September 2016 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 and Gold PowerTrader focus on capturing the strongest and weakest parts of gold's daily cycles, 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

Central banks continue to dominate the headlines. The Federal Reserve and Bank of Japan both announced no change in interest rates today but threatened more QE if and when required. The Bank of Japan also announced a new monetary policy framework called "Quantitative and Qualitative Monetary Easing with Yield Curve Control", basically translated as "when in doubt, print more money". On equities, while there are plenty of reasons to be bearish, my Technical Trend Indicator (TTI) remains on a 'BUY'. The trend has started to fade, however, so buyers will need to step up shortly or we will be back to defensive mode for the first time since October 2014.

Turning to the bond markets, this month I note an interesting and potentially concerning development where a divergence is appearing in the technical indicators. The end of the multi-decade bull market in bonds may not be too far away now. I am paying close attention. The outlook for inflation linked bonds is certainly more favourable. Finally on gold this month I highlight the top physically backed gold ETF's on the market and note recent flows into the various funds on a regional basis. I remain defensively positioned for now with 20% equities / 40% bonds / 30% precious metals / 10% cash.

Stock Market Update

Stock markets are in a holding pattern ahead of the Federal Reserve's FOMC press conference this evening (Wednesday 21st September) at 19.30 Irish time. Markets are pricing in a 20% probability of a 0.25% interest rate hike. Janet Yellen does not like surprises so I expect lots of talk about what-if's and maybes but little action from the Fed President. The Bank of Japan also met last night (Tuesday 20th September) and agreed a new framework for strengthening monetary easing called "Quantitative and Qualitative Monetary Easing with Yield Curve Control", basically translated as "when in doubt, print more money". The Japanese central bank is now accumulating 3% of the Japanese equity market on an annual basis with money created out of thin air. The Swiss central bank is pursuing a similar strategy and now holds $120 billion in publicly traded stocks, including $1.4 billion in Apple shares, $1.2 billion in Google and $1.0 billion in Microsoft. When confidence in central bank policy is finally lost, there will be hell to pay but that is a conversation for another day.

In the meantime, despite the growing central bank footprint on global equity markets and the perception that the Fed, ECB, BoE and BoJ are still in control, volatility is on the rise. I expect this trend to continue as we move towards the US Presidential election on 8th November and into 2017. The market reaction to the news in the weeks ahead will determine what changes, if any, are made to the Active Asset Allocator

 
 

The buy signal generated by my Technical Trend Indicator (TTI) in April 2016 is still in place today, albeit the trend has started to fade. Buyers of stocks will need to step up soon or the TTI will flip back to a 'Sell' for the first time since October 2014. A week or two of additional selling will tip the scales back to defensive mode. So, a potentially important inflection point for the stock market is now at hand.

 
 

Perhaps markets have started to discount a deteriorating growth outlook for the US economy. The recent ISM Purchasing Managers Index dropped below 50 in August, signalling a contracting manufacturing sector in the US. The ISM Services Sector, which represents two thirds of the US economy, also experienced a sharp decline in August to reach its lowest level since 2010.

........Or perhaps stock market investors are balking at paying a record multiple of earnings for shares of US companies. The S&P 500 today trades at 27 times the average of the last 10 years' reported earnings, adjusted for inflation, a peak only surpassed in 1929 and 2000. The average 'Shiller P/E' over the last 135 years is closer to 17 times reported earnings, and that is just the average. Often times, the P/E multiple has dropped to 10 times earnings, or below.

.......This is at a time when corporate earnings in the United States are actually in decline. S&P 500 GAAP earnings peaked in 2015 and have been falling over the last five quarters. Last time US corporate earnings were at today's levels was in 2007 when the S&P 500 was trading at 1,500, approximately 30% below today's price.

 
 

So, the majority of evidence suggests that equities are overpriced today and due a correction at a minimum.  However, continued interference by central banks has clouded the picture, which is why I place such a strong emphasis on my understanding of the primary trend of the market. My Technical Trend Indicator has proven to be an excellent navigational tool for would-be investors. Theoretically, there is no limit to the amount of money central banks can print and invest in the stock market. In theory, this could lead to substantially higher prices for stocks at some point in the future, as valuation concerns are trumped by a wall of liquidity flowing into markets from central banks. I do not believe for one second that this outcome is likely, but I can't rule it out for certain. So the TTI leads the way.

I came across a recent study from the folks at Evergreen GaveKal that touched on the issue of central bank intervention and the potential unintended consequences that may arise. The good people at Evergreen GaveKal highlighted the potential impact of negative interest rates on stock market valuations as follows. 

A negative yield on the U.S. 10-year treasury note will be a much bigger problem for managers to worry about than a Shiller P/E of 27 on the S&P 500 Index..... The effect of persistently negative rates on equities’ valuations is almost incomprehensible: with a negative discount rate, any cash flow producing equity is theoretically worth infinity. The chart below shows the net present value of 2,000-year stream of $5 dividends at different discount rates. At a negative discount rate of -3%, this $5 dividend stock would be worth 47,684 trillion trillions. Welcome to the new crazy!
— Evergreen Gavekal
 
 

Now there is something to ponder! For now though, the Active Asset Allocator remains defensively positioned with 20% global equities / 25% fixed interest rate bonds / 15% inflation linked 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

 
 

An interesting dynamic is unfolding across government bond markets in 2016. While government bond prices continue to make new highs, a divergence is appearing in the technical indicators. The Relative Strength Index and Momentum Index specifically are making lower highs and not confirming the bullish trend. Is this a temporary pause before another surge higher in bond prices and lower in yields or is the bond market signalling that the multi-decade trend of lower rates is finally coming to an end? 

 
 

US 10-year and 30-year government bond yields are exhibiting similar characteristics to Eurozone government bonds. Bond yields are still making lower lows but selling pressure has eased and relative strength is improving. If bond yields continue to rise over the rest of 2016 and into 2017, the longer-term trend will turn from down to up, which will be meaningful. Is the market be signalling that the central banks are starting to lose control?

The Active Asset Allocator currently holds a 20% allocation in fixed interest government bonds along with 15% in inflation linked bonds and 5% in EU aggregate bonds. The 20% allocation is the most sensitive to interest rates changes and one I am most focused on near-term. I expect government bonds to rally on the next stock market decline. If they do not, I will sell the 20% allocation to fixed interest government bonds and book profits on that trade.

Unlike fixed interest government bonds, inflation linked bonds (ILB's) can rally in a rising interest rate environment, so long as inflation expectations increase at a faster rate than central bankers increase interest rates and government bond yields rise. Central banks want inflation and they will get it. The Active Asset Allocator is poised to benefit and the allocation to ILB's will increase in the months ahead.

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 latest report, the total amount of gold held in the world's top 73 gold ETF's reached 2,297 tonnes at 31 August 2016, up 27 tonnes from the previous month. European gold fund ETF's added 33 tonnes, offsetting the 8 tonne decline in North America. Slow and persistent accumulation is characteristic of a bull market.

 
 

The top 15 physically-backed gold gold ETF's by assets in tonnes are summarised in the following table. The Sprott Physical Gold Trust and Central Fund of Canada, 9 and 10 on the list, are the ETF's used in the Active Asset Allocator to provide our precious metals exposure.

 
 

The precious metals bull market rumbles on. Gold priced in euros has outperformed gold priced in US dollars since 2015 due to relative currency moves over the period. Gold will rise in all currencies over time. I expect gold to break out to new all time highs in the next 1-2 years. Bull market QED.

 
 

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

May 2016 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.

 
AAA Asset Allocation.jpg
 

Gold Trader and Gold PowerTrader focus on capturing the strongest and weakest parts of gold's daily cycles, 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 just 1.5% each time and has a win rate in excess of 70%.

Executive Summary

The Active Asset Allocator has returned +6.3% YTD versus +0.0% for the average multi-asset fund. My Technical Trend Indicator has triggered a buy signal, yet stocks have not made much progress since. I remain defensively positioned for now with 20% equities / 30% bonds / 30% precious metals / 20% cash. Over 40% of equities on the NYSE have already declined -20% or more, classic early bear market behaviour, though the large-cap indices appear unconcerned for now. This standoff should resolve itself shortly.

Meanwhile, bonds continue to rally while yields head towards zero or lower. This month I explain why I think we are finally approaching an inflection point in fixed income and the potential end to the 35+ year bull market in bonds. Calls for helicopter money are getting louder and investor confidence in central bank policy is about to be tested. I also discuss the World Gold Council's latest report on trends in the sector including a +122% increase in investment demand for gold year/year.

Stock Market Update

In 2016 year-to-date, global equities have returned -0.3%, EU government bonds +5.2%, EU corporate bonds +2.7%, gold +11.3% and silver +14.4% in euro terms. Over that period, the Active Asset Allocator has delivered a positive return of +6.3%, with just 20% invested in equities and 20% still held in cash, versus 0.0% for the average multi-asset fund. Last month, I noted that my technical studies triggered a buy signal for the stock market for the first time since September 2013 and that buy signal remains in place today. Price hasn't made much progress since the buy signal triggered and I continue to maintain a defensive position for now in the Active Asset Allocator

 
 

Today, over 40% of stocks trading on the NYSE are already down 20% or more (56% of small caps, 30% of mid-caps and 16% of large-caps) - classic early bear market behaviour. This fact has been disguised by the continued strong performance of a handful of names in the market-cap weighted S&P 500 and Dow Jones Industrials, which are driving those indices back towards their old 52-week highs. Volume has also been lacklustre on the recent rally in stocks. While the S&P 500 is not too far off breaking out to new highs, volume does not look like it will confirm the move higher. 

 
 

Last month, I highlighted the prior instances in 2000 and 2007 when the S&P 500 peaked and turned lower, followed shortly thereafter by a bearish cross of the 50WMA below the 100WMA. This coincided with the onset of a bear market in equities and a declining trend in US corporate earnings. At the time of writing my April Investor Letter, the 50WMA had not crossed below the 100WMA. That has changed with the bearish cross now in effect, though price is still holding above both long-term moving averages. A sustained break below 2,024 on the S&P 500 in the weeks ahead will increase the odds that a bear market in stocks has arrived. Conversely, if the stock market can consolidate recent gains despite the bearish cross, it should clear the way for higher prices later this year and I will adjust the Active Asset Allocator accordingly. For now, I remain patient.

 
 

Volatility is on the rise and there is no shortage of events this year that could drive equity volatility significantly higher including the Brexit vote next month, a potential hard landing in China, political and economic chaos in Brazil and Venezuela and of course the possibility of Donald Trump in the White House. The Vix Index below captures the trend in volatility of the stock market and this trend is on the rise. The multi-year basing pattern is similar to that experienced in the lead up to the last bear market in stocks and reinforces my belief that the stock market is in the process of topping.

 
 

It will be interesting to gauge the reaction of the Federal Reserve, ECB, Bank of England and Bank of Japan if a bear market in stocks gets going later this year. I believe they will panic and react by doing things that will appear increasingly crazy to many people, like helicopter money or some version of fiscal or monetary stimulation. I believe this will precipitate a crisis of confidence in paper currency, which is why the Active Asset Allocator continues to hold a 30% allocation to precious metals.

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

From 1952 to 2000, it took $1.70 of non-financial borrowing to generate a dollar of GDP growth. By 2015, that number had more than doubled to $3.46. At the margin, an additional dollar of borrowing is losing its impact. Total debt to GDP across much of the developed world has now reached mind-boggling levels: 370% in the United States, 615% in Japan, 350% in China and 457% in the Eurozone. Meanwhile, GDP growth is decelerating. 

Central banks, in their capacity as lenders of last resort (and buyers of last resort of government bonds), have supported the explosion higher in debt in recent years and central bank policy will be responsible for the eventual debt bust. It is just a question of timing. I believe we are approaching an inflection point, potentially in the next 12 months, where markets will call central bankers' collective bluff... and then central bankers will panic.

What could be the catalyst? Perhaps wide scale debt forgiveness by the Japanese Central Bank, the largest owner of Japanese government debt or the Federal Reserve swapping Treasuries for 100 or 200 year bonds paying a 0.05% or 0.10% coupon or perhaps the introduction of helicopter money by one or more central banks. 

In fact, calls for 'helicopter money' are already on the rise today. Former Fed Chair, Ben Bernanke and more recently Bill Gross, fixed income manager at Janus Capital, have both touted helicopter money as a legitimate monetary policy tool still available to central banks in times of crisis. A search for "helicopter money" on Google Trends also confirms a growing interest from the public in this most unorthodox form of central bank intervention.

 
 

Experiments with helicopter money do not end well. The risks are high and consequences severe if badly managed. James Grant of Grant's Interest Rate Observer sums it up best:

Does the deployment of helicopter money not entail some meaningful risk of the loss of confidence in a currency that is, after all, undefined, uncollateralized and infinitely replicable at exactly zero cost? Might trust be shattered by the visible act of infusing the government with invisible monetary pixels and by the subsequent exchange of those images for real goods and services? ......To us, it is the great question. Pondering it, as we say, we are bearish on the money of overextended governments. We are bullish on the alternatives enumerated in the Periodic table. It would be nice to know when the rest of the world will come around to the gold-friendly view that central bankers have lost their marbles. We have no such timetable. The road to confetti is long and winding.
— James Grant, Grant's Interest Rate Observer

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

So long as gold and silver hold above their respective long-term 20 month moving averages, it is safe to assume the bull market in precious metals has returned. The key numbers today are $1,173 for gold and $15.60 for silver. YTD, gold is +11% and silver is +14% for euro investors.

I expect a declining US dollar will provide a nice tailwind for the next leg higher in the precious metals bull market. The US Dollar Index looks to have formed a multi-year top. The last time this occurred was in 2002 and coincided with the start of the gold bull market. I expect an equally powerful move higher in gold and lower in USD once the trends are set in motion.

 
 

The World Gold Council has published its first quarter 2016 report on demand trends in the industry and highlights some interesting developments in the sector this quarter. Overall, gold demand grew +21% in Q1 2016 to 1,290 tonnes, the strongest first quarter advance on record. While jewelry demand declined -19% due in large part to the recent surge in gold prices, investment demand more than doubled surging +122% year/year.

Inflows into precious metals ETF's accounted for 364 tonnes, the highest since Q1 2009. Also, of note, central banks continue to accumulate gold and added 109 tonnes during the most recent quarter. They are less vocal about their gold accumulation policy but are consistently one of the largest acquirers of gold each quarter.

The United States remains the top holder of gold bullion based on the World Gold Council's latest reported data with in excess of 8,000 tonnes, followed by Germany, the IMF, Italy and France. China reported 1,798 tonnes of gold reserves at 31st March 2016. 

 
 

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