October 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

The stock market continues to climb higher on record low volatility. If this trend continues, European stocks will break out above 17 year resistance levels to new all time highs. If this breakout occurs (and holds), the Active Asset Allocator will take a position in European shares. The risk will be modest. Above 400-415 on the Eurostoxx 600 Index and I am a buyer. A meaningful close back below 400 and I will close or significantly reduce the position. I will let the charts be my guide. Apart from valuation concerns, stocks continue to exhibit bullish characteristics. I have pointed out a few areas of concern in recent Investor Letters, including a decline in the number of stocks making new highs versus new lows and have highlighted another area of potential weakness/divergence in this month's investment update. It is worthy of continued observation in the months ahead. For now, Active Asset Allocator maintains an allocation of 20% global equities / 20% EU government bonds / 15% inflation linked bonds / 5% EU aggregate bonds / 30% precious metals / 10% cash.

Turning to precious metals, Sprott Asset Management has agreed to acquire the common shares of Central Fund of Canada Limited (CFCL) and the rights to administer and manage CFCL’s assets. Upon completion of the transaction, all CFCL Class A shares will be exchanged for units in a new Sprott Physical Gold and Silver Trust. US$300 million in value is expected to be realized for CFCL class A shareholders, relative to 9% pre-announcement net asset value (“NAV”) discount. Good news for existing holders of Central Fund of Canada shares. The 7-9% discount has reduced to 2% and will be eliminated once the deal closes. Also please note, a Gold Trader performance update will follow shortly.

Finally, for the history buffs amongst you, I posted an article in the Research section of the website entitled "The 1929 Parallel", written by John Kenneth Galbraith and published in the January 1987 issue of The Atlantic Magazine. The article is interesting both for its content and the timeliness of its publication in January 1987.

Stock Market Update

“The combination of central banker-applied brute force (buying everything in sight) and deity-like central banker pronouncements has dampened market volatility and frisky free-lancing, but at the same time it has encouraged risk taking (in market positioning, not it business formation). We have thought, and still think, that confidence in central banks and policymakers has been unjustified and thus could erode or collapse at any time. Since the major financial institutions which comprise the financial system are still way overleveraged and opaque (in fact with record amounts of debt and derivatives at present), such a break in confidence could happen abruptly and without warning. Investors should come to grips, intellectually and viscerally, with the likelihood that most fiscal and monetary policymakers’ knowlege of the world is somewhere between “close to nothing” and “way less than zero,” and that their pronouncements and policies usually range from “silly but harmless” to “dumb and dangerous.”

— Paul Singer, Elliott Capital Management

Paul Singer, who runs one of the world's largest and most successful hedge funds, is certainly no fan of central bankers and the controlling influence they exert over financial markets, that's for sure...... and who could blame him. Since the start of 2016, the ECB has expanded its balance sheet by 57% or €1.55 trillion. They are adding another €250 billion in 2017. Not to be outdone, the Bank of Japan has expanded its balance sheet by 34% to $4.6 trillion. Notably however, the Federal Reserve has signaled its intention to start withdrawing liquidity from the banking system this month in a significant shift in policy away from Quantitative Easing (QE) to Quantitative Tightening (QT). They are starting slowly at a rate of $10 billion/month in October and increasing to $50 billion/month in 2018, market permitting.

Despite Singer's reservations, stock markets around the world are climbing steadily higher. Money flows where it's treated best and so far, stocks continue to attract record inflows, particularly into passive, indexed tracking funds. This bull market has now become the second largest in history with the S&P 500 returning +275% since March 2009 in USD terms. Only the decade-long run of the 1990's has done better, +400%. US stocks now account for 52-55% of the global equity benchmark, depending on the benchmark you follow. 

The recent climb higher has come on record low volatility. The next chart shows the Dow Jones Industrial Average. The volatility of the weekly price moves is captured in the lower half of the chart. If you look closely, you will see that volatility has reached a multi-decade low. A rise in volatility does not necessarily have to coincide with a collapse in stock prices (1996-2000 for example), but it could (2008-2009).

In 2017 YTD, global equities have returned +3.7% in euro terms. Stock markets have navigated the historically volatile month of September with ease. If they continue to trade in bulletproof fashion in October, we may see a run higher into the end of the year. Apart from valuation concerns, stocks continue to exhibit bullish characteristics. I have pointed out a few areas of concern in recent Investor Letters, including a decline in the number of stocks making new highs versus new lows. I have also highlighted another area of potential weakness/divergence below. Here is a chart of the FTSE World Index, the global equity benchmark, priced in euro terms. The Index made a higher high in 2017 but on weaker relative strength (RSI) and falling momentum (MACD). This suggests the uptrend is weakening, which usually occurs towards the end of significant moves. It is worthy of continued observation in the months ahead.

A similar divergence occurred in the US Treasury bond market before a sharp decline in prices in 2016....

While stocks continue higher, a declining number are trading above their long-term 200-day moving average. 81% of stocks were above their long-term trend in late 2016. Today, just 70% are in confirmed uptrends. Below 50% and the stock market would get into difficulty.

What if I'm wrong? What if stock markets melt up for two more years, or longer? Central banks have already printed trillions and that money is sloshing around the system. What happens if money continues to flow into equities each month with no regard for valuation? I don't expect it will happen but it might. We are operating in unprecedented times. So here is my plan.

European stocks in aggregate trade at a valuation discount to US companies. Many European stocks are household names (Siemens, SAP, Unilever, Total, Allianz, Anheuser Busch Inbev) yet are under-owned relative to their US counterparts. Eurozone stocks for example account for just 11% of the global equity index (17% if you include the UK), compared to 55% for the US.

European stocks, as measured by the Eurostoxx 600 Index, have traded in very broad range for the last 17 years. The Eurostoxx 600 Index hit a resistance zone of 400 in 2000, 2007 and again in 2015, failing to break out on each occasion. We are approaching that resistance zone again today. The Index reached 390 this week. The market may be strong enough to break through this time. A confirmed break above a 17-year resistance zone would be significant, and quite bullish for EU stocks.

If the Eurostoxx 600 Index can close at new all time highs and turn resistance into support, the Active Asset Allocator will take a position in European shares. The risk would be modest. Above 400-415 and I am a buyer. A meaningful close back below 400 and I would close or significantly reduce the position. I will let the charts be my guide.

The current asset mix of the Active Asset Allocator is 20% global equities / 20% EU government bonds / 15% inflation linked bonds / 5% EU aggregate bonds / 30% precious metals / 10% cash. If we get the breakout in European equities, I will make the following trades:

Equities: Sell 10% Global Equities, Buy 30% EU Equities

Bonds: Sell 10% EU government bonds, Sell 5% EU aggregate bonds

The revised asset mix would be: 10% global equities / 30% EU equities / 10% EU government bonds / 15% inflation linked bonds / 30% precious metals / 5% cash.

One final comment. Passive fund flows are dominating the industry. Almost $500 billion flowed into passive funds in 2016 according to Morningstar, while $200 billion flowed out of active funds last year. That is almost three quarters of a trillion dollars... In one year! One of the unfortunate side effects of this trend has been that the industry is losing talented and thoughtful leaders in active management and none come more talented than Hugh Hendry, of Eclectica Asset Management. Hendry closed his Global Macro Fund last month after suffering a tough period of sub-par performance. His Fund returned -10% YTD through 31 August. Hendry was interviewed recently on the Adventures in Finance podcast. Well worth a listen.

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

While 2 and 5 year UK and US bond yields have risen a little in recent months, 10 and 30 year bond yields remain firmly in downtrends across the world. We could be getting close to a break out higher in longer-dated government bond yields in some regions, but not yet.

Inflation-linked bonds meanwhile remain in broad multi-year uptrends. UK and US IL bonds were adversely impacted in recent months due to currency movements, but the longer-term trends remain intact. The Active Asset Allocator may tilt the exposure towards inflation hedging via ILB's, precious metals and an increased EU equity allocation and away from deflationary hedges (cash and fixed interest rate bonds) if markets start pricing in a more inflationary bias. I do not see that happening quite yet, but the trend may be turning in that direction.

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

As noted in a recent Market Alert, Sprott Asset Management agreed to acquire the common shares of Central Fund of Canada Limited (CFCL) and the rights to administer and manage CFCL’s assets for C$120 million in cash and stock. Upon completion of the transaction, all CFCL Class A shares will be exchanged for units in a new Sprott Physical Gold and Silver Trust. US$300 million in value is expected to be realized for CFCL class A shareholders, relative to 9% pre-announcement net asset value (“NAV”) discount. Good news for existing holders of Central Fund of Canada shares. The 7-9% discount has reduced to 2% today and will be eliminated once the deal closes.

After a sharp -12% decline this year, the US dollar is attempting a long-overdue bounce. I am not expecting much of a rally, rather a consolidation around current levels before the next leg lower. 

US dollar trends typically last years once they get going. Following the Plaza Accord in 1985, the USD fell sharply and remained in a downtrend for 10 years. The USD Index then rallied from 1995-2001 before the next sharp decline from 2001-2008. Following a choppy move higher from 2008-2016, the USD Index has reversed sharply lower in the first nine months of 2017. I believe this is the start of a multi-year trend lower.

Gold is waking up to the USD reversal. From 2001-2008, the USD Index fell -43% from 126.21 to 71.33. During that period, Gold rallied over +600% from $250 to $1900. I think we could see something similar this time around. Gold has broken its multi-year downtrend and is now back-testing the prior resistance zone. I expect resistance to become support as gold builds the energy to launch higher over the next 12 months.

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.

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.