November 2015 Investor Letter

Active Asset Allocator Performance

Investment Philosophy and Approach

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

Executive Summary

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

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

Stock Market Update

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

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

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

 
 

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

 
 

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

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

Bond Market Update

 
 

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

 
 

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

 
 

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

 
 

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

Gold Market Update

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

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

 
 

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

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

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

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

October 2015 Investor Letter

Active Asset Allocator Performance

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Investment Philosophy and Approach

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

 
 

Executive Summary

The Active Asset Allocator is on track to deliver another solid return in 2015 +5.8% YTD in what has been quite a volatile market so far this year. Our proprietary investment tools have helped us navigate the market uncertainty with a degree of confidence. The technical set up of the stock market has improved in recent weeks, though we continue to advise caution in the near-term. Financial engineering has put a gloss on corporate earnings that we believe is unsustainable. 

Despite record low yields, we believe there is still room for government bond yields to fall over the next 12 months. We also provide our updated views on inflation and inflation-linked bonds this month. Rising inflationary pressures have not been lost on the precious metals market and we believe gold is waking up from a four year slumber. Gold has a tendency to move in 7-8 year cycles and we could be about to embark on a new multi-year bull trend for precious metals. 

Stock Market Update

Our Technical Trend Indicator (TTI) has kept us on the right side of the primary trend of the stock market and cautioned when to step aside ahead of major stock market corrections. The TTI has been an invaluable tool in our investment toolbox. A history of TTI buy and sell signals are overlaid on a chart of the S&P 500 Index below.

 
 

Today, our trend indicator (lower left) is still in defensive mode, but has worked its way back towards neutral with the recent rally in the stock market. The number of advancing versus declining stocks has turned up recently, driving some of the improvement in the technical set up of the stock market, though the longer-term trend still remains down. 

The number of stocks making new highs minus those making new lows has also turned positive for the first time in many months. A consistent positive trend here will allow us to become more constructive on the stock market, but we need to see more data before making that call.

 
 

In addition to the above indicators, we pay attention to the percentage of stocks trading above their 200 day moving average to gauge the overall health of the market. In rising markets, at least 50% of the stocks trading on the NYSE trade above the 200DMA. When this percentage falls below 50%, stocks tend to struggle. Today, we only have 36% of stocks trading above their 200DMA. This chart needs to repair itself quickly or the path of least resistance will turn lower again shortly.

 
 

While it is possible that stocks consolidate their recent gains in the weeks ahead and break out to new highs, this is not our current expectation. US companies reporting third quarter 2015 earnings are not delivering much in the way of positive news. Alcoa for example recently kicked of earnings season in the United States with somewhat disappointing news and their shares were clubbed for -10%. Walmart, considered a bellwether for the US economy, also provided a reality check for those with a bullish bias, delivering quite a sobering outlook for 2016 on their quarterly analyst conference call. WMT shares have plunged -36% so far this year. Financial engineering has put a positive gloss on corporate earnings in recent years but that trend can only last for so long. 

 
 

Regular readers will know that we are watching the performance and chart pattern of the FTSE All World Equity Index with interest. This global equity benchmark for fund managers around the world continues to track the 2007/8 stock market top in an eerily similar fashion. We have experienced a sharp selloff in the stock market and are now rallying off the August lows. The bulls will argue we have had our 10% correction and come through October relatively unscathed, so it's off to the races for the rest of the year. We take a more sanguine view. Given that the global economy is slowing and corporate earnings have been relatively disappointing, there is quite a disconnect in the market today between expectations and reality. We remain defensively positioned in the Active Asset Allocator for now, 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

 
 

You have to pay the German government 0.26% per annum to take your money for two years and can earn just 0.57% per annum on a 10 year German bond. A 1% rise in German bond yields will eat up over a decade's worth of income. Irish 2 year government bonds are also sporting a negative yield, despite an economy that is growing at a rate of 6% in 2015. Today, Germany, France, Finland, Ireland and Sweden all have negative government bond yields out to four years. 

Despite record low yields, we believe there is still room for government bond yields to fall and prices to rise. By the time the ECB has finished its QE government bond buying programme, we could see negative 10-year yields across many of the core EU government bond markets, while government bond yields in the EU periphery move closer to zero. EU government bonds should also benefit from the flight-to-quality trade on the next stock market correction. As always, we will be guided by the price action of the fixed income markets we follow. 

 
 

In our active asset allocation strategy, we have begun to rotate away from long duration government bonds - reducing the allocation from 30% to 20% in November 2014 - into a mix of shorter duration EU government and corporate bonds (+5%) and EU inflation-linked bonds (+5%) and will continue this process in 2016. Given the collapse in crude oil prices in 2015, inflation expectations are relatively benign this year but many market forecasters are increasing their inflation estimates for 2016. JP Morgan for example is expecting inflation to rise in Europe from 0% this year to 1.0-1.5% in 2016.

 
 

The iShares Euro Inflation Linked Bond ETF has begun to price in a more inflationary environment for 2016, rallying +4% from the July lows. Inflation linked bonds should outperform fixed interest rates bonds in periods of rising inflation and deliver positive returns should inflation rates increase at a faster rate than anticipated by the market. We are well positioned to capture this trend with allocations to ILB's and precious metals in the Active Asset Allocator.

 
 

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

Slowly but surely the gold market is waking up from a four year slumber. Euro gold rallied +28% from the November 2014 low, then corrected by -17% earlier this year. Euro gold has added another +10% in recent months and we believe this uptrend is just getting started.

 
 

Gold has a tendency to move in 7-8 year cycles and we could be about to embark on a new multi-year bull trend for precious metals. Certainly, the combination of a weakening global economic growth outlook, zero-to-negative interest rates, record loose central bank monetary policy, rising political tensions in between West and East and rising demand for a scarce resource that has been considered money for thousands of years, all combine to set the stage for an explosive rally in the precious metals sector.

 
 

While gold in US dollars has rallied +9% since the July 2015 lows, the gold mining companies have reacted much more favourably, which should be expected as the miners really are leveraged plays on the price of gold. The most popular ETF of gold mining stocks, GDX is +27% over the same period while certain mining companies have performed even better: Agnico Eagle (AEM), Yamana (AUY), Novagold (NG) and New Gold (NGD) to name a few. Caution is warranted however. We have seen this movie many times before over the last four years. Miners need to continue their current form for quite a few months yet before we can be confident that the bear market in precious metals is behind us.

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.

 
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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.

June 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 12.6% per annum net of fees since inception. Our active asset allocation approach is best illustrated in the following chart.

 
 

Executive Summary

Stocks are little changed since our last Investor Letter but under the hood, we note a deteriorating picture. The FTSE All World Index looks to be tracing out a topping pattern, while our own studies show that the technical trend is breaking down. Opportunities in fixed income may present themselves later this year in both fixed and inflation linked sectors if yields continue to back up over the summer. Meanwhile gold continues to frustrate the bulls and bears alike and sentiment for the precious metals is as bad as I have ever witnessed. Despite this picture, gold in Euro terms is +7% YTD. 

Stock Market Update

We continue to experience pockets of strength in certain regional stock markets around the world - Japan, the Eurozone and China to name three - but the broader picture is one of consolidation and range trading. Japanese and Eurozone stock markets continue to rally following sharp currency declines (JPY -40%, EUR -25%) and the Shanghai stock market trades as if on steroids, +158% in 12 months, before declining -13% last week (That could be it for the Shanghai stock market for 2015). The bigger picture however, is less certain.

 
 

The S&P 500 continues to trade in a tight range and has corrected by just 3 points or -0.1% since last month's investment update while the FTSE All World Index (below) has fallen just 2 points or -0.7% over the same period. This global stock market benchmark continues to track the 2007-2008 market top pattern with uncanny similarity - marginal new price highs combined with slowing momentum and weaker internal market strength. We continue to pay very close attention to this chart formation, particularly as stock market valuations are quite stretched and investor confidence is running high, a dangerous combination. This chart may repair itself with price breaking higher on strong volume, but until this happens, we remain guarded.

 
 

In tandem with the potential topping pattern in the FTSE All World Equity Index, some of our own studies also show that the technical trend is potentially breaking down here. Our Technical Trend Indicator is once again trading below its long-term moving average while our Large Cap Breadth Index has been in a downward trend since April.

Valuation is not a timing tool but any sensible valuation metric today indicates that, after a 200%+ run, stock market valuations have entered elevated territory. The value of US corporate equities for example relative to the value of the US economy has stretched to two standard deviations above the long term mean, as illustrated in the next chart. Now is not the time to be swinging for the fences. So, we remain defensively positioned for now in the Active Asset Allocator 20% equities / 30% bonds / 30% gold / 20% cash.

 
 

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

Following a sharp appreciation in price and decline in yields across government bond markets in 2014, yields have begun to rise in 2015 in a mean reversion trade. The trend higher may persist a while longer but 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.

Before the credit crisis, 10-year Eurozone nominal government bond yields traded in the 3-4% range while inflation was running at approximately 2% per annum. Real yields (nominal yields minus inflation) therefore were positive 1-2%. As interest rates were pushed lower after the financial crisis below the rate of inflation, real yields turned negative. In this environment, inflation-linked bonds have delivered positive returns.

Today, nominal government bond yields are 1-2% and inflation remains sticky at 2% so real yields have broken below zero. We anticipate this trend in negative real yields will accelerate over time as nominal yields are kept low via continued central bank buying, while inflation rates begin to rise, a byproduct of years and trillions of dollars, euros and yen of QE. Real yields have the potential to fall by 3-5% over time, which would deliver a 20-35% return on an inflation linked bond fund with a duration of 7 years. We will look to increase the allocation to inflation linked bonds later in 2015 if real yields climb a little higher than current levels.

 
 

Gold Market Update

Gold has a tendency to move in 8 year cycles. Gold declined in price from 1993 to 2000 before the secular gold bull market began in earnest. Gold traded aggressively higher from 2000 to 2007 before correcting and consolidating as the tail end of the equity bull market before we had the financial crisis. Gold's next eight year cycle began in 2007 and is getting long in the tooth. Gold may already have bottomed or we could be set for one final push lower this summer before the next eight year cycle commences.

 
 

The almost four year correction in precious metals has certainly taken its toll. Sentiment is as bearish as I have ever seen it in my 12 years analyzing and investing in this sector. I can't find a single gold bull no matter where I look (apart from the good folks at GoldCore in Dublin). Share prices of the Gold mining companies have fallen by 70-90% in many cases and a growing number are facing bankruptcy. Despite the negative sentiment, gold has delivered a better return than either equities or bonds since before the financial crisis. Gold has actually only had one negative year since the bull market started in 2000.

Where to from here? Of course, I cannot guarantee that the bottom is in and we may experience lower lows this summer in USD terms. In fact, the 50% retracement of the entire bull market from $250 in 2000 to $1,923 in 2011 is $1,088, about -7% below the current gold price.

 
 

If gold breaks lower and trades down towards $1,088, I would expect to see an equivalent rally in EUR/USD, from $1.12/€1.00 towards parity. Euro gold investors would gain on the currency what they lose on the asset price decline and thus experience a minimal drawdown. For now, I will continue to hold a 30% allocation to precious metals in the Active Asset Allocator as I expect we are close to, if not already past, the 8 year cycle low. Of course, I continue to monitor the situation closely.

 
 

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