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.

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.

 
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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.

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.

January 2015 Investor Letter

Model Portfolio Update

Executive Summary

Despite being defensively positioned for much of the year, the Active Asset Allocator delivered a strong performance in 2014, +15.6%, outperforming the average multi-asset fund by +3.1%. Buy-and-hold equity investors have been spoiled in recent years as all news has been treated favourably. That trend is about to change and many will be caught wrong-footed. We anticipate another strong year for the Active Asset Allocator in 2015 as we navigate what we expect will be increasingly turbulent waters.

The Active Asset Allocator is defensively positioned today 20% equities / 50% bonds* / 30% gold. (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 has since rallied +9% in euro terms.  

Equity Market Update

Is history about to repeat? January 2015 has started out in quite a volatile fashion with government bond yields falling (and bond prices rising), crude oil prices tumbling, high yield bonds topping out and the US dollar rallying sharply. The same trends occurred in 2008 before the stock market fell out of bed. 

In our December 2014 Investor Letter, we began with a 6 month chart of the S&P 500, questioning the sustainability of the recent break out to new all time highs, given the many risks that we see on the horizon. Our cautious stance has so far been proven correct. Shortly after breaking out to new 52-week highs, the S&P 500 rolled over and plunged -10%. We then witnessed a sharp bounce in what we noted at the time had all the hallmarks of a short-covering rally, followed by more selling in the first week of January 2015, which is where we find ourselves today. Heightened stock market volatility will be a prevailing theme this year. Be prepared.

 
 

Last month, we also discussed the plunging price of crude oil, which we expect will drive many financial trends all over the world in 2015. We highlighted the strong positive correlation between European equities and Brent crude and noted that crude oil was either about to have a snap back rally (unlikely) or European equities were in trouble. Let's take a look at the updated chart today.

 
 

In a little over a month, Brent crude has fallen another -30% or $21/barrel, while the German Dax Index has dropped -5% or almost 500 points. This divergence has a long way to run before it resolves itself either by crude oil rallying sharply or European equities entering a bear market. For now, we continue to be positioned defensively in the Active Asset Allocator.

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

Following the strong performance by government bonds in 2014, we have begun to shorten the duration of the bonds we hold in the Active Asset Allocator, making the portfolio less sensitive to changes in interest rates. We also started to increase the allocation to inflation-linked bonds and corporate bonds. We will likely keep the allocation to corporate bonds relatively low as they are positively correlated to risk assets. 

Government bond yields around the world continue to decline and credit spreads (the difference between risky high yield bonds and lower risk government bonds) continue to widen. We witnessed the same phenomenon in early 2008 as investors started pricing in the increased global macro risks at that time. The credit spread ratio on the chart below has not yet reached 2011 or 2008 levels, but it is still rising and the slope is getting steeper. We are watching this chart closely, particularly now that the down-sloping trend line from 2009 - 2014 has been broken.

 
 

High yield bonds have not confirmed the recent highs in the S&P 500, which is another red flag we are monitoring closely for now. Should equities and junk bonds rally to new highs together, we will move back to a more constructive asset allocation, but for now, continued caution is warranted in our view.

 
 

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

Gold has historically performed best during periods of US dollar weakness relative to other currencies. What we can see clearly in the following chart is that since 2011, gold has struggled while the USD Index (faded blue line), a proxy for the US dollar, has rallied sharply. Gold got ahead of itself in 2011 and too many bulls crowded the long side of the precious metals market. Those late to the party have now been well and truly shaken out of their positions. Sentiment has reached a negative extreme and it is our view that the three year bear market in gold may have ended in December 2014.

Look closely at the chart below. You will see that the US dollar has rocketed higher over the last few months but gold has refused to decline. This is quite a change in behaviour for the precious metal and a clear signal that the gold bull may be about to return. We recently increased the allocation to gold in the Active Asset Allocator from 20% to 30% to capture what we expect will be rising gold prices in the months ahead.

 
 

When gold recaptures the longer-term 20 month moving average, we will become more confident that the gold bull market is back. Capital should come flooding back into the precious metals sector when the trend higher resumes.

 
 

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

October 2014 Investor Letter

Model Portfolio Update

Executive Summary

Without an immediate about turn in the stock market, we will get an "All Market Sell Signal" on Friday for the first time in over a year. Stocks are now trading at their second highest ever reading based on Warren Buffet's favourite valuation tool. Stock market volatility has picked up recently, and in the short-term, equities are oversold and should bounce. In fact, there have been six other times the Vix Index has jumped 60% or more in three days. Every time, stocks rallied over the next two days. In four of the six times, the rally marked the end of the decline. However, in the other two instances, stocks rallied for 5-7 days and then rolled over to new lows. Our best advice is to continue to follow our Active Asset Allocator Model which is defensively positioned 20% equities / 30% 5+ year Eurozone government bonds / 30% absolute return bonds. / 20% gold.

Equity Market Update

This is a big week for the stock market. My Technical Trend Indicator (TTI) will deliver its first "All Market Sell Signal" in well over a year this Friday unless stocks do an immediate about-turn. Risks are running high as equities enter their sixth year of rising prices without a meaningful correction (we typically experience a 20% correction in stocks every 3.8 years on average). Investors must now contend with an overvalued stock market, overly bullish investor sentiment, the end of the Federal Reserve's latest round of money printing (QE3), which has provided $1 trillion of support to the capital markets this past year and a technical trend change in the market.

We have come a long way since the 2008/9 stock market lows and that is now reflected in equity market valuations. A Warren Buffet favourite valuation tool: US corporate equities are now valued at 127% of US nominal GDP, the second highest reading in history.

The S&P 500 has traded for 475 consecutive trading days above its 200 day moving average - the longest stretch in history - but closed below key support on Friday. While the most popular stock market indices (Dow Jones Industrials, S&P 500 and Nasdaq) are holding up reasonably well so far this year, the smaller cap indices in the US and many key European stock markets have been trading much weaker recently.

The character of the market is changing and this can be seen in the spike in volatility measured by the Vix Index (below) that has coincided with the recent decline in the stock market. In the short-term, stocks are oversold and should bounce from here. In fact, there have been six other times the Vix Index has jumped 60% or more in three days (19/10/1987, 13/10/1989, 8/6/1990, 27/2/2007, 6/5/2010 and 8/8/2011). Every time, stocks rallied over the next two days. In four of the six times, the rally marked the end of the decline. However, in the other two instances, stocks rallied for 5-7 days and then rolled over to new lows. If we get a relief rally that fails over the next week, watch out below. We remain defensively positioned in our Active Asset Allocator Model.

 
 

High yield bonds are also signalling renewed stress in the credit markets for the first time in over three years and equity investors definitely don't like it when junk bonds are plunging to new lows as they are today.

 
 

So, what's an investor to do? The technical trend indicator has navigated the market turns like a professional. Our Active Asset Allocator investment strategy has switched to defensive mode ahead of every significant stock market decline and reverted to bullish mode to capture each medium-term rising trend since inception. Note: the Active Asset Allocation Strategy switched to defensive mode in June 2013 due to our concern over the ageing equity bull market and has since benefited from an overweight position in bonds.

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

US and EU government bond yields are turning lower again but have yet to make new all time lows. Even if they do, there is limited room for yields to fall. We will likely stay in this low yielding environment for quite some time, particularly if equity market volatility picks up over the next 12 months. Only a bout of inflation or a currency crisis will cause yields to spike.

High yield bonds also look unattractive for yield seeking investors, particularly following their recent break lower. So, for investors in search of safety in a low yielding fixed income world, we are left with short duration government debt, emerging market debt and/or absolute return bond strategies. We have an allocation to two of these strategies currently in our Active Asset Allocator model and are happy to discuss in more detail.

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

Commodities as an asset class remain totally out of favour. The CRB Index, when measured against the S&P 500, has returned to 15 year lows, quite unbelievable when one considers the trillions of newly printed notes circulating in the system. We could start to see a rotation into this asset class if equities start to turn lower.

 
 

Gold continues to hold up quite well here, particularly gold priced in euros, which is +11% YTD. Despite gold's resilience to hold above $1,200, I am not hugely excited about the triple test of $1,180 by USD gold in recent months. These support zones tend to become targets for active traders and there are probably plenty of stops placed just under those levels. We could head back below $1,180 on the next decline for gold. That said, this bear market in gold is getting long in the tooth. 2015 could be the year for precious metals to shine once again as one of the remaining true safe haven stores of value in a fiat currency world. In the meantime, continued patience is required.

 
 

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

September 2013 Investor Letter

Model Portfolio Update

Executive Summary

We are approaching the latter stages of this four year bull market in stocks and it has been quite a ride. The multi-year equity market rally has done its job. Investors have stepped back from the brink and have returned to the market in their droves, buying equity funds at a record pace in recent months. The model portfolio remains defensively positioned with an asset mix of 20% equities / 50% bonds / 20% gold / 10% cash. While the short-term performance of the model portfolio has been impacted, the current position is warranted given that stocks remain expensive, sentiment is at a bullish extreme and my technical indicators are advising caution.

Please feel free to add your comments and questions at the end of this report and I will reply to all as best I can.

Equity Market Update

Investor sentiment is back to levels that have marked stock market tops in the past and valuations are also stretched - the S&P 500 currently trades at 19 times 2012 net reported earnings. Stocks are more expensive now than they were at the previous peaks in 2000 and 2007. Today, there is over $8.0 trillion invested in US equity mutual funds and equity ETFs, which is 3.5 times more than the amount invested in cash, a new all-time record looking back over the past 30 years. The last time investors were buying stocks with such abandon was May 2007. At the peak in August 2000, the ratio was 3.1 times. We are not in a new secular bull market for stocks, so I expect this ratio to top out shortly, along with the stock market. Investor appetite for stocks should start to decline in the near future. Now is not the time to be fully invested.

The ratio of funds invested in US stocks versus cash has reached a new all-time record of 3.5 times.

Permission granted from Sentimentrader to reproduce this chart.

Hand in hand with the above measure of investor confidence, we also see a strong desire among stock market participants to embrace risk once again. The Risk Appetite Index comprises a mix of indicators that track investor risk appetite including credit spreads, stock and currency volatility and the relative performance of different stock market sectors. We have seen a big rise in risk-seeking behaviour in recent months.

Investor risk appetite is back to levels coincident with prior peaks in the stock market. Permission granted from Sentimentrader to reproduce this chart.

Last month I discussed some initial signs of technical deterioration for stocks as measured by the Advance / Decline Line. That weakness continues today so I want to include an updated chart in this month's Investor Letter. A quick recap first: the Advance/Decline Line graphically displays the relationship between the number of stocks in rising trends versus the number of stocks in declining trends. In a healthy bull market, you should expect to see the majority of stocks in rising bullish trends (rising A/D Line). However, late in every bull market, the number of stocks participating in each rally falls (falling A/D Line) until such a time that the trend peaks and reverses. We experienced a negative divergence in the A/D Line for months prior to the stock market peak in 2007 as fewer and fewer stocks participated in the rising trend. We are seeing the same behaviour today.

The Advance/Decline Line has not confirmed the recent high in the S&P 500. Fewer stocks are participating in the rising trend, which typically happens close to bull market peaks.

 

In August for the first time in over a year, my technical trend indicator tipped over into the red, breaking support at the long term moving average. While the technical trend has recovered somewhat in recent weeks, any additional sustained selling will tip the long-term moving average into a downward trend. Investors should take note of this early warning signal that the uptrend in the stock market is deteriorating.

The Technical trend is weakening.

Bond Market Update

Bond yields should continue to trend higher over time but are due a rest in the short-term after doubling from the lows in May.

In May of this year, the Federal Reserve hinted that they may consider tapering their purchases of US Treasury and mortgage backed securities in an effort to bring this $85 billion/month QE experiment to an end. That was enough for skittish bond investors to sell. The 10 year yield on US Treasuries promptly doubled (almost) from 1.6% to 3.0% in four short months. In September, Bernanke backed off of his grand plan, but US Treasury yields have only backed off by a mere 0.40%. The bond market has started to sense that something is wrong and Bernanke is worried. He knows he will have to start the taper some day. The Fed just can't just keep on printing $1 trillion/year without something bad happening.

So what does this mean for bond investors today?  Well, return expectations should remain low for starters and short term-bonds should be favoured over long-term bonds. High quality government and corporate bonds should be the preferred choice where possible. After a doubling in interest rates in recent months, chances are that interest rates won't travel much further north from here in a highly leveraged global economy. In any stock market correction, bonds will continue to provide short-term shelter and the risk of capital loss in a high quality short-term bond will be a lot lower than the risk of loss from an equity investment, no matter the quality. It is for this reason that bonds remain a core holding in the model portfolio.

 

Gold Market Update

Gold Cycle Count

 

The gold conundrum continues. Following an epic 11-year run, gold reached a peak of $1,921 in September 2011 and has been in correction more ever since. The bull market for gold is not over, so we should expect $2,000 and higher (possibly much higher) at some point in the future once the current correction ends. Gold bottomed in June 2013 at $1,180 and has been rallying sporadically since, trading at approximately $1,300 at the time of writing. The bull market is doing its job, throwing off the majority of holders. Even the long-term gold bulls are jaded with the market action. 

I continue to believe that gold is building a strong base and in its own good time, when least expected, gold will resume its bull market. During the last gold bull market of the 1970's, gold corrected in price from $200 to $100, a -50% decline before surging higher to a peak of $850 in 1980 as inflation ran wild. While no two bull markets are ever the same, I am expecting a strong second half performance by the precious metals as investors finally lose faith in the paper currency system and trust is restored in the ultimate foreign currency. Patience will be rewarded.

 

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