August 2017 Investor Letter

Strategy Performance

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +10% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
 

Gold Trader focuses on capturing the strongest and weakest parts of gold's daily cycle, buying daily cycle lows, selling daily cycle highs and holding for 10-20 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5%-6% profit per trade while risking 2%-3% each time and has a win rate in excess of 70%.

Executive Summary

Since my last report published on 17th May (apologies for the delay in getting this one out), global equities have declined -1.1% in euro terms, Eurozone government bonds have rallied +0.4% and gold priced in euros has fallen -4.8%. Currency moves have negatively impacted Active Asset Allocator returns in recent months with the USD falling -6% and GBP falling 4% versus the Euro during that time. All is not lost however and this month I highlight my bullish expectations for precious metals for the second half of 2017 and beyond. I think gold is on the cusp of a significant move higher.

This month I also review Bob Farrell's 10 rules of investing and discuss how they apply to the markets (particularly the stock market) today. Farrell is a stock market veteran who cut his teeth on Wall Street during the 1950's and experienced many of the equity booms and busts that followed over the next five decades. Farrell crafted his 10 rules of investing based on those experiences and lessons learned.  For now, I remain defensively positioned in the Active Asset Allocator with 20% equities / 40% bonds / 30% precious metals / 10% cash.

Gold Trader Trade 14 (-2.6%) and Trade 15 (+0.6%) closed in July. Trade 16 is open and +1% so far. Click here to view the August 2017 Investor Letter.

Stock Market Update

I was reminded recently of Bob Farrell and his 10 rules of investing, wisdom he accumulated over an illustrious career on Wall Street spanning five decades. Farrell joined Merrill Lynch in 1957 as a technical analyst after completing a Masters degree at Columbia Business School where he studied under Benjamin Graham and David Dodd, authors of the investment bible 'Security Analysis'. Farrell witnessed many bull and bear markets throughout his career and crafted his 10 rules of investing based on those experiences and lessons learned. This month, I review Farrell's 10 rules and see how they apply to markets today.

1: Markets tend to return to the mean over time. Trends in one direction or another eventually exhaust themselves and price moves back to test the long-term moving average. This generally happens every few years. The epic bull run in stock markets has swung from oversold in 2009 to overbought today. Even in strong bull markets, investors should expect the long-term moving average to be tested every couple of years. Today, the S&P 500 is 20% above its long-term moving average, while the Eurostoxx 600 is 7% above its long-term trend. 

2: Excesses in one direction will lead to an opposite excess in the other direction. Markets that overshoot on the upside will also overshoot on the downside. The New York Stock Exchange publishes data for margin debt at the end of each month. Margin debt represents the extent to which investors borrow to invest in the stock market. Bull markets breed (over)confidence and confident investors borrow to invest in the stock market. Margin debt surged on three occasions since 1995 coinciding with the last three bull market peaks. Today, NYSE margin debt has never been higher. Ever!

3: There are no new eras – excesses are never permanent. There are always hot stocks and sectors of the market that attract speculative capital. Some lead to speculative bubbles but they never last. Today, internet sensations Facebook, Amazon, Netflix, Google and the cryptocurrencies Bitcoin and Ethereum fall into this category. They are attracting a lot of hot money but chasers will be punished, eventually. It always happens.

4: Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. Bullish and bearish trends generally last longer than expected. However once the trends end, they are followed by sharp reversals. The Shanghai Stock Exchange Composite and Nasdaq 100 indices are two examples of exponentially rising stock markets followed by sharp reversals. In China, this occurred in 2008 and again in 2015. In the US, the Nasdaq bubble popped in 2001 and again in 2008. Another appears not too far away.

5: The public buys the most at the top and the least at the bottom. The average investor is most bullish at market tops and most bearish at market bottoms. When the marginal buyer turns into the marginal seller, a bear market begins and endures until panic sets in, the speculative buyers have been forced to sell and investor sentiment turns pessimistic. This roller coaster of sentiment and emotion is what defines a market. 

6: Fear and greed are stronger than long-term resolve. Human emotion is the enemy when it comes to investing in the stock market. Successful investing requires discipline, patience and a cool head. Sharp declines lead to fear; sharp rallies lead to overconfidence and investor complacency. The Vix index is an excellent barometer that captures fear and greed in the stock market. Low readings in the Vix Index go hand in hand with investor confidence and limited demand for insurance to hedge against stock market declines. Spikes in the Vix Index coincide with periods of sharp selling in the stock market as panic sets in. Today, the Vix index is trading near ALL TIME LOWS.  

 
 

7: Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names. Stock market breadth and volume are important indicators of underlying strength of a stock market advance. When participation is broad, stock market rallies have endurance and momentum and are difficult to stop. When participation is confined to just a few large-cap stocks, rallies have less credibility, momentum and strength. Today, stock market breadth remains quite firm. The Advance/Decline line (lower left chart) continues to make new highs, signalling that the majority of stocks remain in an uptrend. However, initial signs of deterioration are showing up in the number of net new highs being made on the NYSE. This occurred just prior to every correction in the past. 

8: Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend. The typical pattern in a bear market decline involves a sharp sell-off, an equally sharp reversal higher and then a long, slow grind lower until valuations become compelling once again. The reflexive rebound separating each decline is designed to keep the believers invested and encourage 'falling knife' catchers. 

9: When all the experts and forecasts agree – something else is going to happen. If everyone's optimistic, there is nobody left to buy. Excessive bullish sentiment can be damaging to your financial health. If often pays to adopt a contrarian investment strategy and take a more defensive position when the herd becomes overly confident about the market's future prospects. 

10: Bull markets are more fun than bear markets. This is true for most investors and fund managers who have long-only investment mandates and are typically fully invested all the time.

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

 
 

German 10-year bond yields have rallied 6 basis points since my last report while US 10-year treasury yields have fallen 7 basis points. Bonds continue to hold their own and are preparing for their next leg higher (and lower in yields) as the bull market in equities finally rolls over and a sharp equity bear market begins. The secular low in bond yields still lies somewhere in the future. 

Meanwhile, the trend in inflation-linked bonds remains steadily higher, albeit at a relatively modest pace. Currency has impacted euro-denominated returns in 2017 YTD, as weakness in GBP and USD in particular have not fed through to higher inflation-linked bond prices in local currency terms. A weakening currency will lead to rising input costs, particularly in a country like the US, which is the world's second largest importer of goods and services ($2.7 trillion in 2016). Rising input costs are inflationary. I expect the inflation-linked bond allocation in the Active Asset Allocator to make a more meaningful contribution to performance over the next few years.

 
 

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

Gold Market Update

Gold is setting up for a big move, so let me lay out my expectations for what I believe will happen over the remainder of 2017 and beyond. Gold's first task is to break above $1,300, which I expect will happen in August or September. A break above $1,300 would be significant for a number of reasons. Gold made a series of higher lows in 2017 since the washout decline to $1,124 in December 2016. Gold trading above $1,300 adds support to the view that the bear market in precious metals (2011-2016) has ended and a new bull market has begun confirmed by a rising trend in the gold price.

 
 

A break above $1,300 would also be significant as it would confirm a break out of the longer-term triangle consolidation that has been in place since gold topped at $1,923 in 2011. Once we get a good close above $1,300, I expect a sharp run higher towards $1,400 or $1,500 before the next consolidation. $1,500 represented strong support in 2011 and 2012 before it gave way in 2013, so I expect gold will take some time to get back above that level. After $1,500, I expect gold will challenge and ultimately exceed the all time highs above $1,900, probably in 2019. Once gold clears $1,900, I believe the bubble phase in precious metals will begin and gold will have a monster move higher in an epic bull market that will be a sight to behold..... but let's not get ahead of ourselves. $1,300 in August/September, $1,400-$1,500 by year-end and $1,900 in 2019, which is 50% above today's gold price.

 
 

I expect the bull market in precious metals will go hand in hand with a currency crisis in the world's reserve currency, the US dollar. I have shown the following chart on a number of occasions in previous reports. It is a chart of the USD Index from 1980 to today (red and black line) and USD gold (blue). The USD Index has made a series of lower highs and lower lows over the last 37 years. After it's run higher in 2014/2015, the USD Index appears now to have topped and started another multi-year decline, which should ultimately break to new all time lows in the years ahead. 

 
 

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.

September 2015 Investor Letter

Active Asset Allocator Performance

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns  over time with a strong focus on capital preservation. We follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. We always invest with the primary trend of the market and do not follow a benchmark. Instead, we manage the market risk for our clients. Our strategy has returned 12% per annum net of fees since inception. Our active asset allocation approach is best illustrated in the following chart.

 
 

Executive Summary

Stocks tumbled in August, the first real -10% decline since 2011 and the bounce out of the August lows has been mediocre so far. Our studies confirm the continued deterioration in the internal structure of the stock market. The recent rally barely registers on the charts. The Large Cap Breadth Index (LCBI) for example (below left) has been steadily declining since peaking in September 2014. The recent performance of the FTSE All World Index also reinforces our defensive position. Bonds,  gold and cash, which together account for 80% of the  Active Asset Allocator investment portfolio, have provided some shelter from the storm. 

Stock Market Update

All eyes are on the Federal Reserve this afternoon as the US Central Bank decides whether to increase interest rates from 0.0% to 0.25%. The magnitude of the potential rate hike is small but market reaction to the news over the next few weeks could be significant.

We experienced a sharp correction in stocks in August, the first real -10% decline since 2011. The bounce out of the August lows has been mediocre so far. Our studies confirm the continued deterioration in the internal structure of the stock market. The recent rally barely registers on the charts. The Large Cap Breadth Index (LCBI) for example (below left) has been steadily declining since peaking in September 2014. This Index captures the underlying trend of the largest companies that trade on the NYSE and is a very useful tool in that it shows where the major players in the investment management sector are placing their trades. Most large portfolio managers need to own the largest market cap stocks for liquidity purposes, as they have multiple billions to invest on a regular basis. The LCBI is highlighting that the big institutional players have yet to step back into the market in any meaningful way.

The advance/decline line (above right) also shows that the majority of stocks have been trending lower for much of 2015. The A/D Line is a composite of over 3,000 stocks trading on the NYSE, so it is a broad measure of market breadth and an excellent barometer of the overall health of the stock market. Both of the above indicators suggest the trend remains down and lower stock prices lie ahead.

We continue to follow the path of the FTSE All World Equity Index with interest. As noted in last month's update,  this Index is the benchmark for global equity fund managers and includes stocks from North America (54%), Europe (23%) and Asia (23%). Similar to the 2007-2008 stock market top, the FAW Index:

  1. made an initial break lower in October 2014 (I);
  2. rallied to new market highs in early 2015 but on weaker momentum (II);
  3. declined to lower lows below (I) in August 2015 (III); and
  4. is currently attempting to rally back to the now declining 50 week moving average.

As long as this pattern continues in a similar fashion to 2007/8, we will continue to recommend a defensive position in the Active Asset Allocator.

 
 

The stock market in the United States looks to have formed a medium-term top. Following a 15% decline in August, the NYSE Index of 3,000+ stocks has managed a weak +6% rally. We need to see a sustained break above the upper resistance trend line before turning bullish again on US equities.

 
 

There have only been four occasions over the last 20 years when the S&P 500 traded below its long-term 100 week moving average. In 2000 and 2007, it preceded a severe multi-year bear market. In 2011, we experienced a -20% stock market correction before the uptrend resumed. In 2015, the Index is once again testing the 100WMA. We closed below the 100WMA for 9 trading sessions before the current rally took us back above this key support level. Correction or bear market pending?  We will find out shortly.

 
 

Turning to Europe, we can see a similar trend unfolding. The Eurostoxx 600 Index, comprising 600 of the largest companies from European developed countries, has fallen -20% since peaking in April 2015 and is currently +6% off those August lows. It is very likely we revisit those lows at some stage over the next 1-3 months. A successful re-test will likely have us turning more positive on equities. However, should we break the August lows, we expect to see an acceleration in selling pressure for stocks. We are at a critical juncture now for the stock market.

 
 

Emerging markets have fared worst of all. Peak to trough, the MSCI Emerging Markets Index (below) has fallen -32% from the highs earlier this year in local currency terms. Many emerging market currencies (ex China) have also experienced punishing declines over the last 12 months. China accounts for 23% of the index, followed by South Korea (15%), Taiwan (13%), India (8%), South Africa (8%), Brazil (6%), Mexico (5%) and Russia (4%).

 
 

The Chinese stock market has already corrected -45% from the top in June and there is no evidence yet that this correction is over. The Latin American region is another basket case and is already fast approaching the 2009 lows experienced during the last financial crisis.

We continue to recommend a defensive position in the Active Asset Allocator of 20% equities / 30% bonds / 30% precious metals / 20% cash as we navigate an increasingly volatile market environment. 

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

Bond Market Update

 
 

We initiated a 5% position to inflation linked bonds in the Active Asset Allocator at the start of the year and will likely add to this position once it starts working for us. While deflationary fears persist in the marketplace, we believe they are already discounted in security prices. It therefore makes sense to us to begin to diversify our bond holdings ahead of the more inflationary future we anticipate. So long as inflation rises faster than nominal interest rates (thus causing real yields to fall), our inflation linked bonds will perform well for our clients.

 

 
 

We also bought a 5% allocation to Euro aggregate bonds, a mix of short duration government and corporate bonds, at the same time as we started our inflation linked bond position. The rationale is similar in that we want to diversify our bond holdings and reduce our interest rate exposure. We do not anticipate a significant rise in interest rates or bond yields in the years ahead but expect volatility to pick up, so we think it makes sense to reduce risk a little.

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

Gold Market Update

Gold priced in euros had a great start to 2015 rallying over +25% shortly after we increased our allocation from 20% to 30% in the Active Asset Allocator. The last few months however have been disappointing and Euro gold has given back a lot of its 2015 gain so far, but is still +5% since we took our overweight position.

 
 

We are now entering the most seasonally positive time of year for gold and expect to see higher prices over the next 4-6 weeks. If we do not get what we are looking for, we will be quick to cut back our allocation to our longer-term strategic weight of 20%. We are paying very close attention to the market action in the precious metals sector.

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

July 2015 Investor Letter

Active Asset Allocator Performance

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns  over time with a strong focus on capital preservation. We follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. We always invest with the primary trend of the market and do not follow a benchmark. Instead, we manage the market risk for our clients. Our strategy has returned 12.4% per annum net of fees since inception. Our active asset allocation approach is best illustrated in the following chart.

 
AAA Asset Allocation.jpg
 
 

Executive Summary

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

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

Stock Market Update

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

 
 

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

 
 
 

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

 
 

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

 
 

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

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

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

 
 

We remain defensively positioned in the Active Asset Allocator holding 20% equities / 30% bonds / 30% gold / 20% cash.

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

Bond Market Update

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

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

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

 
 

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

Gold Market Update

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

 
 

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

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

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

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

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

 

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

 
 

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

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

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.

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. 

 

 

 

 

 

 

 

September 2013 Investor Letter

Model Portfolio Update

Executive Summary

We are approaching the latter stages of this four year bull market in stocks and it has been quite a ride. The multi-year equity market rally has done its job. Investors have stepped back from the brink and have returned to the market in their droves, buying equity funds at a record pace in recent months. The model portfolio remains defensively positioned with an asset mix of 20% equities / 50% bonds / 20% gold / 10% cash. While the short-term performance of the model portfolio has been impacted, the current position is warranted given that stocks remain expensive, sentiment is at a bullish extreme and my technical indicators are advising caution.

Please feel free to add your comments and questions at the end of this report and I will reply to all as best I can.

Equity Market Update

Investor sentiment is back to levels that have marked stock market tops in the past and valuations are also stretched - the S&P 500 currently trades at 19 times 2012 net reported earnings. Stocks are more expensive now than they were at the previous peaks in 2000 and 2007. Today, there is over $8.0 trillion invested in US equity mutual funds and equity ETFs, which is 3.5 times more than the amount invested in cash, a new all-time record looking back over the past 30 years. The last time investors were buying stocks with such abandon was May 2007. At the peak in August 2000, the ratio was 3.1 times. We are not in a new secular bull market for stocks, so I expect this ratio to top out shortly, along with the stock market. Investor appetite for stocks should start to decline in the near future. Now is not the time to be fully invested.

The ratio of funds invested in US stocks versus cash has reached a new all-time record of 3.5 times.

Permission granted from Sentimentrader to reproduce this chart.

Hand in hand with the above measure of investor confidence, we also see a strong desire among stock market participants to embrace risk once again. The Risk Appetite Index comprises a mix of indicators that track investor risk appetite including credit spreads, stock and currency volatility and the relative performance of different stock market sectors. We have seen a big rise in risk-seeking behaviour in recent months.

Investor risk appetite is back to levels coincident with prior peaks in the stock market. Permission granted from Sentimentrader to reproduce this chart.

Last month I discussed some initial signs of technical deterioration for stocks as measured by the Advance / Decline Line. That weakness continues today so I want to include an updated chart in this month's Investor Letter. A quick recap first: the Advance/Decline 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 (rising A/D Line). However, late in every bull market, the number of stocks participating in each rally falls (falling A/D Line) until such a time that the trend peaks and reverses. We experienced a negative divergence in the A/D Line for months prior to the stock market peak in 2007 as fewer and fewer stocks participated in the rising trend. We are seeing the same behaviour today.

The Advance/Decline Line has not confirmed the recent high in the S&P 500. Fewer stocks are participating in the rising trend, which typically happens close to bull market peaks.

 

In August for the first time in over a year, my technical trend indicator tipped over into the red, breaking support at the long term moving average. While the technical trend has recovered somewhat in recent weeks, any additional sustained selling will tip the long-term moving average into a downward trend. Investors should take note of this early warning signal that the uptrend in the stock market is deteriorating.

The Technical trend is weakening.

Bond Market Update

Bond yields should continue to trend higher over time but are due a rest in the short-term after doubling from the lows in May.

In May of this year, the Federal Reserve hinted that they may consider tapering their purchases of US Treasury and mortgage backed securities in an effort to bring this $85 billion/month QE experiment to an end. That was enough for skittish bond investors to sell. The 10 year yield on US Treasuries promptly doubled (almost) from 1.6% to 3.0% in four short months. In September, Bernanke backed off of his grand plan, but US Treasury yields have only backed off by a mere 0.40%. The bond market has started to sense that something is wrong and Bernanke is worried. He knows he will have to start the taper some day. The Fed just can't just keep on printing $1 trillion/year without something bad happening.

So what does this mean for bond investors today?  Well, return expectations should remain low for starters and short term-bonds should be favoured over long-term bonds. High quality government and corporate bonds should be the preferred choice where possible. After a doubling in interest rates in recent months, chances are that interest rates won't travel much further north from here in a highly leveraged global economy. In any stock market correction, bonds will continue to provide short-term shelter and the risk of capital loss in a high quality short-term bond will be a lot lower than the risk of loss from an equity investment, no matter the quality. It is for this reason that bonds remain a core holding in the model portfolio.

 

Gold Market Update

Gold Cycle Count

 

The gold conundrum continues. Following an epic 11-year run, gold reached a peak of $1,921 in September 2011 and has been in correction more ever since. The bull market for gold is not over, so we should expect $2,000 and higher (possibly much higher) at some point in the future once the current correction ends. Gold bottomed in June 2013 at $1,180 and has been rallying sporadically since, trading at approximately $1,300 at the time of writing. The bull market is doing its job, throwing off the majority of holders. Even the long-term gold bulls are jaded with the market action. 

I continue to believe that gold is building a strong base and in its own good time, when least expected, gold will resume its bull market. 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. While no two bull markets are ever the same, I am expecting a strong second half performance by the precious metals as investors finally lose faith in the paper currency system and trust is restored in the ultimate foreign currency. Patience will be rewarded.

 

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.