March 2017 Investor Letter

Strategy Performance

 
 

Investment Philosophy and Approach

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

 
 

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

Executive Summary

The strong rally in growth assets and sharp decline in interest rates have pulled forward future expected returns to such a degree that a passive portfolio of stocks and bonds is now priced to deliver little more than 2% per annum over the next decade, down from 9% per annum in 2009. Despite this prognosis, many are bullish on the outlook for stocks this year. The USD also looks vulnerable. The US Dollar Index peaked in 1985 and 16 years later in 2001. Prior declines in the USD Index have coincided with bear markets in stocks. 16 years later in 2017, are we about to see currency and equity cycles turn lower again?

Inflation-linked bonds have quite attractive risk and return characteristics and often perform well at times when equities and fixed interest rate bonds are struggling; namely during periods when inflation is rising and/or economic growth is falling. Inflation-linked bonds can therefore provide attractive diversification benefits for multi-asset portfolios without impacting expected returns. The Active Asset Allocator currently holds a 15% allocation to inflation-linked bonds. Meanwhile on gold, this month I look at some of the developing bullish trends for precious metals in 2017. I remain defensively positioned for now with 20% equities / 40% bonds / 30% precious metals / 10% cash.

Gold Trader closed Trade 11 for a win and is now looking to enter Trade 12, a short position to catch the top of daily cycle 3 and the drop into the next daily cycle low. 

Stock Market Update

While historical returns on a traditional portfolio of 60% equities / 40% bonds are near all-time highs, forward-looking expected returns are near all-time lows. The strong rally in growth assets in recent years and sharp decline in interest rates have pulled forward future expected returns to such a degree that a passive portfolio of stocks and bonds is now priced to deliver little more than 2% per annum over the next decade, down from 9% per annum in 2009. Active asset allocation will become a key driver in delivering attractive returns for investors and the Active Asset Allocator is well positioned in this regard. Two asset classes which remain significantly under-owned that should outperform in a rising inflationary world are inflation-linked bonds and precious metals, discussed in more detail later in this report.

For now, the stock market continues its ascent, still untroubled by the many potential time-bombs ticking quietly away in the background. The Sell-signal triggered by my technical studies last October, shortly before the US election result, was negated in December, so the bullish trend continues for now. An ageing bull market, now the third longest in history, and record overvaluation in stocks however are holding me back from moving to a fully invested position at this time. The risks are just too high and I think the current rally is running on fumes. A couple more weeks of additional selling in the stock market will tip the scales once again back to full defensive mode. 

 
 

John Hussman of Hussman Funds provides an excellent weekly analysis of trends in the stock market and captures the extent of the current overvaluation in equities better than anyone else. His chart (below left) measures the market value of equity plus book value of debt (enterprise value) of US companies relative to their gross value-added; a variation on the price/earnings multiple. His chart shows that valuations today are more expensive than in 2007 and within a hair's breath of their all-time extremes in 2000. The percentage of bullish newsletter writers from the latest Investors Intelligence Survey is also back near all-time highs.

Newsletter writers at optimistic extreme.

US corporate earnings have stopped falling in the short-term, perhaps on the back of expectations that Donald Trump will get his tax reform and infrastructure spending plans approved. However, US earnings are still at the same level as they were in 2007 when the S&P 500 was trading in the 1,500's, 33% below yesterday's closing price. At current prices, the stock market is all risk, no reward.

 
 

A bell doesn't ring at the top, but Trump's recent failure to get his healthcare reform legislation through the House of Representatives could mark an important tipping point. The Trump rally may have finally ended and if that proves to be the case, stock market volatility should start to accelerate. The Vix Index, a measure of volatility in the stock market,  appears to confirm this view, bottoming at 9.97 on 1st February 2017 and has been creeping higher in recent weeks. 

 
 

The performance of the US dollar has also caught my attention. US dollar bulls are ten-a-penny these days and the long dollar trade is quite lopsided. You have to buy US dollars before you can buy US equities and money has been piling into both markets in recent years. If we are close to the end of the bull run in equities, money will flow out of US stock markets and US dollars at the same time. While euro-based investors have enjoyed the double benefit of rallying US stock markets and a rising USD versus EUR, the trend in both looks set to change. The US Dollar Index peaked in 1985 and 16 years later in 2001. Prior declines in the USD Index have coincided with bear markets in stocks. 16 years later in 2017, are we about to see currency and equity cycles turn lower again?

 
 

For now, I continue to maintain a defensive position in the Active Asset Allocator of 20% equities / 40% bonds / 30% precious metals / 10% cash. 

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

Bond Market Update

 
 

Inflation-linked bonds have quite attractive risk and return characteristics and often perform well at times when equities and fixed interest rate bonds are struggling; namely during periods when inflation is rising and/or economic growth is falling. Inflation-linked bonds can therefore provide attractive diversification benefits for multi-asset portfolios without impacting expected returns. Inflation-linked bonds tend to perform well when rising interest rates are driven by rising inflation expectations. They also represent quite an attractive alternative to fixed interest rate bonds in the current environment when nominal bond yields have already plunged to zero or below. While investors require nominal bond yields to fall deeper into negative territory to generate a positive return, inflation-linked bond returns, as the name suggests, are linked to the prevailing rates of inflation of countries issuing the bonds. If inflation happens to be higher than the nominal bond yield, then the real yield (nominal bond yield minus inflation) will simply be negative. Real yields can move to a negative extreme in a world of high inflation. The Active Asset Allocator currently holds a 15% allocation to inflation-linked bonds.

 
 

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

Gold Market Update

According to the World Gold Council, overall demand for gold increased +2% in 2016 from 4,216 tonnes to 4,309 tonnes. ETF inflows accounted for the majority of the growth, offset by jewellery demand and a reduction in central bank purchases. Demand for physical bars and coins was relatively stable over the calendar year. Gold prices ended the year +8% in USD and +12% in EUR having been +25% in USD for the year to 30th September 2016. Investment demand increased +70% to its highest level since 2012, while annual ETF inflows were the highest since 2009. 

Investment demand soared +70% in 2016. Global gold bar and coin demand was broadly stable. China increased demand by +25% while the demonetisation experiment in India led to a -17% reduction in the demand for gold.

Central banks bought 384 tonnes of gold in 2016, a third less than in 2015 and 32% below their average purchases of the past five years. Mounting pressure on central bank currency reserves was the culprit for the reduced demand. Russia, China and Kazakhstan were the main buyers in the market.

After a five year bear market, the gold bull looks like it has turned the corner. Gold has been in a declining trend relative to the S&P 500 since 2011. The double bottom over the last 12 months could signal the tide is turning in favour of gold relative to US stocks. The pattern is similar to that formed in 1999-2000, shortly before an epic bull run began.

 
 

The monthly gold chart looks bullish. Gold traded above the 20 month moving average for the majority of the bull run from $250 in 2001 to $1,923 in 2011. Today gold is trading at $1,255, above the 20MMA of $1,212. Gold still needs to navigate daily cycles 3 and 4 of the current investor cycle (we are currently mid-way through daily cycle 3) before the next big move higher. I expect the next investor cycle to kick off in May 2017 and if gold holds together until then, the move could be significant.

 
 

The silver chart looks more bullish than gold's. Silver broke above the 20MMA last year and has re-tested the trend line from above a couple of times since. Silver is leading the way and this is another positive for the precious metals market. The Active Asset Allocator currently holds a 20% allocation to the Central Fund of Canada (CEF), which currently holds a 61% allocation to gold bullion and 39% allocation to silver bullion. CEF trades at a -5% discount to the net asset value of the bullion held in the fund. This discount has narrowed from -8% at the start of the year.

 
 

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

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.

January 2016 Investor Letter

Active Asset Allocator Performance

performance table.jpg

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 +11% 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

Global stock markets are under increasing pressure. The S&P 500 has fallen -8% in the first three weeks of 2016, while technology stocks are -10% and small cap stocks -11% YTD. The internal structure of the market has also deteriorated with the number of stocks on the NYSE making new lows increasing significantly in recent weeks. In contrast, the Euro, bonds and gold have acted better and are showing positive returns YTD. Together, these account for 80% of the Active Asset Allocator, which has started 2016 +6% ahead of benchmark.

Government bonds continue to attract safe haven capital flows as stock market volatility persists. I expect gold to also step up as a safe haven asset in 2016 and outline a few more bullish developments this month for the metal, including a +27% increase in investment demand in the third quarter of 2015 and a +62% year/year increase in US consumer demand as recently reported by the World Gold Council.

Stock Market Update

2016 is off to a difficult start for investors. The S&P 500 has delivered its worst January month-to-date performance since its inception in 1923. The S&P 500, NYSE Composite and Dow Jones Industrial Average have all declined -8% in the first 10 trading days of 2016. Global equities in euro terms are -9% YTD. US Transportation (-11%), Technology (-10%), and Small Cap stocks (-11%) have fared even worse, increasing the likelihood that a full-scale bear market may now be in force. In contrast, the Euro, bonds and gold have each acted better and are showing positive returns YTD. Together, these positions account for 80% of the Active Asset Allocator. The S&P 500 closed Friday at 1,880, just 13 points above the October 2015 lows. The Index reached an intra-day lower low of 1,857 but stocks rallied into the close to end another difficult week. A lot of technical damage has occurred and it is now all for the bulls to prove.

 
 

Back in 2008, when the S&P 500 broke decisively below its 50 week moving average (50WMA), stocks sold off sharply but then rallied one final time to test the underside of the 50WMA before the real damage was done. This time around, we have already had one test of the 50WMA from below. We may get another shortly to reset sentiment, which has turned quite bearish in recent weeks (it looks like that this Tuesday morning), or we could just accelerate lower from here. For a rally to occur, the S&P 500 must hold 1,867. If the stock market spends too much time below 1,867, we could be in for trouble. The 50WMA is currently +9% above where the S&P closed on Friday. (US markets are closed on Monday 18th January in observance of Martin Luther King Day).

Outside of US large cap stocks, a lot of technical damage has already occurred. The Value Line Index (lower left chart), an equally weighted index of 1,700 US companies, formed a bull market top in April 2015 and has already declined -22%. The Russell 2000 Index (lower right chart) of US small cap stocks topped out two months later in June 2015 and has also fallen -22% in the intervening period.

The Dow Jones Transportation Average (DJTA), the oldest running stock index in the US (created in 1884 by Charles Dow), comprises 20 stocks in the transportation sector and is an excellent barometer of the health of the US economy. The DJTA has now fallen -28% since topping out in November 2014. The declining transport stocks and collapsing price of crude oil are discounting much weaker trading conditions in the US in the months/years ahead.

 
 

In my October 2015 Investor Letter, I noted that the number of stocks making new highs minus those making new lows had turned positive for the first time in many months and a consistent positive trend would allow me to become more constructive on the stock market. However, I needed to see more data before making that call. Over the following three months, the internal structure of the market deteriorated and the number of stocks on the NYSE making new lows increased significantly. I need to see new highs outpacing new lows before I can turn bullish on equities. In the meantime, I continue to recommend a defensive position in the Active Asset Allocator.

 
 

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

Bond Market Update

 
 

Government bonds continue to attract safe haven capital flows as stock market volatility persists. German 10-year bund yields have fallen -10 bps in 2016 YTD and have almost halved since peaking in June 2015 at 0.98%. Japanese 10-year bond yields have fully retraced their 2015 move, while UK and US 10-year government bond yields have also started trending lower again. If stock market weakness persists over the next couple of months, pressure will come on central banks to restart quantitative easing (printing money, buying bonds) and government bond markets may now be discounting this increasing probability.

German 10-year bund yield

Japanese 10-year bond yield

UK 10-year bond yield

US Treasury 10-year bond yield

High yield bonds continue to fall and are now -14% off their 2014 highs. Last year's divergence relative to equities provided a timely warning for investors that the market's risk profile was changing. Default rates across high yield bonds should spike before this move lower is done and we are not there yet. I expect more pain to come for high yield fixed income investors.

 
 

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

Gold Market Update

Gold in euros returned -0.8% in 2015. A mix of bearish sentiment and apathy continues to surround the sector. The stage is set for the gold bull market to return and there are many positive catalysts, but at the moment, Nobody Cares (This light-hearted presentation by Grant Williams, saved in the Research section of our website, does a very good job of outlining the bullish case for gold and is well worth 28 minutes of your time). I am expecting a trend change in 2016.

 
 

In his presentation, Williams refers to the Q3 2015 World Gold Council report on demand trends in the sector. The report highlighted a +27% increase year/year in overall investment demand for gold in the third quarter of 2015, a +33% increase year/year in bar and coin demand and a +62% year/year increase in consumer demand for gold in the United States in the same period. These are very significant numbers and if this trend continues, it won't take long for the bull market in precious metals to return.

US retail investment demand jumped to 32.7 tonnes generating growth of more than 200% year-on-year. This signaled both a level of interest in gold investment not seen since the global financial crisis, and a level of price awareness on a par with that of Indian and Chinese retail investors. Nowhere was this more clearly demonstrated than in the US, where the US Mint reported rocketing sales of gold eagle coins. Demand for gold was the highest for more than five years: in volume terms, sales hit 397,000oz.
— World Gold Council, Demand Trends Q3 2015

The +33% year/year increase in gold bar and coin demand is shown on a regional basis in the next table. China and the United States stepped up their purchases significantly in Q3 2015.

Physical bullion ETF's lost additional ounces (-4%) in 3Q 2015 but the trend has slowed significantly since the start of last year. Once investors start accumulating ounces in the main gold ETF's once again, the gold bear market will have finally ended. I am monitoring this situation closely.

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

December 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.

 
AAA Asset Allocation.jpg
 

Executive Summary

For the first time since 2010, the Active Asset Allocator has run a full calendar year without a single change to the asset mix. While not unprecedented, this is quite unusual and testament to the difficult trading conditions experienced this year. In 2015, regional stock markets were a mixed bag with the US -3%, Europe +4% and emerging markets -10% on average. Despite euro gold delivering a flat performance and EU government bonds +2%, the Active Asset Allocator is on track to deliver another positive year for investors; not quite 12% but positive nonetheless. I expect 2016 to be filled with opportunity for those of a patient persuasion. Until then, Happy New Year to one and all and my sincerest thanks for your continued support.

Stock Market Update

US stocks returned -3% on average in 2015, though the performance varied widely by sector. Large cap technology stocks for example returned +9%, while industrial company shares declined -2%. Stocks in the transportation sector sunk -18%, despite a -31% collapse in crude oil prices. Euro investors can add +10% to these returns due to the fall in the Euro versus the US dollar in 2015.

 
 

Despite pockets of strength in US stocks, I remain concerned about the broader outlook based on valuation and the deteriorating technical picture I see. Over the last 20 years, the S&P 500 has broken below its long-term 100 week moving average (100 WMA) on just four occasions. In 2000 and 2008, stock prices collapsed shortly thereafter. In 2011, after a battle, stocks recovered the 100WMA and went on to rally another +70%. In 2015, the S&P 500 has once again broken below the 100WMA and the battle is on. The 100WMA currently stands at 2,006 so a meaningful close below that level could spell trouble. This bull market in stocks is almost 7 years old now and approaching the second longest bull market in history (average: 3.8 years, median 3.6 years). Bull markets typically don't die of old age, but at the same time, they all must eventually end. 2016 is shaping up to be quite an interesting year.

Last month, I reviewed the chart of the Value Line Geometric Index, noting the deteriorating technical picture. Over the past five weeks, there has been no real improvement. This equally weighted index of 1,700 stocks is signalling that the US economy is at the very least, slowing down.

 
 

The same pattern is evident in the FTSE All World Index, my global stock market barometer. While some regions have performed well this year, particularly in Europe, due to the weaker currency (Eurostoxx 600 +7%, Germany +9%, France +9%, Italy +13%, Denmark +34%, Ireland +39%), in aggregate, the trend in the Index is down. Many Asian and Latin American stock markets have declined over -10% in 2015.

 
 

So, I remain cautious heading into the new year. This stock bull market is ageing and stock valuations are high relative to history. US corporate profits have peaked for this cycle. Margin debt has also peaked and is now in decline. Meanwhile, the Federal Reserve has no real room to cut interest rates to cushion the fall if stock markets roll over. Interesting times indeed.

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

 
bond yields.jpg
 

There is little to report in fixed income this month. Government bond yields have risen by 10-20 basis points in Germany and by 10 basis points in the United States, but only at the shorter end of the yield curve. This is in response to the Federal Reserve increasing short-term rates by 25 basis points earlier this month. While the Fed controls the short end of the yield curve in the US, the market determines long-term bond yields. Long-term bond yields have hardly budged in the US over the last month, increasing by just 3 basis points. 30-year yields have rallied by 10 bps in the UK and 20 bps in Germany since our last report and have actually fallen 11 bps in Japan over the same period.

The main story continues to be the slow motion deterioration in the high yield/junk bond market. Investors reaching for yield have invested in high yielding fixed income instruments including credit derivatives and below-investment grade bonds. The JNK ETF has already declined -11% from its recent peak compared to just -2% for the S&P 500. Much pain ahead for high yield investors.

 
 

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 started the year at €978 ($1,183) and is priced today at €976 ($1,062), so despite all the hoopla and bearish calls, euro gold has returned -0.2% in 2015. Gold is of course a core component of the Active Asset Allocator and a zero return hasn't helped much this year but gold will rally in its own good time and when the bull market resumes, the Active Asset Allocator will be ready. The patience of a saint is however required in the meantime. After a four year bear market, I think the wait is almost over.

 
 

What could be the spark that reignites the gold bull market? US dollar bulls today are ten-a-penny. Being bullish the USD is very much a consensus trade, particularly since the Federal Reserve has started to raise interest rates, while the ECB continues to talk the euro lower. However, all of this information is already in the price. Long USD and  long US equities are very much the same crowded trade and both may be about to reverse.

 
 

Looking back through history, the USD Index declined sharply in the lead up to the 1987 stock market crash. The USD Index fell sharply during the 2001/2 technology bust and again during the 2008 financial crisis.  It would surprise an awful lot of folks if the USD turned lower in 2016 in  tandem with a declining US stock market. This does not have to happen for gold to rise but it may drive new demand into precious metals by US investors if a protracted decline in the USD takes hold.

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

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.

September 2015 Investor Letter

Active Asset Allocator Performance

Investment Philosophy and Approach

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

 
 

Executive Summary

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

Stock Market Update

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

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

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

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

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

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

 
 

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

 
 

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

 
 

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

 
 

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

 
 

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

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

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

Bond Market Update

 
 

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

 

 
 

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

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

Gold Market Update

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

 
 

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

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

July 2015 Investor Letter

Active Asset Allocator Performance

Investment Philosophy and Approach

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

 
AAA Asset Allocation.jpg
 
 

Executive Summary

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

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

Stock Market Update

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

 
 

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

 
 
 

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

 
 

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

 
 

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

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

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

 
 

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

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

Bond Market Update

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

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

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

 
 

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

Gold Market Update

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

 
 

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

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

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

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

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

 

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

 
 

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

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

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.

March 2015 Investor Letter

Model Portfolio Update

Executive Summary

Currency swings are getting more violent, a clear sign of stress in financial markets, as central banks step up their efforts to intervene, all in the name of price stability. Of course, increased currency volatility has been a direct result of central bank intervention. With the Euro -25% in 12 months, systemic risks are rising and a market dislocation cannot be ruled out. Despite the escalating risks, equities continue to trade in bullish mode. In this month's Investor Letter we examine some potential chinks in the armor of the stock market.

The Active Asset Allocator is currently defensively positioned 20% equities / 30% bonds* / 30% gold / 20% cash. (Bonds now include euro government, corporate, inflation linked and absolute return bonds). We increased the allocation to gold in December 2014 from 20% to 30% and gold rallied +20% the following month in euro terms.

Stock Market Update

While stock markets were surging higher back in 2007, three technical indicators were diverging and signalling potential trouble ahead. The Relative Strength Indicator (RSI) and Moving Average Convergence Divergence (MACD) Indicator shown at the top and bottom of the following chart were both losing momentum, making lower highs and lower lows for much of 2007 despite rallying stock prices, suggesting that the underlying trend of the market was weakening. (The third indicator of course is our own Technical Trend Indicator, which forms the basis of the decisions we take in our Active Asset Allocator investment strategy). Both indicators of course proved prescient as stock prices tumbled in 2008.

 
 

Roll forward to today and we may have a similar set up. Global stock markets, measured by the FTSE All World Index above, peaked at 286.09 in September 2014, declined in October 2014 and then made a slightly higher high in February 2015 at 286.34. Today, FTSE All World Index trades at 282. Note however, that the technical indicators, the RSI and MACD, are diverging again. Both have been unable to confirm the recent highs in the stock market. If this internal market weakness persists for much longer, we could experience an acceleration in selling in the stock market. Our own technical trend indicator is also only a couple of days away from delivering another "All Market Sell Signal". We therefore remain defensively positioned in the Active Asset Allocator, holding 20% equities, 30% bonds, 30% precious metals and 20% cash.

 
 

On a regional basis, stock market performance has varied widely, depending on which currency is used as the denominator. Currency swings are getting more violent, a clear sign of stress in financial markets, as central banks step up their efforts to intervene, all in the name of price stability. Of course, increased currency volatility has been a direct result of central bank intervention. With the Euro -25% in 12 months, systemic risks are rising and a market dislocation cannot be ruled out. Despite the escalating risks, equities continue to trade in bullish mode

Since January 2014, the clear stock market winner has been the United States, where the S&P 500 (below left) has rallied +15% while the USD has also gained +26%, providing a double win for non-US investors. The S&P 500 chart in euros now looks parabolic in its rise (below right). Currency volatility is distorting the investor decision-making process and leading to mis-allocations of capital. This will not end well. 

In addition to the overvalued and overbought nature of the US stock market, long USD is now also a very crowded trade. At some point soon, US equities and the USD will both turn lower and non-US investors will suffer a double hit. We continue to advise caution for now.

 
 

Closer to home, the Euro has lost a full -25% of its value in a little over a year, a staggering move (Thank you Mr. Draghi). EU stocks have so far been able to offset those currency losses, albeit to differing degrees. Since January 2014, the Eurostoxx Index has returned +24%, Germany +26%,  France +20%, Italy +12% and Spain +12%. If you are a non-Euro investor however, and you have not hedged your currency exposure, your net return from investing in the EU stock market has been, at best, zero.

The rally in the USD (and plunge in the EUR) has been relentless without any kind of correction in over twelve months. I am expecting a "sell the news" event that puts at least a short-term top in the USD (and bottom in the EUR) as Fed Chair Janet Yellen steps up to the microphone and once again announces she will think about raising rates from zero to 0.25%. When stock, bond and currency markets catch on to the fact that the Federal Reserve is trapped there will be hell to pay, but that is tomorrow's news. Today, investors appear unconcerned.

It is interesting to note that, while US and EU stock markets have been ripping higher, emerging market equities have not participated in the cyclical bull market in stocks over the past five years. Emerging markets have been consolidating in a relatively tight range over that time. A break higher would be a bullish development and likely cause us to add an allocation to EM in our Active Asset Allocator investment strategy. For now, we watch and wait.

 
 

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

We continue to operate in an environment of low inflation and modest economic growth in the Eurozone, which supports our continued positive outlook for Eurozone government bonds. The ECB is also helping our cause, printing €60BN / month and buying bonds of EU member states in an effort to fulfill their price stability mandate.

Yields on AAA and AA EU government bonds have reached record low levels and have moved below zero for 2 and 5 year bonds in Germany, Netherlands and Austria. We believe there is still scope for peripheral EU bond yields to fall and prices to rise. The performance and asset distribution of the iShares Euro Government Bond Fund ETF in our Active Asset Allocator strategy is summarised below.

Our smaller allocation to EU corporates and inflation linked bonds offer some additional protection in the form of a higher yield for corporates and inflation protection in the index-linked fund. However, these holdings are more short-term tactical positions rather than long-term holdings, as we continue to wait for a lower-risk entry to the stock market.

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

Gold Market Update

The USD surge (and EUR plunge) has been one of the most violent on record since the Euro started trading on world financial markets on 1st January 1999 (at €1.00 / $1.1743). The Euro is now approaching oversold levels on a technical basis (MACD and RSI) and we should expect a rally in the EUR from here.

 
 

Commodities have borne the brunt of the USD rally over the past 18 months but are now trading at long-term support. The CRB (Commodities Research Bureau) Index for example is priced at a -20% discount today to the price it reached all the way back in 1996. Despite the US central bank printing trillions of USD in the intervening period, investors continue to focus on deflation as their main concern.

 
 

We are getting close to the inflection point when inflation rather than deflation becomes the key focus for investors. This is why we own gold in the Active Asset Allocator. Despite the correction in 2013, gold (priced in euros) continues to be the stand out performer relative to equities and bonds since 2007. Gold also provides an excellent hedge during difficult, volatile markets. 

We increased our allocation to gold in the Active Asset Allocator in December 2014 and caught the +20% surge in Euro gold in December and January. Now that the USD has potentially topped, we are looking for gold to make its move. If we don't get what we are looking for, we cut back our allocation to precious metals accordingly, but for now, we are happy with our positioning and remain patient for gold to show its hand.

 
 

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