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.

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.

December 2014 Investor Letter

Model Portfolio Update

Executive Summary

2014 is shaping up to be another good year for our Active Asset Allocator investment strategy. We have been able to maintain our 12% annual return since inception and are on target to beat our benchmark despite our strategy's lower risk profile. Stock markets have been strong all year and have returned 15%-18% YTD. However, bonds have done even better +19%, justifying our overweight position. Long duration bonds are +25% this year, an incredible performance. We are making a number of changes now to the bond allocation in our AAA model to reduce the interest rate sensitivity of the bonds we own, including:

  • Reducing the allocation to 5+ Year EU government bonds from 30% to 20%
  • Adding 5% allocation to EU aggregate bonds
  • Adding 5% allocation to EU inflation linked bonds
  • Reducing the allocation to absolute return bonds from 30% to 20%
  • Adding 10% allocation to gold

We are increasing the allocation to gold from 20% to 30% ahead of what we expect will be a strong period for precious metals in the months ahead. Our Active Asset Allocator is now positioned 20% equities / 50% bonds* / 30% gold. (Bonds now include euro government, corporate, inflation linked and absolute return bonds).

Equity Market Update

The S&P 500 has put in a powerful rally to recover from the sharp -10% correction in October. The move so far has been straight up without correction. In fact, coming off a six month low, for only the second time since 1928, the S&P 500 traded above its 5-day moving average for 30 consecutive days, before ending that streak on 1st December. That is an impressive move and has all the hallmarks of a short covering rally. The bulls appear to have regained the upper hand for now. However, if the majority holding a short position against the S&P 500 have been carried out, we may have a vacuum below current price. Short sellers are a necessary part of any functioning market and have the effect of slowing down a stock market in decline, as the shorts must always buy to cover their initial sale. When the stock market trades like it has done for the past few weeks and the shorts get run over, often the real move (lower in this case) only occurs afterwards. It doesn't always have to happen this way of course, but we are not out of the woods yet. Let's take a look at some charts to see how stock markets around the world are setting up today.

 
 

It has been a roller coaster year for US equity investors. The S&P 500 returned +9% through September before falling out of bed in October and giving up all the gains for the year. Stocks then rocketed out of those October lows and the S&P 500 is now back to +10% YTD. A strong US dollar versus the Euro has added another +10% for unhedged Euro investors. If you have been able to withstand the volatility, 2014 is turning out quite well. However, the US stock market has used up a lot of energy to get to where it is today. The bulls are now fully committed, the bears have covered and the Fed has pulled $1 trillion of financial support. So, who is left to buy? We should find out shortly.

While US large cap stocks continue to make new highs, albeit on declining volume, European markets are lagging. The Eurostoxx 600 Index (above left) and the German Dax Index (above right) have failed so far to make new highs along with the S&P 500. It is the same story for the small cap sector with the Russell 2000 in the US making a series of lower highs and lower lows in 2014. These divergences could be signalling that equity markets are running out of steam and due for a pause/consolidation. Also, Brent crude has historically had a strong positive correlation with European equities and Brent crude is now plummeting. Either crude oil is about to have a snap back rally or equities are about to roll over.

 
 

Spain and Italy have traded in a wide range since the 2008 financial crisis. While stock markets in the US and many across Asia have tripled or more since the 2009 lows, Spain and Italy trade at less than half their prior peaks today... six years into the current equity bull market.

The outlook for Europe is challenging as we head into 2015. The region is forecast to grow by only 1%, versus 2.5%-3.0% for the US, and deflationary risks are rising. We expect EU equity markets to struggle next year. However, the Euro has fallen by -10% versus the US dollar in 2014, which should benefit export-oriented companies in the region and further Euro weakness in 2015 could prove a catalyst for EU stocks. Much will depend on the ECB.  

There is precedent here. The set up across many EU stock markets today looks similar to that of Japan in late-2012. The Nikkei had traded in a wide range between 7,000 and 11,000 from 2009-2012 but then broke higher in November 2012. The catalyst was Japanese central bank money printing. The Nikkei went on to double in JPY terms over the next 24 months while the Japanese Yen collapsed by -40% versus the USD. While we don't expect a similar outcome for Eurozone stocks this time, it cannot be ruled out. We are watching the EU currency and stock markets closely for clues.

 
 

For now, we remain defensively positioned in our Active Asset Allocator investment strategy.

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

Bond Market Update

 
 

Our Active Asset Allocator investment strategy has been overweight bonds all year and while equities have returned 15%-18% so far in 2014, the bonds we hold are +19% YTD, while longer duration bonds are +25% over the same period. Today, a passive 5+ year EU government bond fund - a good proxy for our model portfolio bonds - has a duration of 10 years and a yield of 1.5%. While yields can fall further, there really is limited room left for yields to decline (and bond prices to rise). We do not expect a dramatic rise in interest rates for the foreseeable future, particularly as deflation grips the Eurozone, but believe it is prudent to start reducing the interest rate sensitivity of our bonds now. As a result, we are making the following changes to the model portfolio:

  • Reducing the allocation to 5+ Year EU government bonds from 30% to 20%
  • Adding 5% allocation to EU aggregate bonds
  • Adding 5% allocation to EU inflation linked bonds

We are also reducing the allocation to  absolute return bonds from 30% to 20% and increasing the allocation to gold from 20% to 30% ahead of what we expect will be a strong period for precious metals in the months ahead.

We would like to include an allocation to emerging market debt in our AAA model but today is not the time, as emerging market debt has already rallied sharply over the past 18 months and offers no real margin of safety.

 
 

The same is true for high-yield (a.k.a. junk) bonds. Investors are reaching for yield in a zero interest rate world and will pay a heavy price when the market turns. It could in fact be turning now. The Barclays High Yield Bond Index below is rolling over and has not confirmed the recent highs in the S&P 500. Risks are rising, buyer beware.

 
 

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

Gold Market Update

The volatility in precious metals has picked up sharply in recent weeks. Buyers and sellers are battling it out, which is often a signal that an intermediate-term trend change is at hand. Last Friday, gold fell $36 from $1,200 to $1,164. Then, following the Swiss referendum over the weekend, where the Swiss voted against a proposal to back the Swiss Franc with gold, on Monday morning gold fell another $22 to $1,142. The gold bears were sure gold would fall sharply following news from Switzerland, but the reverse happened. We experienced a dramatic $80 rise in the gold price back above $1,200, which is where we find ourselves today. Too many bears were crowding the short side of the market and were forced to cover.

 
 

An interesting set up is now occurring in the gold market. The USD gold price has made a series of lower lows over the past three years, but selling pressure is easing, as can be seen in the chart above (RSI and MACD indicators). The public today still believes it makes little sense to invest in gold at exactly the time when it is needed most. Sentiment will turn and when it does, gold prices will move substantially higher. 

For brave souls, the gold miners have enormous potential. Gold mining companies today trade at the same price relative to gold as they did when the gold bull market began over a decade ago. Mining is a notoriously difficult business but with crude oil prices falling - a major input cost in the mining business - and gold prices set to rise, certain gold miners offer incredible value today.

 
 

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