation to fixed interest rate bonds from 20% to 15%. 

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

Gold Market Update

Last month, I noted that gold crossed bullishly above its long-term 20 month moving average for the first time since topping out at $1,923 in 2011. Gold has continued to trade above the 20MMA and is about to be joined by silver this month. Silver holds both precious metal and industrial properties. Silver is considerably more volatile than gold, but also offers more upside and a good degree of inflation protection in a world gone mad with central bankers threatening money printing ad infinitum. 

Last month, I also noted the recent strong performance of the gold mining stocks. Over the last four weeks, the miners have rallied another +20%. Fortunes will be made in this sector over the course of the bull market in precious metals.

The bull market in precious metals has historically coincided with periods of USD weakness. This time may be different as central banks across the world are all working towards the same goal as they attempt to destroy the value of their own currency relative to other to gain a competitive edge. Trillions of dollars, euros, pounds and yen have been created out of thin air. I expect USD weakness to drive the gold bull market in the years ahead, but potentially not to the same degree as prior episodes as the Fed has more competition this time. Gold will be the last currency standing when this game finally ends.

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