March 2016 Investor Letter

Active Asset Allocator Performance

Investment Philosophy and Approach

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

 
 

Executive Summary

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

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

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

Stock Market Update

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

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

 
 

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

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

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

 
 

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

 
 

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

Bond Market Update

 
 

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

 
 

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

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

 
 

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

Gold Market Update

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

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

 
 

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

 
 

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

February 2016 Investor Letter

Active Asset Allocator Performance

Investment Philosophy and Approach

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

Executive Summary

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

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

Stock Market Update

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

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

 
 

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

 
 

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

 
 

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

 
 

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

 
 

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

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

Bond Market Update

 
bond yields.jpg
 

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

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

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

Gold Market Update

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

 
 

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

 
 

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

 
 

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

 
 

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

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

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.

May 2015 Investor Letter

Active Asset Allocator Performance

Executive Summary

The S&P 500 has only managed a +2% gain since peaking in late 2014 and with the recent move higher, volume is not following price.  Since December 2014, in the weeks when the S&P has declined, volume has increased, while in the weeks when the S&P has advanced, volume has declined (reflecting fewer buyers willing to participate in the move). The global stock market benchmark - the FTSE All World Index - is also flashing some cautionary signals of note. In addition to a stock market update, we cover the recent decline in bonds this month and provide an update on a potential significant turning point for USD and gold later in 2015.

Stock Market Update

We are transitioning from a strong uptrend in US stocks to sideways, range trading with a lot of whipsaw moves to frustrate latecomers. This is the hallmark of a late-stage bull market. The S&P 500 has only managed a +2% gain since peaking in late 2014 and with the recent move higher, volume is not following price.  Buying volume is, in fact, falling as the market rises now and rising as the market declines. This is a troubling development. In fact, since December 2014, in the weeks when the S&P has declined, volume has increased from the prior week by approximately 350 million shares. In the weeks that the S&P has advanced, volume has declined by an average of 565 million shares (hat tip John Hussman for that factoid: www.hussmanfunds.com). While US stock markets appear at first glance to be on a relatively firm footing, smart money is exiting under the radar.

 
 

There are several divergences cropping up that are notable. The economically sensitive index of US transportation companies, the Dow Jones Transportation Average, is lagging and has returned -9% since peaking in December 2014.

 
 

Small companies measured by market capitalization  and Utility stocks in the US are also lagging. The Russell 2000 Index  has not confirmed the recent marginal highs in the S&P 500 this month, while the Utilities have already declined  -10% since January 2015.

The picture is a little brighter for European stocks thanks to a -25% collapse in the EUR versus the USD over the last 12 months. Currency effects however are transitory. Valuation and fundamentals always matter in the end. So, while we note pockets of strength in certain stock markets around the world (Germany, France, Italy, Spain, Japan, China), in aggregate the picture is one of a weakening trend. This is perhaps best captured by a chart of the FTSE All World Index, the global stock market benchmark for active global equity fund managers. The chart today looks remarkably similar to the setup in 2007 when global stock prices reached marginal new highs but technical indicators were flashing warning signals as momentum deteriorated for months before price followed lower with dramatic effect. We are not saying that the same outcome will occur this time, just that it could and we prefer to be defensively positioned ahead of time.

 
 

We are looking forward to the day when we can get bullish on stocks again; bull markets are more fun. For now, however, we remain defensively positioned 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

The bull market in bonds won't last forever, but we don't think it is over just yet. In the last few weeks, bond investors had an uncomfortable new experience; five, ten and thirty year yields all actually went up and correspondingly, bond prices declined. German 10 year yields shot up by +800% in just 17 trading days from 0.08% to 0.72% before settling back to 0.60%, which is where the German 10-year lies today. The ECB was quick to respond to the mini bond market revolt saying they would accelerate their purchases of core Eurozone government bonds in the months ahead. The time is now at hand for the ECB President to act on his promise.

 
 

The rally in US 30-Year yields from 2.22% to 3.10% was modest by comparison at 'just' +39%. The rally (and decline in bond prices) also looks to us like it is over for now. If we start to see some selling pressure in stock markets, bonds should perform relatively well. We will be watching closely to see if the trend of higher highs in bond prices (and lower lows in yields) continues over the Summer months.

 
 

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

Gold Market Update

Gold continues to build a base either side of $1,200, frustrating both bulls and bears, while gold priced in EUR has a more bullish chart. The stage is set for gold to rally sharply later this year, once the USD has finished its relentless run higher. However, gold investors may have to endure one more head-fake move, where USD gold breaks below the recent lows of $1,130, causing the last remaining bulls to capitulate, before the real move higher can commence. It doesn't have to happen this way, but following a 3-4 year bear market, we often see one final   false breakdown that causes the last remaining bulls to capitulate, before the real move higher gets going. 

 
 

How much gas has the USD left in the tank? The next chart may provide a clue. The USD Index has a tendency to peak every 15-16 years. It happened in 1985 at the Plaza Accord and again in 2001 at the top of the tech/telecom stock market bubble. This coincided with the start of the gold bull market. Roll forward another 15 years and you get to 2016. This is what makes the recent USD surge all the more interesting. We could be fast approaching a major peak in the USD that also coincides with the 6-year cyclical bull run in stocks (and maybe bonds too) and bottom in commodities and precious metals. The next major top in the USD and bonds and bottom in gold could be very significant turning points. Gold investors must not get shaken out of positions in the meantime. Patience should be rewarded later this year.

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

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.

September 2014 Investor Letter

Model Portfolio Update

AAA Performance June 2014.jpg

Executive Summary

Our model portfolio overweight position in bonds has worked well this year but the time has come to bank some profits and shorten the duration of the bonds we hold. The end of this multi-decade bull market in bonds is finally coming into view. German 10 year yields have reached 0.89%, while Dutch 10-year yields are trading at 500 year lows. There simply is little room left for yields to fall and therefore limited upside for bond prices. As a result, we are making the first change to our model portfolio in quite some time, introducing a 30% allocation to absolute return bonds. To fund this position, we are reducing our existing bond allocation by 20% and also investing 10% from cash. The model portfolio is now invested 20% equities / 30% 5+ year Eurozone government bonds / 30% absolute return bonds. / 20% gold.

Equity Market Update

Equities continue to trade in almost bullet proof fashion, ignoring all negative news, from QE tapering in the US to increasing political instability across much of Europe. The US stock market is leading the charge and the S&P 500 today is making new all time highs. Investor complacency is running high. Despite an ageing bull market, there are some short-term reasons for optimism, albeit largely technical in nature. For example, our Technical Trend Indicator continues to give the all-clear for stocks. Every touch of long-term support has been met with more investor buying. As long as this trend continues, equity investors should reap the rewards. However, with equity market valuations running high and investor sentiment quite frothy, equity investors should remain on red alert for any sign of deterioration in the technical trend of the market. 

 

In another positive development, our Most Active Stocks Index Advance/Decline Line remains firmly in bull mode and our Large Cap Breadth Index Advance/Decline Line could be breaking out to the upside again, reaffirming the recent strong trend higher for stocks.

 

However, despite the above short-term positive developments, we remain defensively positioned and patiently await the next correction in risk assets to take effect. While timing the next market decline is always difficult, a study of market history suggests that we may not have too long to wait.

  • Historically, 5% corrections happen in stock markets every 7 months. The last one happened in January 2014, 8 months ago.

  • Historically, 10% corrections occur every 26 months. We witnessed the last 10% correction in April 2012, 29 months ago.

  • Historically, 20% corrections occur every 45 months. The last 20% correction ended in March 2009, 66 months ago.

The latest Investors Intelligence Sentiment Index is also revealing in that it has reported the lowest percentage of investment strategists with a bearish outlook since 1987, with a reading of just 13.3% bears. Investor sentiment readings also reinforce our defensive position for now.

 

As we enter third quarter earnings season in the United States, companies reporting earnings will also have to contend with a strongly appreciating US dollar, which will negatively impact profits earned abroad, when translated back to the domestic currency. The US dollar has rallied +6% versus the euro in the last three months and has experienced a similar sharp appreciation versus the Japanese Yen and Australian dollar. For now, we are happy with our current allocation in the model portfolio.

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

Bond Market Update

Our overweight Euro zone government bond position in the model portfolio has worked out very well this year. With no growth or inflation in sight, EU bonds have rallied sharply in 2014, driven higher by defined benefit pension schemes across the continent seeking to buy long duration bonds to match their ever-growing pensioner liabilities and also by EU banks leveraging up customer deposits and buying bonds in a reach for yield. 

However, the time has come to cut this position and shorten the duration of the bonds we hold. We don't want to outstay our welcome. The end of this multi-decade bull market in bonds is finally coming into view. German 10 year yields have reached 0.89%, while Dutch 10-year yields are trading at 500 year lows. There simply is little room left for yields to fall and therefore limited upside for bond prices. As a result, we are making the first change to our model portfolio in quite some time, introducing a 30% allocation to absolute return bonds.

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

Gold Market Update

As long as equities continue their cyclical bull market, there will likely be little interest in or demand for insurance in the form of gold. That has been the case since late 2011 and gold delivered its first negative return last year for euro investors in thirteen years! Gold's time has not yet come but it will and when it does I expect fireworks in this sector. Until then, we must remain patient.

In the short-term, euro investors in gold are getting some reprieve from the strong rally in the US dollar versus the euro, as year to date, euro gold (black and red line on chart below) is +9% while gold in USD is just +1% higher (grey line on chart below). 

 

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

April 2014 Investor Letter

Model Portfolio Update

Executive Summary

I presented at the Irish Association of Pension Funds (IAPF) annual investment conference in the Convention Centre last week and will post a copy of my presentation to the website shortly. While my presentation was targeted towards defined benefit pension scheme trustees, you will be familiar with many of the investment themes I discussed.

We are now one quarter way through 2014. The economic climate continues to improve but this has already been discounted by the equity market. Stock valuations are expensive and we are long overdue a correction. Our defensive position has been rewarded so far in 2014 as gold and bonds have outperformed stocks year to date. I expect this trend to continue as the year progresses. If you would like to learn more about the services we provide, please contact Brian Delaney at 086 821 5911.

Equity Market Update

It's déja vu all over again. For the third time in a little over a decade, we have returned to bubble-like valuations and sentiment readings in the stock market. Investors are once again being lured into paying huge premiums for low quality new issues. Investment banks are lining up to take advantage of soaring prices and speculative demand. In the September 2013 to March 2014 period, three quarters of all IPO's announced in the US were of money-losing businesses. Only in 2000 did we see a greater number of unprofitable businesses taken public. Already this year, we have seen 42 initial public offerings (IPO's), matching the prior peak in 2007 just before the last bubble burst. Private company executives are once again enthusiastically selling their shares to an unsuspecting public and heading for the exits. Again, only in 2000 did the number of IPO's eclipse the current tally.

 

In another perfect example of the current speculative mood, Facebook recently agreed to pay $19 billion for the free messaging service Whatsapp, a company with 60 employees and no revenues. I am sure Mark Zuckerberg has big plans for Whatsapp, including selling a lot of advertising to its 190 million users and perhaps charging an annual fee to use the service. It might work, but would you pay for 'Whatsapp' if you could download 'Telegram' for free? Telegram is one of a number of similar free messaging services that is growing rapidly and offering essentially the same service as Whatsapp with a few extra bells and whistles. Zuckerberg will have his work cut out for him to make his latest purchase work out.

Central banks have successfully spiked the punch bowl, suppressing interest rates and volatility, and driving investors once again to speculate, taking uncomfortable levels of risk. On almost any metric, the US equity market is historically quite expensive. There is a growing gap between the financial markets and the real economy. The trend is still up for stocks and as the music continues to play, market participants continue to party like it's 1999. However, at some point in the not too distant future, the music will stop and the trend will turn. Investors will experience another harsh lesson as their unrealised profits turn to losses. Capital preservation will become the name of the game once again and dreams of untold riches from stock market speculation will fade into distant memory. Not yet, but soon.

Some of the smartest money managers I know are currently holding 50% of their portfolio in cash. 50%! Despite the exuberance that has returned to stock market investing in the past 12 months, there is actually plenty about which to be concerned. One example is the recent survey of U.S. investment newsletters by Investors Intelligence, which identified the lowest proportion of bears on the stock market today since the ill-fated year of 1987.

 

In another example of bull market exuberance, leveraged loan issuance by banks is now surging. Banks are lending to low grade corporates with abandon and re-packaging those loans in high yielding ETF's, which investors are snapping up. The next chart shows the three-month sum of leveraged loan issuance versus the price of the S&P 500. The last few times the S&P suffered corrections, it coincided with a run-up in leveraged loan issuance. It also happened at the peak in 2007, but to a much small degree than today. The past three peaks saw total issuance of between $150 - $200 billion during the prior three months. Today, this figure is $487 billion, double the previous peak! 

 

Needless to say, we remain cautious in our investment outlook and our model portfolio continues to reflect this view with an allocation of 20% stocks, 50% bonds, 20% gold and 10% cash. There is a time to swing for the fences and a time for capital preservation. Today, we believe it is time for the latter.

Bond Market Update

Bond Yields.JPG

Eurozone government bonds have continued to perform well +5.8% year-to-date, justifying our overweight position in this sector. Despite the volatility, equities are only +1.3% over the same period. Our allocation to bonds is very much a tactical call and I want to make sure that we don't outstay our welcome here. However, over the next three to six months, bonds should continue to act as a safe haven asset, particularly if equities turn lower, which is what I expect will happen. 

Euro AAA bonds are currently yielding 1.1% and have a duration of approximately 7 years, which means that a 1% change in interest rates will change the value of your AAA bond investment by 7%.  Japan endured a 20 year deflationary crisis and Japanese 10 year yields bottomed at 0.50%, so Euro AAA bond yields can probably only decline by another 0.60%, meaning there is probably only 4-5% upside and multiples of that risk to the downside; a poor long term investment. However, the bonds we currently hold as a tactical position are a broader mix of Eurozone government bonds that currently yield 2.3% with a duration of 9 years. Again, we are only holding these bonds as a defensive position as stock markets appear ready to roll over.

Gold Market Update

Gold continues to show encouraging signs that its multi-year bear market is over and its bull market is about to resume. Gold bottomed in June 2013 at $1,179, rallied +22% and then declined to re-test the lows in December 2013 bottoming at $1,181. Gold shot out of the blocks in 2014 rallying over $200 to $1,392 and is now consolidating those gains. Gold is not out of the woods yet. Only a clear break and hold back above $1,525 will confirm the bull market is back. Until then, patience is warranted. 

 

The gold mining stocks continue to confirm the short-term bullish outlook for the precious metals. The gold mining stocks ETF GDX made a low of $22 in July 2013 and a lower low of $20.18 in December 2013 but on significantly lower selling pressure (MACD). The sellers are exhausted and I'm not surprised after a 70% peak to trough decline. The trend lower looks to be turning. If this is the case, the miners will become very profitable investments over the next couple of years.

 

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

November 2013 Investor Letter

Model Portfolio Update

SI Performance.JPG

Executive Summary

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

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

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

Equity Market Update

Equity market cycle count

"We are in the middle of a kind of bubble market and when they prick the bubble, there will probably be a pretty bad reaction. "
Julian Robertson, hedge fund manager, October 2013.

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

Bond Market Update

Bond market interest rates

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

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

Gold Market Update

Gold market cycle count

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

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

Fundamental Case

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

Technical Case

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

Sentiment

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

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