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.

October 2015 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 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.

June 2015 Investor Letter

Active Asset Allocator Performance

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns  over time with a strong focus on capital preservation. We follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. We always invest with the primary trend of the market and do not follow a benchmark. Instead, we manage the market risk for our clients. Our strategy has returned 12.6% per annum net of fees since inception. Our active asset allocation approach is best illustrated in the following chart.

 
 

Executive Summary

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

Stock Market Update

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

 
 

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

 
 

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

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

 
 

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

Bond Market Update

Following a sharp appreciation in price and decline in yields across government bond markets in 2014, yields have begun to rise in 2015 in a mean reversion trade. The trend higher may persist a while longer but we do not anticipate the recent spike in yields to be the start of a strong persistent uptrend.  Sub-par economic growth and a multi-year debt deleveraging cycle should keep downward pressure on bond yields for some time to come.

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

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

 
 

Gold Market Update

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

 
 

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

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

 
 

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

 
 

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