May 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 10-20 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

Over the last couple of months, Facebook, Apple, Amazon, Netflix and Google together have added $260 billion in market capitalisation. Meanwhile, the other 495 companies in the S&P 500 have lost a similar amount. Market leadership is narrowing to just a handful of names, a trend that often occurs at the tail end of a bull market. Smart investors are taking note. Paul Singer recently raised $5 billion to take advantage of opportunities when investor confidence becomes impaired and volatility spikes. Warren Buffett is sitting on 22% cash in his investment company Berkshire Hathaway. We are getting close.

Bonds have had a quiet couple of months but as long as 3% on the 10-year US Treasury and 1% on the 10-year German Bund hold, I continue to believe that the final low in yields of this multi-decade bull market lies somewhere in our future. The price action in gold could provide the clue to the timing of the turn (lower in stocks, higher in bonds and gold). Gold Trader is looking to catch the top of gold's fourth daily cycle before the final descent into a medium-term low in June. Once next month's low is in place, I expect a powerful move higher over the Summer, possibly to $1,500, as the stock market finally rolls over.

Stock Market Update

Paul Singer's hedge fund Elliott Management raised $5 billion in 24 hours last week to take advantage of a potential major investment opportunity set that could emerge "when investor confidence is impaired, recent correlations and assumptions don't work and prices are changing rapidly". Singer, one of the most successful hedge fund managers of all time, is expecting a sharp rise in volatility and some unpleasant consequences for investors in the not too distant future. He is not the only one. Warren Buffett is currently holding 22% cash - nearly $100 billion - in his investment company Berkshire Hathaway. Two titans of the investment industry are on edge and concerned about the outlook for global markets.

Back in May 2013, Paul Singer penned an excellent article describing the moral hazard that has been created by the Federal Reserve. (The full article is available in the Research section of my website at the following link: In the Wilderness). In the article, Singer lambastes the Federal Reserve for the dangerous policies they have pursued and the unintended consequences that have yet to be felt from their reckless and irresponsible actions.

“If you look at the history of Fed policy from Greenspan to Bernanke, you see two broad and destructive paths quite clearly. One path is the cult of central banking, in which the central bank gradually acquired the mantle of all-knowing guru and maestro, capable of fine-tuning the global economy and financial system, despite their infinite complexity. On this path traveled arrogance, carelessness and a rigid and narrow orthodoxy substituting for an open-minded quest to understand exactly what the modern financial system actually is and how it really works. The second path is one of lower and lower discipline, less and less conservative stewardship of the precious confidence that is all that stands between fiat currency and monetary ruin. Monetary debasement in its chronic form erodes people’s savings. In its acute and later stages, it can destroy the social cohesion of a society as wealth is stolen and/or created not by ideas, effort and leadership, but rather by the wild swings of asset prices engendered by the loss of any anchor to enduring value. In that phase, wealth and credit assets (debt) are confiscated or devalued by various means, including inflation and taxation, or by changes to laws relating to the rights of asset holders. Speculators win, savers are destroyed, and the ties that bind either fray or rip. We see no signs that our leaders possess the understanding, courage or discipline to avoid this.”

— Paul Singer, Elliott Management, May 2013.

One of the consequences of continuous central bank intervention in capital markets has been the emergence of the short volatility trade as investor confidence levels ratchet up once again. A tremendous amount of capital has been placed on bets that volatility will remain suppressed for the foreseeable future. This, at a time when the Vix Index (below) is trading at multi-decade lows. Over the past 13 trading days, the S&P 500 has traded within a range of 1.01%, the least volatile 13 days in history! Volatility spikes and rapid changes in price are what Paul Singer is preparing for.

The Vix Index is a measure of the volatility of S&P 500 index options and is considered a prescient gauge of investor confidence (when the Vix is low) and fear (when the Vix spikes higher).

Another direct consequence of continuous central bank intervention has been the reach for yield as investors are forced out of low risk cash and into higher risk investments in the search for income and a reasonable investment return. Total assets in Rydex Money Market Funds have now also fallen to multi-decade lows.....

.... at a time when stock market valuations and margin debt as a percentage of nominal GDP have rarely been higher.

There is also a potential negative divergence now appearing in the S&P 500 where price is breaking out to new all-time highs but relative strength and momentum indicators are failing to confirm the move. This signals that the rally could be nearing its final stages.

In his 1st May Weekly Market Comment, John Hussman showed a simple chart of the S&P 500, marking all days since 1960 where the opening level of the Index was 0.5% above the prior day's closing price and the Index was within 2% of an all-time high. On some occasions, these conditions occurred shortly before the final bull market high, while on others (August 1987 and October 2007), they occurred just a few days before or after the final market top. Food for thought.

Stock markets have enjoyed a very strong multi-year rally since 2009, and since bottoming versus gold in 2011. The S&P has handily outperformed precious metals over the last six years, following gold's strong relative performance versus US equities from 2000 until 2011.  I believe the trend is now turning once again in favour of gold. I think gold will put in a meaningful low over the next 4-6 weeks (see Gold Market Update for more information), which I expect will coincide with a top in the stock market. After that, things should start to get interesting.

European stocks (lower left chart) trade at a valuation discount relative to US stocks and the market is pricing in quite a depressed level of earnings growth for EU companies. So, there is a margin of safety priced in to EU stock markets. Chinese stocks (lower right chart) continue to face significant headwinds and the chart of the Shanghai Stock Exchange Composite Index suggests that the downward trend will persist for some time yet. I will be tilting the regional equity bias in the Active Asset Allocator towards Europe following the next meaningful correction, but for now, I continue to recommend caution and 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

The trend remains down for government bond yields across the world. Inflationary pressures are probably greatest in the United States and eventually that will be reflected in the US Treasury market. However, as long as the US 10-year yield remains below 3.0%, I think the final low in yields of this multi-decade bull market lies somewhere in our future. 

Debt, demographics and delusional central banks are combining to perpetuate this bull market in bonds. Despite the recent rise in yields, Eurozone government bond yields also remain in a multi-year downward trend. As long as 10-year German bund yields remain below 1.0%, the bond bull market remains intact.

It has been a quiet couple of months for inflation-linked bonds but the longer-term trend remains up for this under-owned asset class. Inflation-linked bonds offer attractive diversification benefits for multi-asset portfolios and perform well at times when equities and fixed interest rate bonds are struggling. I will likely increase the allocation to ILB's in the Active Asset Allocator over the course of the next 12 months.

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

I closed Trade 12 of the Gold Trader strategy last week for a 2% gain (+4.4%YTD). I am looking to place another short position for Gold Trader to catch the top of gold's fourth daily cycle before the final descent into a medium-term low in June. Once next month's low is in place, I am expecting a powerful move higher over the Summer, coinciding with a top and decline in the stock market.

I am pretty excited about the prospects for Gold Trader. The strategy looks to capture 5-6% per trade while risking just 2-3% each time and has a win rate in excess of 70% based on over 10 years of data. Profits are tax-free to the client and fees are performance based. No gain, no fee. Please get in touch if you are interested in learning more.

I expect gold to bottom next month near $1,170. The possibility remains for a fast and sharp drop below the December 2016 low of $1,124 to shake out the bulls, which would provide the fuel for the next rally. Either way, once gold gets going, I expect a strong move higher towards $1,500. Gold Trader will be searching for a long position next month to get on board the move. 

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

December 2016 Investor Letter

Strategy Performance

Investment Philosophy and Approach

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

Gold Trader and Gold PowerTrader focus on capturing the strongest and weakest parts of gold's daily cycles, buying daily cycle lows, selling daily cycle highs and holding for 10-15 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5% to 6% profit per trade while risking 2% each time and has a win rate in excess of 70%.

Executive Summary

Stock markets are back in rally mode following the US and Italian election results. I believe this is the final "blow off" phase to a market top which could peak at any stage between now and March 2017. Stock market valuations have once again reached an extreme only experienced in 1929, 1972, 1987, 2000 and 2007. Donald Trump's election success has been compared to that of Ronald Reagan who won the race to the White House in November 1980. Following Reagan's win, the S&P 500 rallied +14% in just a few weeks but topped out in November 1980 and then tumbled -22% over the next year. That was when stocks were trading at single digit P/E multiples. Today, they are four times more expensive.

Government bond yields are rising, particularly in the US where Trump's policies will be viewed as potentially quite inflationary. US Treasuries have declined -8% since the US election result. Eurozone government bonds have held up better, falling just -4% during the recent Trump-inspired inflation scare (but -7% since August). Euro government bonds have now reached an oversold extreme and I expect a rally in EU government bond markets to get underway shortly, likely coinciding with a top in equity markets. While the Federal Reserve has backed away from its position as lender of last resort, the ECB continues to buy everything not nailed down and has recently extended its QE programme to December 2017. 

Gold has also declined recently in tandem with other safe haven assets. Despite the recent correction however, gold priced in euros has still rallied +12% year-to-date. Based on my reading of the gold cycles, we are getting very close to the end of the current investor cycle for gold and I expect a turn higher shortly, possibly coinciding with an interest rate hike by the Federal Reserve on December 14th.  I remain defensively positioned for now with 20% equities / 40% bonds / 30% precious metals / 10% cash.

Stock Market Update

Trump's election victory has led to an +4% rally in the USD, an +8% rally in US stocks and an -8% drop in 30-year US Treasuries. 30-year Treasury yields jumped 50 basis points from 2.6% to 3.1% over the last four weeks. More broadly, global stock markets have added +5% in Euros, Eurozone government bonds have declined -4% and gold in euros has fallen -5%. What was initially considered bad news for investors ahead of the US election transformed into good news, literally overnight. The Active Asset Allocator lost -2.2% in November but has returned +8.4% year-to-date. In this Investor Update, I review the short-term impact of the Trump effect on equities, bonds, currencies and precious metals and examine what may be in store for investors in 2017. 

Will a Trump presidency make America great again? He has promised tax cuts, infrastructure spending and regulatory reform, all of which could boost US GDP over the next two years, but at a significant cost of ballooning government debts and budget deficits. His protectionist policies on trade and immigration will negate the aforementioned positives to a certain degree. Of course this is all speculation for now as Trump and his team have yet to execute on their plan. Let's take a closer look at some of Trump's proposed policies and their likely potential impact.

The headline rate of corporation tax in the US is 35%. However, the average tax rate of the largest 50 companies in the S&P 500 is just 24%. So, stock markets may be overestimating the positive impact of Trump's tax reform plan. On infrastructure spending, Trump is planning to spend $100 billion/year on much-needed repairs to America's transportation network. Spending billions of dollars on America's rail infrastructure, roads, bridges and tunnels makes sense and should provide a timely boost to US GDP growth. However, the Trump team must execute. The Obama administration attempted a similar strategy in 2009 in the midst of the Great Financial Crisis. "The American Recovery and Reinvestment Act of 2009" was put in place at a cost of $800 billion to save and create jobs and invest in infrastructure, education, health, and renewable energy. The impact on job creation and GDP growth was considered relatively modest in the following years. Asset prices benefitted handsomely of course but this was largely a result of four rounds of quantitative easing rather than Obama's fiscal policy decisions.

Many are comparing Trump's recent victory to that of Ronald Reagan who won the race to the White House in November 1980. Reagan beat incumbent President Jimmy Carter on a platform of policies quite similar to those now being proposed by Donald Trump. Following Reagan's election victory,  the S&P 500 took off (see chart below) rallying +14% in just a few weeks (compared to just +8% so far since Trump's win). However, that was it for the stock market rally back then. Stocks topped in November 1980 and then dropped -22% over the next 12 months. That was when stock market valuations were trading at single digit P/E multiples. Today, stocks are four times more expensive. 

Back in 1980, the US national debt amounted to $908 billion and US GDP was $2.86 trillion (32% debt/GDP). Today, the US national debt is $19.6 trillion while US GDP is only $18.7 trillion (105% debt/GDP). It is going to be much more difficult for the Trump administration to grow the US economy by more than 2%/year during his time in Office. So far, the stock market has given Trump the benefit of the doubt, but I can't help but feel that 2017 is shaping up to be quite a different proposition, for reasons I will explain next.

The Dow Jones Industrials Average is a price-weighted index of 30 of America's largest publicly quoted companies including many household names like Disney, JP Morgan, Caterpillar, MacDonalds, Proctor & Gamble, Exxon Mobil and Goldman Sachs. Following the Great Financial Crisis of 2008, the Dow kicked off a new bull market, fueled to a large degree by central bank money printing on a scale never before witnessed. The rise over the next 9 years has been a sight to behold - a triple from those March 2009 lows. Times have changed however. QE has ended in the US, bond yields have rallied 100 basis points and the USD has added +10% versus the Euro since May 2016. US corporations are facing multiple headwinds at a time when corporate earnings are declining.

From a technical perspective, we are now at an interesting juncture. Take a look at the chart below. Multi-year support broke for the first time in 2015 but stocks recovered strongly for the remainder of the year. 2016 started with another sharp 15-20% correction before the bulls regained control once again. The DJIA has now rallied all the way back to the major multi-year support trend line and has broken out to new all time highs this week. Is this the start of a new multi-month rally or a bull trap? Chartists and traders around the world are watching this setup very closely. We should find out shortly.

A similar pattern is unfolding on a shorter time-frame in the S&P 500 - a break of support in October 2016 followed by a sharp rally that has just broken out to new all-time highs. In a world dominated by computer-driven algorithmic trading, these chart patterns matter. 

When the S&P 500 is trading at a P/E multiple of 25 times earnings and those earnings peaked in 2015 and have been declining ever since, the chart patterns matter even more. The last time US corporate earnings were at current levels was almost 10 years ago, back in 2007 when the S&P 500 was trading at 1,500, -32% lower than today's level.

Margin debt, which measures the extent to which investors borrow to invest in the stock market, also looks like it may have peaked. Notice that margin debt as a percentage of GDP peaked at similar levels in 2000 and 2007 coincident with the previous two stock market bubbles.

The recent break higher in the stock market has looked convincing and has reversed the sell signal in my technical studies, which triggered in October. Portfolio managers under performance pressure are chasing this move in fear of underperforming benchmarks as we approach the end of the year. I believe the recent breakout will not be sustained and, similar to last year, we will get a sharp reversal at some point between now and March 2017. So I continue to recommend a defensive position in the Active Asset Allocator with an asset mix of 20% global equities / 40% EU bonds / 30% precious metals / 10% cash.

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

Bond Market Update

US Treasuries have been hit hardest during the recent correction in government bonds. The 10-year Treasury yield rallied 110 basis points from 1.4% in August to 2.5% today, sending Treasury prices falling over -10%. 30-year Treasury yields increased 1% from 2.1% to 3.1%, resulting in a capital decline of -15%. (the Active Asset Allocator strategy has no exposure to US Treasuries).

Eurozone government bonds held up better, falling just -4% during the recent Trump-inspired inflation scare (but -7% since August). Euro government bonds have now reached an oversold extreme and I expect a rally in EU government bond markets to get underway shortly, likely coinciding with a top in equity markets. While the Federal Reserve has backed away from its position as lender of last resort, the ECB continues to buy everything not nailed down and has recently extended its QE programme to December 2017.

Government debt in the Eurozone continues to grow at a faster rate than GDP. The ECB must hold interest rates below the rate of inflation so that these debts can be serviced and inflated away over time. While EU fixed interest rate bonds are approaching the end of their multi-decade bull market, the outlook for Inflation linked bonds (and gold) is brighter. Although fears of deflation continue to reverberate around the world, the echo is starting to fade. We are moving towards an environment of rising inflation. The Active Asset Allocator will continue to transition from fixed interest rate bonds to inflation-linked in 2017.

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

Gold Market Update

Despite the recent correction, gold priced in euros has still rallied +12% year-to-date. Based on my reading of the gold cycles, we are now getting very close to the end of the current investor cycle for gold and I expect a turn higher shortly, possibly coinciding with an interest rate hike by the Federal Reserve on December 14th. 

The Federal Reserve last raised interest rates a year ago on December 16th 2015. Gold closed at $1,071 that day. In a shakeout move, gold dropped $20 the following day before then shooting higher by +30% over the next 6 months. I expect something similar this time round. Also, inflation wasn't a concern for the Fed last year but with Trump in the White House in January 2017, the narrative is changing.

Another difference between then and now is that USD gold looks to be making a higher low for the first time since 2011. A higher low is bull market action and will confirm a change of character for the gold market. If gold can form a low in the $1,100's, the next target will be a higher high in 2017 above $1,378. I think we will get it. A higher low followed by a higher high will get more involved in the precious metals market, a necessary development to drive gold prices higher.

Gold priced in euros has been holding up reasonably well since June 2016. Euro gold has not made a lower low despite the +7% rally in the USD over the same period. 

The time has come for gold to show its hand. If the bull market is back, gold should rally sharply over the next 6 months. If gold disappoints, something else is at hand and I will cut back exposure in the Active Asset Allocator. 

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

April 2016 Investor Letter

Strategy Performance

Investment Philosophy and Approach

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

Gold Trader and Gold PowerTrader focus on capturing the strongest and weakest parts of gold's daily cycles, buying daily cycle lows, selling daily cycle highs and holding for 10-15 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5% to 6% profit per trade while risking just 1.5% each time and has a win rate in excess of 70%.

Executive Summary

Following the worst start to the year for equities in recorded history, we have just experienced one of the sharpest recoveries off the lows since records began. This rally has been so strong in fact that my technical studies have just triggered a buy signal for the stock market for the first time since September 2013. This month, I review the recent improvement in the stock market's technical setup and outline my plan of attack for the weeks ahead. For now, the Active Asset Allocator remains defensively positioned, 20% equities / 30% bonds / 30% PM's / 20% cash.

This month I also explain why I remain bullish on bonds and expect an additional 15-20% upside for the 10 year duration bond ETF I hold in the Active Asset Allocator and provide a brief update on the ongoing bullish developments in the precious metals sector as this bull market shifts into gear.

Stock Market Update

My technical studies have just triggered a buy signal for the stock market for the first time since September 2013. Equity valuations today are approaching an extreme only witnessed near prior stock market peaks and US corporate earnings are now in a declining trend. Despite these cautionary flags, continuous central bank intervention has created the perception that stock market investing is a low risk endeavor and a buy-the-dip mentality on every correction has taken hold. This will not end well. In the interim, price trumps opinion. My Technical Trend Indicator (TTI) is smarter than I am and keeps me on the right side of the prevailing stock market trend. In this monthly update, I consider my plan of attack for the weeks ahead.

“Based on valuation measures having the strongest correlation with actual subsequent market returns across history, equity valuations have approached present levels in only a handful of instances: 1901 (followed by a -46% market retreat over the following 3-year period), 1906 (followed by a -45% retreat over the following year), 1929 (followed by a -89% collapse over the following 3 years), 1937 (followed by a -48% loss over the following year), 2000 (followed by a -49% market loss over the following 2 years), and 2007 (followed by a -57% market loss over the following 2 years). A few lesser extremes occurred in the 1960’s and 1970’s, followed by market losses in the -35% to -48% range.”

— John Hussman, Hussman Funds, 18th April 2016.

In this long-term chart of the S&P 500, I have highlighted the prior instances in 2000 and 2007 when the stock market topped and rolled over, followed shortly thereafter by a bearish cross of the 50WMA below the 100WMA. This coincided with the onset of a bear market in equities and a declining trend in US corporate earnings. In 2016 YTD, we have already experienced a sharp -14% drop in stocks followed by an equally sharp +16% rally. However, there has been no bearish cross yet of the 50WMA below the 100WMA and the S&P 500 currently trades above both trend lines. Meanwhile, US corporate earnings have begun to slide, highlighted in the lower section of the chart below. This should be expected and is consistent with the maturing phase of an ageing equity bull market, which is now over seven years old.

Margin debt, a measure of the degree of speculation evident in the stock market, also appears to have peaked and rolled over. Prior peaks in margin debt have coincided with past peaks in the stock market. So today, we have a combination of stocks that are trading at expensive valuations, a weakening trend in US corporate earnings and a declining trend in margin debt. That's the bad news.

Despite this backdrop, equities have powered ahead in recent weeks. In February 2016, only 15% of stocks on the NYSE were trading above their 200DMA. Today, this figure has jumped to a much healthier 69%. If stock markets can consolidate their recent gains over the next couple of weeks while a majority of stocks continue to trade above the 200DMA, the bulls will remain in control.

In another positive development, the NYSE Advance/Decline Line (lower left chart), which captures the trend of rising stocks versus declining stocks over time, has recently broken out to new all time highs. This suggests that price should follow suit shortly. Volume flowing into advancing versus declining stocks is lagging however and has yet to break out (lower right chart) to new highs. So, we still have some mixed signals here (click on charts to enlarge).

As markets have rallied, stocks making new lows have also all but disappeared, which is another requirement before a bull market can resume.

So from a technical perspective, the outlook for equities has improved, but there are still many reasons for caution. Remember, 2016 started with the worst negative stock market performance in history, so it's only natural that the first rally following this correction should be powerful. The markets are overbought in the short-term and a correction of some degree should now be expected. The extent of the correction will determine when and by how much I will increase the equity allocation in the Active Asset Allocator. Stay tuned, we should find out soon enough.

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

The ECB is attempting to stimulate economic growth and generate inflation in the order of 2% annually by printing money, buying bonds, funding some EU country deficits and potentially using some form of "helicopter money" for EU citizens. The road ahead is concerning but we have not yet reached an inflection point where ECB policies trigger an acceleration in the rate of inflation and a path towards higher government bond yields. Draghi has committed to doing "whatever it takes" which means he is willing to drive 10-year EU government bond yields into negative territory. 

The Active Asset Allocator currently holds a 20% allocation in EU government bonds (IEGZ). The regional split of this bond fund is 32% France, 27% Italy, 19% Germany, 17% Spain, 5% Netherlands. The fund has a yield of 1.4% and a duration of 10 years. If ECB policies are successful, the yield on IEGZ should reach zero or negative implying 15-20% upside return potential from here. I plan to increase the allocation to inflation linked bonds (IBCI) and reduce the allocation to fixed interest rate bonds (IEGZ) later in 2016. Of course, the overall allocation to bonds will reduce if/when I increase the allocation to equities in the weeks ahead. Stay tuned.

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

Gold closed above the 20-month moving average (20MMA) in February 2016, confirming a new bull market had begun. As long as gold continues to trade above the 20MMA, bull market rules will apply - we buy and hold and do not get shaken out of our position. The 20MMA closed on Friday at $1,170 and should start trending higher shortly.

Silver's bull market kicked off a month later, as this more volatile precious metal closed above its 20MMA in March 2016. Silver's 20MMA closed on Friday at $15.60, so above this price, bull market rules should also apply. 

The one fly in the ointment for both precious metals (silver in particular) is the extent of the speculative long position that has been accumulated by hedge funds and those betting on higher prices for the precious metals. The latest Commitment of Traders report shows an all time record net long position by speculators in the silver market.

Commercial traders (the mining companies and bullion banks) take the opposite side to the speculators and are always net short the metals to varying degrees, depending on price, to hedge their production. The Commercials are often referred to as the "smart money" as they are able to manage the gold and silver price in the short-term, knocking down the price and covering their short trades when the speculators get overly stretched on the long side. We are potentially at this point now, particularly in the silver market. The Commercials do not always win and have been forced to cover at much higher prices in the past. As always, I will be guided by the price action as it unfolds. Above the 20MMA, it's a bull market.

I expect the precious metals bull  market to benefit from an overall declining trend in the US dollar over the next 3-5 years. The USD has been perceived as a safe haven currency since the 2008 financial crisis and has benefited handsomely from significant inflows into various US growth assets, driving price and valuation to extreme levels. As valuations normalize, I expect the USD to decline on a trade weighted basis.

Confirming the bull market in precious metals, the gold and silver miners are rocketing higher. The gold and silver mining index is already +111% from their recent lows. The miners are notoriously volatile. However, for those willing to close their eyes and hold on, I expect BIG rewards here. The miners are too volatile for the Active Asset Allocator but are confirming my bullish view on the sector.

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

February 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

The Active Asset Allocator remains defensively positioned with euros, bonds and precious metals accounting for 80% of the asset mix. The strategy has returned +2% YTD in a very challenging environment where global equities have fallen -14% and the average multi-asset fund has declined -9%. With stocks now in a confirmed bear market, volatility is creeping higher while margin debt has peaked and is rolling over. There is room for equities to rally in the short-term but I expect bear market forces to take hold later this year. 

Bonds continue to defy the top callers and with JP Morgan recently forecasting that ECB rates on bank deposits could be cut from minus 0.3% to minus 4.5%, there is certainly more room for bond yields to fall and prices to rise. Finally, I touch on some exciting developments in the gold market, which may, finally, be waking up from a four year slumber. If that proves to be the case, there are exciting times ahead for precious metals investors.

Stock Market Update

The Active Asset Allocator remains defensively positioned with euros, bonds and precious metals accounting for 80% of the asset mix. The strategy has returned +2.2% YTD in a very challenging environment where global equities have fallen -14% and the average multi-asset fund has declined -9% in the first six weeks of the year. 

From a technical standpoint, global stock markets are in a confirmed bear market with many trading 20%+ below their recent highs. The majority of volume traded on the New York Stock Exchange each day is flowing into declining shares. Evident in the following chart, when the majority of volume is flowing into declining relative to advancing stocks, the S&P follows the trend lower, and sometimes in a meaningful way. The trend can turn at any stage and I continue to watch for signs of a reversal. However, for now, I remain defensively positioned.

When stock markets decline, volatility tends to spike higher and the Vix Index captures this trend. At prior meaningful lows in the stock market, the Vix Index has spiked to a level of 45 or above, as investors rush for the exits together, creating the oversold conditions necessary to lay the foundations for the next market advance. The next chart shows that, while volatility has increased in the first six weeks of the year, we have yet to experience any real sense of panic selling in the stock market. The Vix Index closed out last week at 25. Despite the double digit stock market declines YTD, investors remain in confident mood.

That may be about to change however. Margin debt represents borrowed money, or leverage, used by investors to speculate in the stock market. One glance at the next chart shows the risk seeking nature of investors in recent years as margin debt as a percent of nominal GDP has surged back to the prior bubble peaks of 2000 and 2007. Margin debt has a tendency to peak with the stock market and that now looks to be the case. Importantly, this chart does not yet reflect the high volume selling that has taken place in recent weeks. The next update later this month will show a sharper decline in margin debt. If this trend continues, we will certainly get a spike in the VIX towards 45 as investors scramble to close out highly geared positions in a declining market. In the meantime, I continue to wait patiently for a low risk place to turn more constructive on equities.

Despite the 2% rally in global stock markets on Friday and some follow through buying on Monday this week, the path of least resistance remains down for the FTSE All World Index, the global stock market benchmark.

There is a glimmer of hope for the bulls and I am watching closely to see if a meaningful reversal can take hold. At each prior major low in the stock market, the S&P 500 experienced heavy selling, rallied and then went on to make a lower low shortly thereafter, but the Relative Strength Index (RSI) failed to confirm this lower low in the price index. The higher low in the RSI signaled that selling pressure was easing despite the stock market decline, thereby laying the foundation for a market reversal.  We have a similar condition unfolding today in the S&P 500 (red dotted support lines on RHS of the next chart). However, this set up is only evident in the S&P 500 Index. The other major US and European indices have no such divergence in place, leading me to believe that the S&P 500 will follow the many other indices breaking down shortly. Also, the S&P's long-term 50 week moving average (WMA) is about to cross bearishly below the 100 WMA for the first time since 2008 (point (IV) on the chart below), as this bear market takes hold, with serious potential consequences for stock market investors.

As noted above, there is no divergence in place between price and relative strength for the Russell 2000 Small Cap Index or the Euro Stoxx 600 Index of European shares or many other charts that I have reviewed but not included here. 

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

Mario Draghi of the ECB said recently there would be “no limit” to how low Euroland yields could be pushed. Janet Yellen at the Fed has already stepped back from her plan to increase interest rates after a mere 25 basis point tightening (the likelihood of a March 2016 rate increase has fallen from over 60% to around 10%). Meanwhile Haruhiko Kuroda of the Bank of Japan is trying hard to lead his country down a path of negative interest rates and destroy the JPY in the process. JP Morgan also recently reported that the ECB could cut the rate it charges on bank deposits to minus 4.5% compared to minus 0.3% today. These policies do not work yet Draghi, Yellen and Kuroda continue to print, pushing on a string and hoping that their combined efforts will stimulate demand. 

This backdrop continues to be favourable for bonds. We are certainly in uncharted territory, yet if the ECB cuts the rate it charges on bank deposits from -0.3% to -4.5%, EU government bonds yields can certainly continue to fall.... and that is exactly what is happening. The bull market in bonds rumbles on. The Active Asset Allocator continues to maintain a 30% allocation to EU fixed interest, corporate and inflation linked bonds.

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

The gold bull is waking up. Gold is on track to close above its long-term 20 month moving average this month for the first time since topping out at $1,923 in 2011.  A close above $1,175 should do it. The gold mining stocks have reacted strongly to the recent surge in the price of gold, confirming this move could be the real deal. I need to see more bullish confirmation in price unfold before being confident that the bear market is in fact behind us but so far, this move looks good.

Many of the gold mining stocks have rallied 40-60% in recent weeks, but they have been so unmercifully and so aggressively sold over the past four years that the YTD rally is hardly noticeable on a long-term chart. If the gold bear market is over and the bull market is about to resume, the miners will shoot the lights out over the next few years.

I have noted before that gold tends to move in 7-8 year cycles and right on cue, gold is waking up and a new eight year cycle is about to begin.

Following the sharp declines of 2012 and 2013, gold has spent the past two years consolidating in a more bullish fashion. Now we are seeing bullion break out higher in all currencies as the next leg of this bull market kicks off. For those patient enough to handle the swings and stay invested, it will be a sight to behold.

If you know of any colleagues or friends who may have an interest in my investment approach, please do share my contact details. All new business leads are very much welcomed! Thanks for stopping by and sincere thanks again to all of you who have already signed up as a Secure Investments client or who are still thinking about it!

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

February 2015 Investor Letter

Model Portfolio Update

Executive Summary

The Active Asset Allocator was handsomely rewarded with an overweight position in bonds in 2014. This year, we are diversifying into corporate and inflation linked bonds while we wait for a compelling entry point into the stock market. In the meantime, our overweight gold position is working well. Our overweight position in equities worked in 2012 and 1H2013 and our overweight position in bonds worked in 2014. Gold is shaping up to be the trade of the year in 2015 and we fully intend to participate. Why don't you join us? We are not fussy where the returns come from, only that they do come in some form.

Equity Market Update

We start this month's update with a recap of the current positioning of the Active Asset Allocator investment strategy. As a reminder, the Active Asset Allocator invests in a mix of global equities, bonds and precious metals, the allocation of which is actively managed and determined by each market's primary trend. One of our tools, the technical trend indicator, delivered a 'sell' signal in October 2014 and has remained in defensive mode ever since. As a result, the Active Asset Allocator remains defensively positioned today with an allocation of 20% global equities / 30% bonds / 30% gold / 20% cash.

While European stock markets have started 2015 on a firm footing, US equities have traded in a weaker fashion, chopping sideways in the first six weeks of the year. US equities now account for 57% of the typical investment manager global equity benchmark and this is why we focus so much of our time and research on this region. A break below support will have us sitting tight in defensive mode and focusing on a low risk place to rebuild our equity exposure. If we get a sustained break in the S&P 500 above resistance and out to new all time highs, we will increase our equity allocation, despite current expensive equity valuations. If we increase our equity exposure, we will have a clearly defined exit strategy in place in the event that the market turns lower later in the year.

We have come a very long way from the March 2009 stock market lows - over 200% in fact if the S&P 500 is your benchmark. In that time, the VIX (FEAR) Index, a key measure of stock market volatility (blue dotted line below) has returned to pre-crisis lows, falling from a crisis peak of almost 80 in 2008 back to 12 in December 2014, an -85% drop. The Vix Index rises on fear and falls on greed. It reached multi-decade lows in December 2014. However, in the first six weeks of 2015, we have seen a +45% jump in the Vix, our stock market volatility barometer, from 12 to 17.5. Investor complacency has given way to a small degree of investor angst. It is too early to tell just yet if this is an emerging trend, but our interest is piqued.

This next chart should give the equity market bulls something to think about. Here we see real NYSE margin debt growth - basically investors borrowing to invest in the stock market - at a new all time high, above both prior peaks in 2000 and 2007. Amazing. If/when margin debt peaks and starts to turn lower, the stock market will be in trouble. Margin debt growth may have peaked in February 2014. We will have to wait and see. 

Let's end the equity market update on a positive note. Healthy bull markets require a majority of stocks to participate in the uptrend. The Advance/Decline Line - a key input into our Technical Trend Indicator - captures this trend and so far, the trend continues in a bullish fashion. The A/D Line hit a new all time high just last week, tipping the scales once again in favour of the bulls. Other inputs into our trend indicator are more cautious but the A/D Line is signalling that new highs lie ahead. 

Typically, the A/D Line tops out weeks or months before the stock market as you can see in the following chart. We wait patiently for the market's next signal.

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

Bond Market Update

US real GDP has grown by 2.2% per annum for the past four years, accelerating to over 4.0% in the last six months, with no real sign of inflation or deflation. US 30 year treasuries are currently yielding 2.6%. In the Eurozone, real GDP growth has grown by +0.3% pa over the same period, nudging higher to +0.4% in recent months, while deflation remains the prevailing threat. German 30 year bunds currently yield 0.9%. Neither bond market offers compelling value, while both appear to be discounting a slower growth and/or recessionary environment in the not-too-distant future. However, capital has been treated well in the fixed income markets and as long as that trend continues, the bond bull market won't die.

The Active Asset Allocator currently holds a 30% allocation to Eurozone government bonds (1.3% yield, 10 year duration), a 5% allocation to Euro aggregate bonds (0.7% yield, 6 year duration) and a 5% allocation to Euro inflation-linked bonds.

The Active Asset Allocator was handsomely rewarded in 2014 with an overweight position in Eurozone government bonds. This year, we are diversifying into corporate and inflation linked bonds, while we wait for a compelling entry point into the stock market. In the meantime, we continue to benefit from our overweight position in gold. Our overweight position in equities worked well in 2012 and 1H2013; our overweight position in bonds worked well in 2014; our overweight position in gold is working well so far in 2015. We are not fussy where the returns come from, only that they do come in some form!

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

Gold Market Update

We increased the allocation to gold in the Active Asset Allocator from 20% to 30% in December 2014. Shortly afterwards gold took off, rallying +20% in euro terms before giving some of that back in the last week. We will likely cut back the allocation to precious metals in the Active Asset Allocator shortly and wait patiently for the next safe entry point, likely to come in April or May. Gold is gearing up to potentially be the trade of the year for 2015 and we fully anticipate being on board along with our clients. For any prospects reading this evening, please do get in touch and we can show you how to implement the Active Asset Allocator in a very cost effective way.

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

June 2014 Investor Letter

Model Portfolio Update

Executive Summary

Our model portfolio remains defensively positioned 20% equities / 50% bonds / 20% gold / 10% cash ahead of what we expect to be an increasingly volatile second half to 2014. We are still tracking ahead of benchmark this year despite a more conservative portfolio and are on track to maintain our double digit annual return since inception. 

We are also excited to launch Delta Futures this month, an actively traded investment approach using multiple asset classes across multiple time frames. Delta Futures has returned +33% since launch on 1st January 2014. Please get in touch for more information on how to implement our Active Asset Allocator or Delta Futures investment strategies.

Equity Market Update

All markets move in cycles. Bull markets spend the majority of their time advancing, interspersed with periods of consolidation and/or correction. Bear markets do the opposite, spending the majority of their time declining, with strong counter-trend rallies separating each move lower. Analysing market cycles helps to set the framework for making informed investment decisions. Examining 50 years of stock market data shows us that the average equity market Investor Cycle lasts 22 weeks. In a healthy bull market, we should therefore expect 15-18 weeks of solidly rising stock prices, followed by a period of consolidation or correction. The strongest bull markets tend to give back the least during their consolidations. 

We are now on week 18 of the current equity market Investor cycle, so history tells us that we should be on watch for a move down into an Investor cycle low. Investor cycle lows are often strong selling events, so this is why we continue to advise caution in the short-term. We are also on Year Six of this powerful bull market in stocks. A study of market history also tells us that equity bull markets have tended to last 3.8 years on average. So, the current bull market in stocks is getting long in the tooth. This is one of the key reasons we are also cautious in our medium-term outlook for stocks.

Let's examine some charts to see if our cautious outlook is justified. At first glance, this equity bull market looks remarkably resilient, still favouring those with a bullish bias. The major US large-cap indices are making new highs each week and selling pressure is non-existent. However, if you look a little closer, you will see some initial signs of weakness, though they are only initial signs at present. Smaller cap stocks for example, measured by the Russell 2000 Index, are struggling to keep up with the S&P 500. While the S&P 500 is hitting new all-time highs, the Russell 2000 is -7% off its own recent peak. The small cap sector is considered riskier than its large cap counterpart and small cap stocks typically tend to lead the market, higher and lower. So, perhaps the Russell 2000 is signalling that the current trend is beginning to weaken.

The stock market's underlying technical strength has also been truly impressive. A majority of the the 3,000+ stocks that trade on the NYSE have been in steadily rising uptrends for the majority of this cyclical bull market, as can be seen in the Advance/Decline Line below for the total market. This total market A/D Line is a key input into our technical trend indicator, which drives the asset allocation decisions we make. Now, if you look closely at these charts, you will see that, while the total market A/D Line remains in a steadily rising uptrend, the Large Cap Breadth Index A/D Line has flattened out. This means that the largest stocks in the index are no longer driving the stock market higher. This could change in a few months time, which would be a bullish development and cause us to move back to a fully invested position, but for now, caution is advised. It is the same story for the Most Active Stocks Index A/D Line, which has stalled despite the price indices hitting new highs recently. Stocks that are attracting the greatest daily volume are no longer leading the market higher. The stock market is looking tired.

Many of the stocks that have been leading the market higher until recently are in the social media and biotech sectors and some have taken a drubbing in recent weeks, another sign that the character of this market is changing. Tesla (TSLA) plunged -33% in March 2014. Facebook (-24%), Netflix (-35%) and Twitter (-61%) have also experienced very sharp corrections recently.

In our April 2014 Investor Letter we noted that a record number of unprofitable IPO's were coming to market and only in 2000 did we see a greater number of money-losing businesses taken public. The door appears to be closing now if the recent price action of the above stocks is anything to go by. 

We are also concerned about the recent turn lower in margin debt (money borrowed to buy stocks on margin). History has not proven very kind to investors when margin debt peaked in the past (1987, 2000 and 2007) and began to unwind as investors headed for the exit. 

Finally, if the US dollar is emerging from a 3-year cycle low, which is looking more likely each day as time passes, then it could put the breaks on this strongly trending US equity market. The US dollar index is made up of a basket of currencies, with the Euro having the biggest influence on the direction of the USD at 55% (followed by the Japanese Yen at 15%). Over much of the last 12 months, a rising Euro has coincided with a falling USD and a sharply rising US equity market. Since May 2014 however, the trend has started to turn. 

 The ECB meets later this week and Mario Draghi will likely attempt to talk down his currency again in an effort to stave off the growing deflationary threat across the Euro zone. We An additional interest rate cut will likely send the Euro lower versus the USD.

To learn more about the full range of investment services available at Secure Investments, please contact Brian Delaney at 086 821 5911 or by email at brian.delaney@secureinvest.ie. 

January 2014 Investor Letter

Model Portfolio Update

Executive Summary

2013 turned out to be quite a strong year for stocks, rather subdued for bonds and downright difficult for precious metals. Our model portfolio captured approximately 50% of the stock market gains, as we were overweight equities until the end of June 2013. We switched to a defensive position in July and have maintained that stance ever since. In hindsight, we gave up some extra performance as equities continued their run through year-end. However, stock markets are now turning lower as we enter 2014 and we are well positioned. 2014 is shaping up to be a much more challenging year for investors. Capital preservation will be the name of the game and we aim to steer our customers through these volatile times with our tried and tested conservative approach. To learn more, please feel free to drop us an email or call Brian at 086 821 5911.

Equity Market Update

2013 turned out to be a fabulous year for global stock markets with the MSCI Global Equity Index returning +21% for the last 12 months. Our model portfolio captured approximately 50% of those gains, as we were overweight stocks until the end of June 2013. We moved to a more defensive position in July on the first big break lower for equities and the bonds we purchased performed quite well +2.5% for the July-December period. However, global stock markets recovered and tacked on another 10% through year-end, so our tactical switch proved overly conservative in hindsight. However, we continue to believe a conservative approach is the correct strategy in the current environment where stocks are expensive, particularly on Wall Street, overbought in the near-term and investor sentiment is running sky high. We advise caution and patience for now.

As we turn to 2014, what does the future hold? Well, the current bull market in stocks is approaching its fifth birthday and is already a full 12 months longer than the average bull market of the past one hundred years (4.8 years versus 3.8 years on average). In fact, we are currently witnessing the fourth longest stock market advance since 1932. Equities are expensive, overbought and overextended but the trend higher must be respected. What we are likely seeing here is a runaway move that will lead to a major stock market top - unless it has already occurred. The timing of the top is unknowable in advance, but I sense we are getting very close now, for a few reasons:

1) Everyone's bullish on stocks. Those holding a negative opinion are in a tiny minority. By any measure, optimistic sentiment has reached a record extreme. At a minimum, we are due for a stock market correction. We may or may not be at the end of this 5-year bull market run, it is too early to tell just yet but a +10% decline to reset sentiment is definitely overdue.

2) Investors are heavily committed. Margin debt levels - money borrowed to invest in stocks - have returned to those last seen at the end of the equity bull market in 2007 (and 2000 for that matter). Margin debt always rises during a healthy stock market advance but when it reaches an extreme like today and then turns lower, the risk of a significant stock market correction rises significantly. We are there now.

3) Market breadth is showing early signs of deterioration. The Advance-Decline Line measures the heart beat of the stock market. It is a great tool for capturing turning points, often tipping off investors ahead of time when the trend is changing. The A/D Line is calculated by adding together the difference between the number of advancing and declining stocks each day. When this indicator starts to decline for example, it signals that fewer stocks are participating in the market rally. The A-D Line typically turns lower ahead of the broader market.

Today, we see the A-D Line still making higher highs, but its progress has slowed significantly. The slope of the line is flattening and may begin to turn lower shortly. I calculate a second A-D Line for large cap stocks only and this indicator peaked in November 2013 and has been trending lower ever since.

4) Nobody's worried! The time to worry is when folks believe there is nothing to worry about! Certain branches of the Federal Reserve in the US calculate various different financial stress indexes which they then combine into a Financial Stress Composite. Some of the index components include stock prices, volatility, interest rates, credit spreads, leverage, liquidity, etc... When the Stress Composite, pictured below, exceeds +2, markets are in a period of extreme stress; -2 and stress levels are at an extreme low. A few days ago, the Composite reached a level of -1.21, the lowest reading on record. Each time in the past (68 times in all) the Composite approached a similar reading, the next 12 months return for the S&P 500 was  -6.4%!

5) Stocks are expensive. The S&P 500 now trades at 25 times the average of the last ten years of inflation-adjusted earnings, a rate similar to prior peaks (excluding the 2000 market top). Also, corporate earnings in aggregate today are at a historic peak relative to GDP and have a long way to decline back to their long-term average. So, price/earnings multiples (and stock prices) potentially have a long way to fall.

The stock market remains overvalued, overbought in the near-term and investor sentiment has reached an optimistic extreme. We therefore maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.

Bond Market Update

The moment of truth will arrive shortly for the bond market. Historically, government bonds have always rallied during stock market declines, as investors run for cover away from high risk investments and towards lower risk investments. That trend has been in motion since government bond yields were at double-digit levels in the 1980's. Today, with 10 year bond yields only 1.8% in Germany and 2.8% in the US and UK, the trend lower in yields (and higher in prices) is coming to an end. However, I don't believe we are there yet and I expect government bonds to rally once again on the next big decline in stocks. Thereafter, it will be time to shorten the duration of the bonds we hold in the model portfolio and introduce a broader mix that will include shorter dated government bonds, some corporate bonds and some emerging market debt. For now, we continue to hold our defensive position as the defensive characteristics of government bonds continue to work in our favour.

As government bond yields fall (shown for the US government bond market in the example above) bond prices rise. In the next chart we can see that bond prices are rising and the technical indicators show that this rising trend has only just begun and has plenty of room to rally in the weeks ahead. Our model portfolio should benefit and capture this performance during the first quarter of 2014. Continued patience with this position will be rewarded.

Gold Market Update

As noted in our recent update on precious metals, it is looking increasing likely that gold is emerging from a difficult 2.5 year bear market. Gold bottomed in June 2013 at $1,179, rallied +22% and then declined to re-test the lows set over the Summer. So far, that re-test has been successful with gold bottoming in December 2013 at $1,181 and then rallying into the New Year. Gold is currently trading at $1,260.

Notable in the chart below, we can see that, in addition to the successful re-test of the lows, the momentum of the decline has also slowed (MACD), indicating that there are few sellers left to sell. The longer gold can hold above $1,179, the stronger the case that the bull market is about to resume. Of course, we need to see gold making higher highs in the months ahead to confirm the bullish case, but the current setup is a solid start.

The gold, silver and junior mining stocks are also confirming this bullish breakout in the precious metals and have already rallied 11%, 10% and 15% respectively year-to-date, while the broader stock markets are all in the red. More on that in the weeks to come.

To learn more about the full range of investment services available at Secure Investments, please contact Brian Delaney at 086 821 5911 or by email at brian.delaney@secureinvest.ie. 

November 2013 Investor Letter

Model Portfolio Update

Executive Summary

If you strip out the impact of inflation, US stocks are as expensive today as they were just prior to the tech bubble bursting in 2000 and the housing bubble bursting in 2007. You would have to go all the way back to 1982 to see the last time that the stock market was truly undervalued. Investor appetite for high flying tech stocks with no earnings (Twitter) is a great barometer of the current mood. Margin debt, which measures hedge fund borrowing to invest in the stock market just hit a new all time high of $401 billion. The extent of the borrowing is now higher than the two prior peaks in 2000 and 2007.

Bonds have been a great safe haven every time stock markets have corrected. That safe haven status may be coming to an end, though it is a little too early to tell just yet. If bonds fail to rally in a meaningful way on the next big correction in stocks, I will be taking action in the model portfolio, by reducing the allocation and duration of the bonds held. I have already identified a better home for the capital and will be sharing that with you in due course.

Gold continues to search for direction. Gold bottomed in June 2013 at $1,180, rallied to $1,400 over the summer and is now in the process of testing the prior lows. A successful re-test will signal a trend change for gold investors and a strong indication that the 2 year bear market in precious metals is at an end. 

Equity Market Update

Equity market cycle count

"We are in the middle of a kind of bubble market and when they prick the bubble, there will probably be a pretty bad reaction. "

Julian Robertson, hedge fund manager, October 2013.

A few months back, Leon Black, founder of private equity firm The Apollo Group, told investors he was selling everything that wasn't nailed down. This month, retired hedge fund manager Julian Robertson of Tiger Management also passed judgement on the bubble-like characteristics of today's stock market, as did Paul Singer of Elliott Management, another kingpin of the investment industry. Singer noted last week that:

"the recent trading environment has felt like walking into a place and having a sense that something is wrong and dangerous but not knowing exactly what will happen and when. QE Infinity has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying. 

It is also not clear whether stock prices, which are still on a tear and at all-time nominal highs, are at these levels because of optimistic economic prospects, QE, or the beginnings of a loss of confidence in paper money causing a shifting of capital out of fixed income and into purportedly “real” assets. It appears to us that the Fed is basically paralyzed and afraid to reduce, much less eliminate, its bond-buying. In this environment, plain-vanilla ownership of stocks or bonds represents a highly conjectural bet on government-manipulated markets."

Those that continue to hold an overweight position in stocks please take note. 

There is no doubt that equities are expensive today. If you strip out the impact of inflation, US companies as measured by the S&P Composite Index, are as expensive today (Fed bubble) as they were just prior to the tech bubble bursting in 2000 and the housing bubble bursting in 2007. As you can see in the chart below, the stock market has only reached fair value (grey line) once since the mid-1990's and that was briefly in 2009. For the entire remaining period, the stock market has been expensive (red line) relative to corporate earnings. You would have to go all the way back to 1982 to see the last time that the stock market was truly undervalued (green line).

More stocks are trading above 3 times their book value today than at the stock market bubble peak in 2000.

Investor sentiment is also approaching a bullish extreme. Investor newsletter writers for example have rarely been more bullish about the future outlook for stocks than they are today. Every time investor sentiment got this stretched, a correction was not far ahead.

A great example of the extent of the current level of investor optimism is captured in the following chart. Here we show margin debt reported by the NYSE, which has now reached a new all time high of $401 billion. Margin debt is a measure of borrowings by hedge funds and speculators to invest in stocks. The extent of the borrowing is now higher than the two prior peaks in 2000 and 2007.  

Margin debt used by hedge funds and speculators has reached a new all time record of $401.2 billion. 

Retail investors are also getting in on the act. Recent data from the Rydex family of funds shows that Rydex cash fund holdings have fallen to very low levels today, while money is pouring into the stock market. Lipper data recently showed that investors have contributed a net $41 billion to equity funds and ETF's over a three week period in October. Going back to 2002, that exceeds the prior three-week record inflow by more than 17%.  

So, we have a quite a dangerous combination of an overvalued and overbought stock market with overly bullish investor sentiment. The uptrend can of course continue in the short run as momentum feeds on itself and in the short-term, the stock market still looks bullish. Despite being overvalued, overbought and sentiment being overly bullish, we have yet to experience any real selling pressure. 

What could trigger a selloff in the stock market? A medium-term peak in corporate earnings could be the tipping point. Corporate earnings peaked in 1999 in the midst of the tech bubble and peaked again in 2007 as the Fed-inspired housing bubble burst. It could be third time unlucky for equity investors as corporate earnings mean revert once again. This time however, there will be no support from central banks to lower interest rates. Short-term interest rates are already 0% in the US, EU and Japan.

S&P 500 real earnings growth has recovered since the 2008 financial crisis.

Equity market volatility has been on the decline since 2009. That trend appears to be changing.

The Vix Index, a measure of stock market volatility, is preparing for a breakout.

Bond Market Update

Bond market interest rates

Is QE losing its effectiveness? Despite the Federal Reserve printing $500 billion since May and using the proceeds to buy US government bonds, US 10 year government bond yields have risen  by 140 basis points from 1.6% to 3.0% in September before backing off a little last month. If money printing at the current extreme is no longer working to keep interest rates at record lows, then the bond bull market / bubble, which has been in effect for over 30 years, may be at a serious inflection point. Despite the record money printing, the bond market may have begun to price in a more inflationary outlook in our future. 

I want to see how bond markets react on the next big down move for stocks, which I continue to believe is directly ahead. Bonds should benefit as capital moves back to safe haven assets. If bonds fail to rally in a meaningful way, I will be taking action in the model portfolio. In any event, early in the new year, I will be looking to reduce the allocation and duration of the bonds in the model portfolio. I have already identified a better home for the capital and will be sharing that with you in due course.

Gold Market Update

Gold market cycle count

Gold bottomed in June 2013 at $1,180, rallied to $1,400 over the summer and is now in the process of testing the prior lows. A successful re-test will signal a trend change for gold investors and a strong indication that the 2 year bear market in precious metals is at an end. 

Although the past two years have been trying for the gold bulls, the fundamental case for owning gold continues to get stronger. I believe the bull market in precious metals is still intact. We are experiencing a vicious bear market within a bigger bull market. The current bear market is resetting sentiment, which will provide the fuel for the next big move higher. When will it happen? Nobody knows for sure, but I think we are getting very close now.

Fundamental Case

Money printing by all the major central banks continues at a pace never before seen in the western world. The US recently raised the debt ceiling once again which will allow them to continue to fund their deficit by printing money. The recent appointment of Janet Yellen as next Fed Chair is also very bullish for gold longer term. The supply of fiat money is limitless; the supply of gold is finite (and falling). Bull markets are hard to hold on to. Gold acts as the ultimate foreign exchange, has no counterparty and physical bullion is difficult to tax by governments. Gold will have its day but investors have to remain patient.

Technical Case

Since the June low of $1,180 gold has rallied to $1,434 and fallen back to $1,275 so far. If gold can move higher from here it will have made a higher low and that is constructive; the first time it has happened in over 2 years. Ultimately gold needs to get back above the declining 200 day moving average to confirm the bull market is back on track. The 200 DMA is currently $1,440 and falling. We need to see continued strength here before burnt investors will start to wade back into the sector.

Sentiment

The pessimistic mood in the precious metals sector is unprecedented. The vast majority of investors have thrown in the towel. Many are calling the bull market over and shorting the sector now. All the big investment banks are confidently predicting much lower gold prices for years to come. There really are very very few bulls left. This level of negative sentiment sets the scene for the next leg higher. 

To learn more about the full range of investment services available at Secure Investments, please contact Brian Delaney by email at brian.delaney@secureinvest.ie. 

August 2013 Investor Letter

Model Portfolio Update

Executive Summary

I reduced the allocation to equities in the model portfolio from 50% to 20% in the third week of June 2013 and continue to run with that asset mix today. 20% of proceeds were invested in 5+ Year Eurozone government bonds and 10% in cash. The current asset mix remains at 20% equities / 50% bonds / 20% gold / 10% cash. Given that stocks remain overvalued (the price/earnings multiple on the S&P 500 is 19 times based on 2012 net reported earnings), investor sentiment remains overly bullish, we are 4.5 years into the current equity bull market (compared to 3.8 years for the long term average) and a number of my technical indicators are tipping into bearish mode, I continue to recommend a defensive position for now.

Equity Market Update

Equity Market Cycle Count

Stock market tops are a process. After breaking 1,400 for the first time in July 1999, it took the S&P 500 another 15 months to hammer out a major top before plunging in October 2000. The second major bull market peak in recent times began to take shape in 2007. The S&P started to wobble at 1,450 in February 2007. Then, in October 2007, US equities experienced a sharp -20% correction from 1,576 to 1,257 in five months. The relief rally lasted all of two months before the wheels came off. All in all, coincidentally, it again took 15 months for the US stock market to complete the topping process before collapsing in 2008.

This time around, top-calling is a little trickier. The Fed has begun to talk about tapering their massive monthly purchases of treasuries and mortgage backed securities. However, talk is cheap. Mr. Bernanke has an unlimited monetary arsenal at his disposal and could resume his QE project at the drop of a hat if economic data start to soften again. More QE could mean ever higher stock prices. At some point though in the not too distant future - we could be there already - continued Fed intervention will be perceived by investors as the problem rather than the solution. Stock prices will stop going up Federal Reserve announcements of additional money printing. Then they will start going down and that will be a sight to behold. The tide has started to turn in my opinion, which means that the next 12 months could prove quite challenging for stock markets. 

Let's examine the stock market's technical setup for clues that the four year uptrend may be waning.

This week, for the first time in over a year, my technical trend indicator has tipped over into the red, testing support at the long term moving average. Investors should take note of this early warning signal that the uptrend in the stock market is deteriorating.

The technical trend has started to break down.

We can also see some initial signs of an overall weakening in this equity bull market by examining the Advance / Decline Line of all NYSE traded stocks. The A/D Line graphically displays the relationship between the number of stocks in rising trends versus the number of stocks in declining trends. In a healthy bull market, you should expect to see the majority of stocks in rising bullish trends. However, late in every bull market, the number of stocks participating in each rally falls until such a time that the trend peaks and reverses. For example, in 2007, we witnessed a negative divergence in the A/D Line for months prior to the stock market peak as fewer and fewer stocks participated in the rising trend. We are starting to see the same behaviour today.

The Advance / Decline has not confirmed the recent high in the US stock market. Fewer stocks are participating in the rising trend, which typically happens close to bull market peaks.

In addition to the initial signs of technical deterioration we see in the stock market, investor optimism has also reached a rather bullish extreme. Taken together, excessive bullish sentiment and initial signs of a technical breakdown in the stock market should provide food for thought for those with a bullish outlook. Last time we reached a similar low level of investor bearishness was just prior to the stock market correction in May 2011; before that was just before the wheels came off in 2008. Buyers beware.

Bearish sentiment has reached lows that have marked similar peaks in stocks in the past.

Permission was provided by Sentimentrader to post this chart.

Here is a longer term view of the same chart. There is still room for bearish sentiment to decline further (and stock prices to continue to rise), but a correction to reset sentiment is not far off. 

Long term view of investor bearish sentiment.

Permission provided by Sentimentrader to post this chart.

Like clockwork, and coincident with the low levels of bearish sentiment graphically shown above, investors are back in confident mood and returning to the stock market in their droves, with many going on margin (borrowing) to do so. Margin debt peaked at close to 2.8% of nominal US GDP in 2000 and again in 2007 as the S&P 500 was making a multi-year top in each instance. Margin debt levels are surging higher again and I fear the same result for stock prices in the months and years ahead.

Investors are as confident again now as they were in 2007 with a record number borrowing on margin to invest in the stock market.

Evidence is building that the current stock market rally is running into trouble. Stocks remain overvalued, investor sentiment remains overly bullish, and a number of my technical indicators are tipping into bearish mode. It is therefore prudent to continue to hold a defensive position for now as recommended in the model portfolio.

Bond Market Update

Global bond yields are rising. Central banks are losing control of their interest rate setting ability.

Long-term interest rates are rising across the world. US 10 year yields have risen 100 basis points from 1.76% to 2.76% in the past 8 months, despite the Federal Reserve printing $680 billion during that time to buy US government bonds. The bond market is signalling its discontent with Federal reserve policy of unlimited money printing. Rising interest rates will be the trend of the future, so investors that buy bonds should only do so for tactical reasons and always invest at the short end of the yield curve. 

Gold Market Update

Gold Cycle Count

After a 2 year correction, the gold bull is back. The gold correction lasted from the peak in September 2011 of $1,921 to a trough in June 2013 of $1,180, a steep decline of -39%. Now, I expect gold to make up for lost time and challenge the all time highs over the next 6-12 months. During the last gold bull market of the 1970's, gold corrected in price from $200 to $100, a -50% decline before surging higher to a peak of $850 in 1980 as inflation ran wild. This time round, following the $1,180 low in June, gold has already recovered $240 to reach $1,420. If I am right about gold, we should see a strong move higher over the next 3-5 years as the bubble builds momentum.

Gold price history

Despite gold's recent 20% rally off the June lows, investor sentiment relating to the sector remains in the doldrums. Investors have thrown in the towel and have been very slow to return despite the recent turnaround in performance. This behaviour is exactly what is required to drive the gold bull market higher over the medium-term. As you can see from the next chart, the popular Rydex Funds are showing no signs of investment inflows into their precious metals funds. We have a long way to go before fund inflows return to the levels of 2010 and 2011.

Fund flows into the Rydex gold funds suggest indifference to the current rally. this is exactly what is required to propel gold higher in the months and years ahead.

The gold mining stocks, after getting taken to the woodshed earlier this year, are also making a comeback. While gold has rallied +20% in 6 weeks, the gold miners as measured by GDX, have already tacked on +39% over the same period. It is too early to get excited yet, but the prospects are definitely looking better. It's always darkest before the dawn. Hold your gold position and add on weakness. The next three years are going to be very profitable for precious metal investors.

To learn more about the full range of investment services available at Secure Investments, please contact Brian Delaney by email at brian.delaney@secureinvest.ie. 

June 2013 Investor Letter

Model Portfolio Update

Note: Performance figures updated to 31 May 2013. Warning: Past performance figures are estimates only and may not be a reliable guide to future returns.

Executive Summary

I reduced the allocation to equities in the Active Asset Allocator model this month from 50% to 20%, investing 20% of the proceeds in 5+ Year Eurozone government bonds and 10% in cash. Following this change, the model portfolio now holds an allocation of 20% equities / 50% bonds / 20% gold / 10% cash. Following an epic run in the stock market over the past 2 years, equities are now showing signs of technical damage and deterioration. The S&P 500 broke below the 50 day moving average on Thursday 19th June, which generally doesn't happen in healthy bull market advances. Previous breaks of the 50DMA occurred just prior to big stock market corrections in May 2010, July 2011, May 2012 and October 2012. There is no way to know how deep the next correction will be. However, stock markets today are pricing in an awful lot of good news and long term support for equities is approximately 20-30% below current levels.

Equity Market Update

Equity market cycle count

I will start this month's Investor Letter with a look back in time to 1987, a year that will be etched into the memory of many seasoned investors active in the market at the time. 1987 started out quite well for the stock market. The S&P 500 surged +13% in the month of December 1986 from 242.17 to 274.08. The bulls were firmly in control and investors generally were in optimistic mood. After all, Paul Volcker was at the wheel of the Federal Reserve and was in the process of successfully taming inflation after a period of rapidly rising consumer prices the late 1970's and early 1980's; 30 year US Treasury yields had peaked in October 1981 at 15.2% and had declined to 7.4% by December 1986. In January 1987, economists were forecasting 3% GDP growth for the year ahead and US stocks were trading at a cyclically-adjusted P/E of 17 times earnings. What could possibly have gone wrong?

US Treasury bond and the US dollar peaked in March 1987 and both declined for months in advance of the US stock market collapse, signalling all was not well in the United States at the time.

As the months of 1987 passed, US bond and currency markets began to turn lower. The 30 year US Treasury bond peaked in March 1987 at 102 and then began to fall. The 30 year Treasury bond would end up declining by -24% to 78 by October 1987 (before recovering +10% by year-end). The US dollar also trended lower for much of the year, signalling many months in advance that all was not well in the United States. The USD Index started the year at 104 and ended the year at 85, a decline of -18% in 12 months. Gold began 1987 at $400/oz and delivered a strong 12-month performance, closing out the year +20% higher at $480. Of course, we know now that stocks drifted higher until August, peaking at 337.89. September 1987 was a mild negative month for US stocks as they fell -2.4%. Then the floodgates opened a month later. On no apparent news, selling in the S&P 500 began to accelerate. Everybody ran for the exits at the same time and stocks collapsed -34% from a high of 328.94 to a low of 216.46 in the space of a couple of hours. Portfolio insurance was blamed as one of the reasons for the rout and I am sure it played a part in the flood of sell orders that hit the floor of the NYSE but the simple fact was that stocks were overpriced at the time and too many folks were crowded on the long (and wrong) side of the market.

Stocks and bonds both peaked in May 2013 and have started to decline. The correction so far has been quite orderly.

The reason I bring up the 1987 experience is that I notice a number of similarities in today's stock and bond markets. Despite quite an optimistic mood, the S&P 500 has already peaked this year at 1,687 in May and has corrected by -7.5% so far to a low of 1,560 in mid-June. The 30 year US Treasury bond also peaked in May 2013 at 149.65 and has declined by -11% so far to 133.10. The US dollar has held up better, while gold has acted quite weak year-to-date. So, it is a bit of a mixed bag so far when compared to the 1987 analogy but that could change. The US dollar Index topped in May 2013 at 84.50 and fell -5% to 80.50 in June before rebounding. The USD Index is currently trading at 83.00. Gold began 2013 at $1,675 and has taken quite a dive in the intervening period. Much like the correction that played out in the last big gold market during 1974-1976, gold is correcting the 12-year monster move from $250 in 2000 to $1,900 in 2011. (During the 1970's, following a run from $35 all the way $200, gold then plunged almost 50% to $100, before starting the second leg of a powerful bull market, which ended at $850). Gold closed this week at $1,235. The recent change in behaviour of the stock and bond markets suggests to me that investors should play a defensive hand for now.

The stock market is overvalued, overbullish and overbought. The next chart on the left shows prior times when the stock market exhibited similar overbought readings followed by a deterioration in the technical set up for stocks, which is where we are right now (thanks to John Hussman at www.hussmanfunds.com for that detail). Margin debt levels are also peaking after an almost 40% surge in the past 12 months. Prior peaks in margin debt levels, which measure speculators’ intent to borrow and invest in the stock market, have always coincided with at least short-term tops in the stock market. When you also factor in quite frothy levels of investor sentiment, which I wrote about last month, I think it is time to play defence for a while and move to a more conservatively invested position. This could just be another short-term correction, or it could be the start of something bigger. Time will tell.

Stocks are overvalued, overbought and investors are overbullish. Meanwhile, margin debt levels have reached lofty levels again.

A note on earnings as we approach second quarter earnings season in the United States. Stock analysts at all of the investment banks are back in optimistic mood. Goldman Sachs analysts for example are forecasting strong corporate earnings growth of 8% per annum for the next four years for all the large US multinationals, despite corporate earnings already at record all-time highs and being highly cyclical. There's plenty of room for disappointment. 

IBM, Oracle, Accenture and Cisco have all reported varying degrees of disappointing earnings results this quarter. Analysts don't appear to have noticed yet.

IBM, Cisco, Accenture and Oracle are a sample of US technology focused companies that have already reported disappointing results during the second quarter and their share prices have all declined. 

So, today we have short-term interest rates at zero. There is no room left to cut when the next slowdown happens. The Fed has boxed itself into a corner and is now trapped to a large degree. Bernanke has started to talk about backing away from QE. It is a dangerous game and it appears that the markets are about to call his bluff. We have reached a point in time where stocks are trading under the assumption that corporate earnings in the US, already at an all time high, will continue growing by 8% per annum and investors will continue to pay a rich multiple for those earnings. It really could be different this time but risks are tilted to the downside in my opinion.

References to the 1987 stock market collapse are not intended to cause alarm; stock market crashes are very low probability events by design. I simply advise caution as stocks are relatively expensive, bullish sentiment is running high and after a significant move higher, equities have recently showed some technical weakness, breaking below their 50DMA. After a +150% rally over 3 years, it could be a long way down! It's time to be cautious and watch out for additional signs of market weakness, or indeed strength.

For now, I expect we will see a relatively orderly correction in stocks over the next 6-8 weeks, which is why the model portfolio is now positioned as it is. However, if US Treasuries continue to sell off over the summer months and the US Dollar reverses course and starts declining in tandem with the US bond market; and gold turns higher in an overdue resumption of its long-term bull market, then the outlook for stocks will become a lot more uncertain and we could see something more disorderly. Another reason I am concerned is because I feel that the Federal Reserve, after years of appearing to be in control of inflation and the bond market, now appears to be losing control. 

Bond Market Update

Rates are rising as central banks' control over their bond markets is slipping.

5 year interest rates in Germany, the United States and the United Kingdom have almost doubled in six weeks. 5 year interest rates in Germany have jumped from 0.36% to 0.73%; in the US from 0.74% to 1.39% and in the UK from 0.75% to 1.42%. These are huge moves in a relatively short space of time. It is a similar story for 10-year government bond yields, against which mortgage interest rates are typically set. 

In the United States, the mantra at the Federal Reserve for the past decade has been to signal to the capital markets a willingness to print money and buy government bonds of varying maturities to keep interest rates low. This in turn, they believed, would buy time for over-leveraged banks and over-leveraged individuals to get their financial affairs in order, and also act as a stimulus to the economy and housing market. The problem with this approach is that it is only a temporary solution and has now been fully priced in. Bond markets are now clearly signalling that the current QE printing programme of $85BN/month is not enough to keep rates at record lows. $1 trillion of money printing every year  is just not enough. 

I believe that the Federal Reserve will very shortly row back on their tapering talk and will revert to their old policy of QE to infinity. Another 6-8 weeks of falling stock prices should do the trick. The real problem will come when Bernanke says "don't worry we will just keep printing money and buying bonds to keep rates low" and the bond market doesn't co-operate. At that point we will know that the Fed has lost control. Then there will be real fireworks.

Gold Market Update

The gold correction continues; a cyclical bear market within a secular bull market. The correction from the peak in September 2011 of $1,921 to this week's low of $1,180 is  -39%. The decline has had its effect. Small speculators have thrown in the towel and closed out their long positions. Meanwhile, the large commercial traders, who are always net short the gold market to hedge their clients' (gold miners) long exposure, have cut back aggressively on their short position. 

Small speculators have thrown in the towel, while the commercial traders, always net short to hedge their clients' long exposure, have cut back aggressively on their short position. 

During the last gold bull market of the 1970's, gold corrected in price from $200 to $100, a -50% decline before surging higher to a peak of $850 in 1980 as inflation ran wild. It is a different environment today. The scourge of inflation has yet to take hold due the continued credit contraction/destruction cycle. Quantitative easing is being pursued at record rates by central banks across the world and inflation will eventually follow. Gold is destined for much much higher prices and I continue to search for clues that the current 18 month correction has finally run its course. It may have actually occurred just a couple of days ago. The gold miners typically lead the metal higher in bull markets and lower in bear markets. On Thursday last, with gold lower during the day, the miners posted a positive close. On Friday, gold started the day lower but closed almost $50 higher at $1,235 and the miners took off adding 8%-10%. The reason I am paying close attention here is that the upside for both precious metal and mining stocks is potentially enormous if the bull market is about to resume.

The gold mining stocks are pricing in the end of the gold bull market, such has been their abysmal performance over the past 18 months. The next chart show all of the major declines in gold stocks since 1930. Corrections A, B and C all occurred during secular bull markets. Correction D is today's drop. The subsequent recoveries are also noted in the chart and were epic rebounds. If the steep 18 month correction is over, gold miners should start moving aggressively higher in the months ahead.  

This chart measures every major decline for gold stocks since 1930. The current plunge should be close to an end.

To learn more about the full range of investment services available at Secure Investments, please contact us by email at brian.delaney@secureinvest.ie.