Bond Bubble

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Something potentially very important just happened with the 10-year Treasury yield.

It broke a downtrend in place since the start of 2016, and if it can hold this breakout through the Bank of Japan and Fed meeting next week, it will be a strong signal that the bond bull market may be ending, and interest rates may be (finally) moving higher.

 

I’m under no illusions that bonds aren’t exactly the most exciting topic in the markets, but the reason we keep focusing on the action in the bond markets is because what bond yields do from here will
be critically important for how stocks and bonds perform in Q4.

 

Stocks have pulled back a bit recently as bond yields have risen, but the potential is still there for either a continued melt up (at which point advisors are going to want to be very long) or a potentially violent pullback in both stocks and bonds (at which point advisors are going to want to be very defensive). 

So, with the BOJ and Fed meeting looming next week and the first presidential debate the week after that, the rest of September will be an especially critical time if you are an advisor or investor who has underperformed markets so far in 2016 (and there are a lot of very good advisors who have underperformed this difficult market), as these events will present an opportunity to close that performance gap… if you know what’s happening and how to be positioned. 

 

And, we’ve seen that over the past few weeks. Banks and other “higher-rate sensitive” sectors have massively outperformed, while tech and higher beta allocations have lagged, rewarding cautious advisors and investors who didn’t chase markets higher in late July/August.

We are going to be very focused on making sure our paid subscribers know, immediately, what the implications are for each of these key events,
and which sectors will benefit from those events, whether it’s banks, consumer staples, utilities, tech or inverse ETFs. 

 

In tomorrow’s edition of The Sevens Report
we are going to be providing a “Higher Rate Playbook” for paid subscribers that details (with specific ETFs):

 

1) How to hedge a higher interest rate driven decline in stocks,

 

2) Which market sectors will outperform in a higher rate environment, and

 

3) What parts of the bond market will outperform and underperform in a rising rate environment.

Look, it’s been a very tough year to beat lazy indexing, but we recognize the chance to make up ground over the coming weeks, and into Q4 and we’re going to be focused on helping our advisor subscribers do just that by making sure they have the need-to-know analysis of all asset classes and global regions, not just US economics or the Fed. 

We’re approaching the one-year anniversary of the August 2015 collapse in stocks, and while markets are higher (finally), so is volatility, as international events exert greater influence over the Fed, the US economy, and the US stock market.

We understand that in this market, clients’ assets are at the mercy of the BOJ, ECB, Italian banks, Chinese policy makers, etc., and that’s why, every day, we make sure our paid subscribers know the key trends in:

  • Stocks
  • Bonds
  • Commodities
  • Currencies
  • Economic data

It’s only by providing that 360-degree coverage, every day, that advisors and investors can truly have an understanding of the risks and opportunities for their portfolios in this environment. 

The end of the bond bull market has been called many times by analysts over the past several years, and while I’m not about to do that today (the benefit of the doubt remains with the bulls) there is a subtle but important change in the markets that may signal the lows in Treasury yields are in for a long, long time.  

 

Another Nail in the Bond Bubble Coffin?

Hopefully by now we’ve driven home the point that next week’s BOJ meeting is the most important event on the calendar since Brexit, because if the BOJ disappoints markets it’ll send Japanese bond yields higher, which will pull Treasury yields higher and hurt stocks.

But, even if the BOJ chooses to do more stimulus, we still may have seen the lows in global bond yields for a very long time.

The reason?

Currency hedging (and Las Vegas).

Longer-term readers know that foreign buying of Treasuries has been a massively positive influence on Treasury prices/negative influence on yields.

One of the reasons foreign buyers have gobbled up Treasuries over the past several years was because it was very easy and cheap to hedge out the currency exposure (a German portfolio manager who bought Treasuries was also buying dollars, and that represented an additional risk he or she would want to hedge out, so it became a pure yield play).

But too much of a good thing can become a problem, and in this case the ocean of foreign money flowing into Treasuries, all looking for the same currency hedge, has caused a problem.

For those who follow sports, it’s the same problem bookies have each week when betting the spreads.

In Las Vegas, when too much money goes towards one team, bookies have to adjust the point spread to make a bet on the other team more attractive.

That’s why betting spreads move during the week, as the bookies are always trying to make the amount bet on Team A equal to the amount bet on Team B. That way the bookies have no risk and just collect fees. It’s similar with currency dealers and trading desks.

To bring it back to the markets, if everyone wanted to hedge out the risk of the euro or yen strengthening vs. their Treasury positions, the bets become too one sided and the currency dealers and trading desks have to increase their fees to insulate themselves against losses.

That has been occurring in the foreign exchange markets over the past several months, and at this point, according to reports from Deutsche Bank and Reuters (and I’ve read similar articles from other firms), it now costs so much to hedge out that foreign exchange risk that it has totally offset the additional yield you get in Treasuries over other government debt.

Basically, the “Long Treasuries” trade has become too crowded, and isn’t worth it anymore.

That’s important for advisors and their clients for one simple reason:

It means that a major source of demand for Treasuries has been diminished, which is Treasury negative regardless of what the Fed or BOJ does next week.

 

Have a Plan in Place if Stocks and Bonds Drop

Let me be clear: If the BOJ disappoints markets next week, both stocks and bonds will drop. But, even if the BOJ does unleash more stimulus, depending on what happens with global bond yields, we still could see Treasury yields rise (or at least not fall very much).

We are committed to making sure our paid subscribers have a strategy to protect client portfolios in either environment, and that’s why tomorrow, we are going to be providing a “Higher Rate Playbook” for them that details (with specific ETFs):

 

1) How to hedge a higher interest rate driven decline in stocks,

 

2) Which market sectors will outperform in a higher rate environment, and

3) What parts of the bond market will outperform and underperform in a rising rate environment.

If all we do is help you navigate the next six weeks correctly and help you get properly positioned in client accounts for the fourth quarter, we will have more than covered our subscription cost.

If you don’t have a morning report that is going to give you the plain-spoken, practical analysis that will help you navigate the coming weeks and help you get positioned properly to outperform into year end, then please consider a quarterly subscription to The Sevens Report.

There is no penalty to cancel, no long-term commitment, and it costs less per month than one client lunch!

With thousands of advisor subscribers from virtually every firm on Wall Street and a 90% initial retention rate, we are very confident we offer the best value in the private research market.

I am continuing to extend a special offer to new subscribers of our full, daily report that we call our “2-week grace period.”

If you subscribe to The Sevens Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Click this link to begin your quarterly subscription today.

 

Value Add Research That Can Help You Finish 2016 Strong!

Our subscribers have told us how our focus on medium-term, tactical opportunities and risks has helped them outperform for clients and grow their businesses.

We continue to get strong feedback that our report is: Providing value, helping our clients outperform markets, and helping them build their books:

“Thanks for your continued insight; it has saved my clients over $2M USD this year… Keep up the great work!” – Top Producing FA from a National Brokerage Firm.

“Let me know if there is anything else that you need from us. Thanks again for everything. I really enjoy the Report – it is helping me grow my business and stay on top of things.”
– Independent FA.

“Great service from a great company!!” – FA from a National Brokerage Firm.

“Great report. You’ve become invaluable to me, thanks for everything…! – FA from a Boutique Investment Management Firm.

Subscriptions start at just $65 per month, billed quarterly, and with the option to cancel any time prior to the beginning of the next quarter, there’s simply no reason why you shouldn’t subscribe to The Sevens Report right now.

Begin your subscription to The Sevens Report right now by clicking this link and being redirected to our secure order form.


Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65. To sign up for an annual subscription simply click here.
 


Best,
Tom

Tom Essaye
Editor, The Sevens Report


 

ECB Preview

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The first of the major central bank decisions in September comes tomorrow via the ECB, and from a general standpoint the major question heading into this meeting is:

“Will the ECB ease further, hint at easing further, or stay firmly on the sidelines?”

Given the uncertainty surrounding tomorrow’s decision, I found myself in my home office last night writing our ECB Preview (sent to paid subscribers at 7 a.m. this morning) which explained:

1) What will make the meeting “hawkish” or “dovish” and

2) Provided the anticipated market reaction of stocks, bonds, the dollar, oil and gold for the three possible outcomes: The ECB meets expectations, the ECB is Dovish, or the ECB is Hawkish.

While I was working, my wife came in and asked me what I was doing and I told her, “Writing an ECB Preview,” and she asked, “What does the ECB have to do with stocks?”

In a few quick sentences I explained that the ECB was important because if it doesn’t hint at future easing, that will make German Bund yields go up, which will make Treasury yields go up, and that will make both stocks and bonds go down!

She smiled and told me, “I Can See Why People Subscribe!”

If you’re like me, never in your wildest dreams did you think when you started in this business that you’d have to be focused on what the ECB was doing because it could turn the US stock market.

In fact, I’m not even sure the ECB existed when I started in this business!

But, a Dot-Com bubble burst, financial crisis, QE Infinity and Negative Interest Rates later, here we are, and the simple truth is that if the ECB doesn’t do one specific thing tomorrow at their meeting and press conference, it will disappoint markets—and stocks will drop (more on that later).

We have spent the last few weeks making sure our paid subscribers know the list of six key events facing markets, because those events will cause at least short-term volatility, and knowing these events are looming helps advisors who subscribe to the full, paid edition of The Sevens Report
set the right expectation for clients… so that they aren’t blindsided if any of these events cause a market pullback.

And, if the ECB, BOJ or Fed disappoints markets and causes a spike in bond yields and pullback in stocks, our subscribers will be able to demonstrate to their clients they expected the volatility
and had a plan in place should things get worse.

That’s how advisors (both active and passive managers) use The Sevens Report
to improve client relationships and impress prospects.

Tomorrow’s ECB meeting does have the potential to cause a drop in stocks, so we want to make sure everyone knows

1) What’s Expected,

2) What Will Make the ECB Dovish and

3) What Will Make the ECB Hawkish.

We’ve included an excerpt of that research for you below as a courtesy:

ECB Preview (Sevens Report Excerpt)

To keep things in plain English, the ECB is important to advisors and their clients because the decision will move both the US bond and stock markets.

If the outcome of the ECB meeting is considered “dovish” that will be positive for US stocks
because that ECB decision will pressure German Bund yields lower, and that in turn will drag US yields lower and increase the case for justifying a further multiple expansion in stocks above 2200.

Conversely, if the ECB is taken as “hawkish” that will cause German 10-year Bund yields to likely turn positive, which will push US Treasury yields higher and weigh on US and European stocks. Below we have a guide to what’s expected, what would be considered dovish, and what would be hawkish.

What’s Expected: The ECB Hints at an Extension of QE.
The current ECB QE program ends in March, and most economists expect that Draghi will strongly hint that the current QE program will be extended for a second time, likely till the end of 2017. Likely Market Reaction: Restricted for Paid-Subscribers.

It will Be Hawkish If: There is no hint at a QE extension in December. If the ECB remains in a “Wait and See” mode given the more resilient EMU economy post Brexit, that will disappoint markets. Likely Market Reaction: Restricted for Paid-Subscribers.

It Will Be Dovish If: The ECB announces the extension of QE tomorrow, or hints at both the extension of QE and upcoming changes to the QE program.
To that latter point, one of the current issues with ECB QE is that there is a relative scarcity of bonds to buy in the market, so if the ECB is planning on materially extending QE it could also change the rules regarding what bonds it can buy (likely increasing the pool of corporate and sovereign debt). Likely Market Reaction: Restricted for Paid-Subscribers.

The key takeaway here is that uncertainty surrounding global interest rates is a becoming a more substantial headwind on stocks, and that’s why stocks were down again this morning, as the Bank of England Governor Marc Carney implied the Bank of England may not need to do as much stimulus as expected, post Brexit.

Bottom line, before stocks can move higher, there has to be clarity on the direction of interest rates, and that will only come from the ECB, Fed and BOJ.

If you do not have a morning report that is going to give you the plain English, practical analysis that will help you navigate those central bank events, then please consider a quarterly subscription to
The Sevens Report. 

There is no penalty to cancel, no long term commitment, and it costs less per month than one client lunch!

With thousands of advisor subscribers from virtually every firm on Wall Street and a 90% initial retention rate, we are very confident we offer the best value in the private research market. 

I am continuing to extend a special offer to new subscribers of our full, daily report that we call our “2-week grace period.”

If you subscribe to The Sevens Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Click this link to begin your quarterly subscription today.

 

Volatility Will be an Opportunity for the Informed Advisor and Investor in the 4th Quarter

We aren’t market bears, but we said consistently that things were going to be volatile in 2016, and we were right!

The market is not going to stay as quiet as it was this summer.

 

How could it, considering the events that are coming over the next few weeks:

  • The ECB Meeting September 8th: Will the ECB hint at more stimulus (bullish) or not (bearish)?
  • The Fed Meeting September 21st: Will the Fed hike rates (very bearish), hint at hiking rates in December (bearish) or stay ultra-dovish (bullish)?
  • The Bank of Japan Meeting September 21st: Will the BOJ adopt “Helicopter Money Light” (bullish), or just do another inconsequential easing like in July (bearish).
  • First Presidential Debate September 26th: Will Trump get back into the race (bearish short term – and this is not a political opinion) or will Clinton maintain a comfortable lead (not bearish).
  • International Energy Forum September 26th: Will OPEC and Non-OPEC members agree on a global production “freeze” (bullish oil) or not (very bearish oil).

Some advisors and investors will be blindsided by the volatility
these events might create, but the advisor who is able to confidently and directly tell their nervous clients what’s happening with the markets and why stocks are up or down, and what the outlook is beyond the near term (without having to call them back), will be able to retain more clients and close more prospects.

We view volatility as a prime opportunity to help our paying subscribers grow their books of business and outperform markets
by making sure that every trading day they know:

1) What’s driving markets

2) What it means for all asset classes, and

 

3) What to do with client portfolios.

We monitor just about every market on the globe, break down complex topics, tell you what you need to know, and give you ETFs and single stocks that can both outperform the market and protect client portfolios.

All for $65/month with no long term commitment.

I’m not pointing this out because I’m implying we get everything right.

But we have gotten the market right so far in 2016, and it has helped our subscribers outperform their competition and strengthen their relationships with their clients – because we all know the recent volatility has resulted in some nervous client calls.

Our subscribers were able to confidently tell their clients 1) Why the market was selling off, 2) That they had a plan to hedge if things got materially worse and 3) That they were on top of the situation.

That’s our job, each and every trading day. And, we are good at it. We watch all asset classes to generate clues and insight into the near-term direction of the markets, but our most important job is to remain vigilant to the next decline.

While we spend a lot of time trying to identify what’s really driving markets so our clients can be properly positioned, we also spend a lot of time identifying tactical, macro-based, fundamental opportunities that can help our clients outperform.

If you want research that comes with no long-term commitment, yet provides independent, value added, plain English analysis of complex macro topics, click the button below to begin your subscription today.
 

Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65. To sign up for an annual subscription simply click here.
 

Best,
Tom

Tom Essaye
Editor, The Sevens Report

 

  

What Will Move Bond Markets

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For the past two weeks, we’ve told you via these free excerpts that the markets were entering a critical six-week period that ultimately would decide whether the rally in stocks continues… or reverses.

Well, that six-week stretch of events started with a bang last Friday as Fed Vice Chair Fischer surprised markets by basically saying Friday’s jobs report would decide whether the Fed would hike rates in September.

As a result, bond yields spiked and stocks dropped.

And, if Friday was any indication, we’re in for a wild ride as the markets navigate the remaining 6 key critical central bank/macro events between now and September 26th (more on that below).

We never like to see the markets go down as all of us are generally “long” stocks, but Friday was a good day for us here at The Sevens Report, because it validated what we’ve been saying to our paid subscribers for the past several weeks:

Specifically, that whether stocks resume the July rally or break down from here will depend on the bond market, and as a rule, anything that sends bond yields up will be negative for stocks, and anything that sends bond yields down will be positive for stocks.

While other research publications were simply providing recaps of a dull market during the majority of August, we were consistently telling our subscribers that the bond market is the key and the coming several weeks were going to be critical—and on Friday afternoon (and continuing today), our advisor subscribers were able to demonstrate to their clients they were on top of markets and in control of their portfolios!

In fact, one subscriber wrote in and said it was the “Plain English” analysis of the bond market that’s helped him strengthen a relationship with a high net worth client, and he’s pretty sure that he’s going to get an additional allocation because, as the client said, his other advisors seemed to have “taken August off” given the quiet market.

That’s the kind of feedback that makes the early wake ups and long hours of work worth it, and the best part is that our subscriber only had to spend less than 10 minutes each morning reading our daily macro report. That’s how The Sevens Report
helps advisors grow their business.

Every trading day at 7 a.m. we provide plain English, concise analysis of:

  • Stocks
  • Bonds
  • Commodities
  • Currencies and
  • Economic Data

And, our daily report takes less than 10 minutes to read each day!

Finally, we do it at a cost that’s substantially less than our competition (and less than one client lunch per month), and that’s why we continue to believe we offer the best value in the paid research space!

Given last Friday’s “hawkish” surprise from Fed Vice Chair Fischer, it’s critically important for all advisors to understand what is really driving the bond market
(it’s not a Fed rate hike) because where bonds go from here will determine the next move in stocks.

We’ve included an excerpt of that research as a courtesy.

Understanding What Will Move the Bond Markets (It’s Not Rate Hikes)

The question of when the Fed hikes rates has come back to the forefront for investors, as expectations for a rate hike in September or December have increased following the hawkish comments from last Friday.

But it is very important to understand that while the media will focus on the Fed hike drama, easily the most important thing to understand about the bond market right now is that the Fed has little to no control over whether 10- and 30-year Treasury yields stay in a downtrend (good for stocks), or reverse and start to trend higher (bad for stocks).

Whether the Fed hikes in September, December or 2017 won’t resolve the major issue facing stocks right now, which is the near-term direction of global 10- and 30-year bond yields.

Instead, there are two other central banks that control the direction longer-dated Treasury yields:

  1. The European Central Bank (ECB) and
  2. The Bank of Japan (BOJ)

For US stock and bond investors, what those banks do in September is much, much more important than what the Fed does between now and December.

Now, I said that the Fed doesn’t control longer-term interest rates anymore to a friend this weekend, and he was incensed that I could utter anything so “stupid.”

But, I pointed out that over the past two years, we’ve seen the Fed:

  1. End the QE program and
  2. Hike Fed funds 25 basis points

Yet, during that two-year period, yields on the 30-year Treasury are down 80 basis points, from 3.1% in December 2014 to 2.1% post Brexit, and yields on the 10-year Treasury are also down 100 basis points (or 1%), from 2.3% to 1.33% post Brexit.

CHART

So my question to him was: If the Fed is still in control of longer-term Treasury yields, how can this be possible?

The answer is they aren’t in control any longer as the Treasury market has been overrun by foreign buyers due to the actions of the BOJ, ECB and now BOE.

The reason this is important for advisors and their clients is this:

Between now and year end, whether stocks resume their rally will depend on whether the ECB and BOJ are more hawkish than expectations, not the Fed.

If that happens, yields on Bunds and JGBs (Japanese Government Bonds) will rise and that will cause Treasury yields to rise too, regardless of whether Yellen trots out with a dove on her shoulder and promises to never hike rates again!

The critical bottom line is this: The financial media will be totally consumed with whether the Fed is going to hike rates in September, but from a stock standpoint (specifically whether stocks rally in Q4 or pullback) what the ECB does on September 8th and what the BOJ does on September 21st are much, much more important.

They are in control of longer-dated Treasury yields, and longer-dated Treasury yields will decide the next move in stocks and we will make sure you stay focused on what’s really important in the bond markets over the coming six weeks.

Make Sure You Have the Plain English and Actionable Analysis to Navigate the Next Six Weeks

We will give our advisor and investor subscribers the plain English talking points to help them turn any Fed or central bank-based volatility into an opportunity to demonstrate their knowledge of markets and impress current clients and prospects.

And, we are going to provide that same level of analysis for the remaining 6 key events that are coming in September, events that will decide whether this rally extends into the fourth quarter

  • Friday’s Jobs Report: Will the number increase the odds of a September rate hike (and if so cause more short term declines in stocks).
  • The ECB Meeting September 8th:  Will the ECB hint at more stimulus (bullish) or not (bearish)?
  • The Fed Meeting September 21st:  Will the Fed hike rates (very bearish), hint at hiking rates in December (bearish) or stay ultra-dovish (bullish)?
  • The Bank of Japan Meeting September 21st:  Will the BOJ adopt “Helicopter Money Light” (bullish), or just do another inconsequential easing like in July (bearish).
  • First Presidential Debate September 26th:  Will Trump get back into the race (bearish short term – and this is not a political opinion) or will Clinton maintain a comfortable lead (not bearish).
  • International Energy Forum September 26th:  Will OPEC and Non-OPEC members agree on a global production but (bullish oil) or not (very bearish oil).

If all we do is help you navigate the month of September correctly and help you get properly positioned in client accounts for the fourth quarter, we will have more than covered our subscription costs.

If you do not have a morning report that is going to give you the plain spoken, practical analysis that will help you navigate the coming six weeks, then please consider a quarterly subscription to
The Sevens Report. 

There is no penalty to cancel, no long-term commitment, and it costs less per month than one client lunch!

With thousands of advisor subscribers from virtually every firm on Wall Street and a 90% initial retention rate, we are very confident we offer the best value in the private research market.

I am continuing to extend a special offer to new subscribers of our full, daily report that we call our “2-week grace period.”

If you subscribe to The Sevens Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Click this link to begin your quarterly subscription today.

 Value Add Research That Can Help You Grow Your Business in 2016

Our subscribers have told us how our focus on medium-term, tactical opportunities and risks has helped them outperform for clients and grow their businesses.

We continue to get strong feedback that our report is: Providing value, helping our clients outperform markets, and helping them build their books:

“Thanks for your continued insight; it has saved my clients over $2M USD this year… Keep up the great work!” – Top Producing FA from a National Brokerage Firm.

“Let me know if there is anything else that you need from us. Thanks again for everything. I really enjoy the Report – it is helping me grow my business and stay on top of things.” –  Independent FA.

“Great service from a great company!!” – FA from a National Brokerage Firm.

“Great report. You’ve become invaluable to me, thanks for everything…!  –  FA from a Boutique Investment Management Firm.

Subscriptions start at just $65 per month, billed quarterly, and with the option to cancel any time prior to the beginning of the next quarter, there’s simply no reason why you shouldn’t subscribe to The Sevens Report right now.

Begin your subscription to The Sevens Report right now by clicking this link and being redirected to our secure order form.

Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65. To sign up for an annual subscription simply click here.

Best,
Tom

Tom Essaye
Editor, The Sevens Report

WHY STOCKS DROPPED YESTERDAY

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Yesterday’s dip in stocks was not because of an EpiPen, regardless of what the financial media said.

Yes, Hilary Clinton’s EpiPen comments did remind everyone of the healthcare induced pullback in 2015, but this time that’s largely a political distraction.

By far the most important thing that happened yesterday was that we learned 8 of 12 Regional Federal Reserve Bank Presidents requested a Discount Rate hike in July.

That’s potentially very important, because it means the chances of a rate hike in 2016 are higher than previously thought—and that is a threat to this market rally.

That’s the real reason stocks dropped yesterday, not some EpiPen political drama.

I included that analysis in the full, paid edition of The Sevens Report
this morning (which was delivered to subscribers at 7 a.m.), and I got some great feedback.

One subscriber, a wealth manager with ML, called and told me that he reads three things every morning: Gartman, The Sevens Report, and some of ML’s research.

He said Gartman had great information, but it was long and he really doesn’t need to know about pricing trends in cotton or the inner workings of Japanese politics.

The ML research was comprehensive, he said, but it was typical “Ivory Tower” stuff that was full of jargon and often tough to discern a clear, concrete takeaway.

He went on to say he subscribes to The Sevens Report
because every day it tells him, in plain English, what’s important in all asset classes: Stocks, Bonds, Commodities, Currencies, Bonds, and Economics.

No jargon, no obscure facts, just the information you need to know, in plain English, every day at 7 a.m.

And, he added that it didn’t hurt that the cost of The Sevens Report
was about 1/10th that of the Gartman Letter!

The truth is, this is a very difficult market, in part because there are unending distractions that take advisors and investors away from the key forces driving all asset classes right now: Global bond yields.

That’s why we consistently bring our subscribers (and you via these free excerpts) back to global bond yields, because they will decide whether stocks break out and extend the rally or break down and suffer a nasty pullback.

That’s why yesterday the most important piece of information was the revelation that at the July FOMC Meeting, for the first time in 2016, a majority of Regional Fed Bank Presidents called for a discount rate hike.

That’s a potential problem for stocks for two reasons:

  • First, recent history implies a majority of Regional Fed Bank Presidents calling for a discount rate hike is a precursor to a Fed Funds rate hike, and
  • Second, the market is still largely ignoring that fact as there is still just a 30% chance of a hike in September and a 50% chance of a hike in December.

Both of those numbers are too low, and both represent a potential risk to this stock market rally.

Understanding the outlook for US and global interest rates is the key to successfully navigating the markets for the rest of 2016, and we’ve included an excerpt of recent rate research as a courtesy.

Demand for a (Discount) Rate Hike Grows (Sevens Report Excerpt)

Easily the most important thing that’s happened so far this week is that a Fed document was released Tuesday that revealed for the first time in 2016, a majority of the Fed’s Regional Bank Presidents requested a reserve rate hike in July.

History tells us that implies that a majority of FOMC officials think the time for a Fed funds rate hike is sooner than later (like in the next month or two). For reference, the last time eight Regional Fed Bank Presidents requested a reserve rate hike was September and October of last year, and the Fed hiked in December.

But the important takeaway for any stock and bond holder is this:

The Fed may indeed be closer to a rate hike than the market expects.

And, that’s starting to be reflected in Fed Fund Futures as they have risen over the past week.

  • Last week, Fed Fund Futures showed just a 20% chance of a September rate hike.
  • Now, Fund Funds Futures reflect a 30% chance of a September rate hike.
  • Last week, Fed Fund Futures showed just a 40% chance of a December rate hike.
  • Now Fed Funds Futures reflect a greater than 50% chance of a December rate hike.

And, despite that, the S&P 500 is less than 1% off the recent highs.

That should be a concern, because the idea of forever-low global rates and no 2016 Fed rate hikes spurred a 7% S&P 500 rally in July, and if that proves to be untrue, then there’s a risk of a pullback.

Bottom line, there is mounting evidence that global and US interest rates may not stay as low as the stock market has currently priced in, and that is a risk to the entire July/August rally. Again, we won’t know the outlook for rates until the end of September. But the bottom line is that markets are very, very complacent with regard to any future rate hikes, and there is growing evidence that a rate hike is in the works.

The Next Six Weeks Will Be Critical for this Rally

For now, this remains a market largely stuck in neutral at the moment and in need of resolution on several key upcoming events before it can break meaningfully past 2200 in the S&P 500, given current valuations.

Specifically, the overhang of global rate uncertainty needs to be resolved before stocks can resume the forever-low-rates rally and extend multiples and valuations beyond current levels.

And, that process will begin tomorrow with Yellen’s Jackson Hole speech.

Generally, it’s expected that Yellen will be (as usual) dovish in her comments tomorrow, and if so, that could provide a short term boost for stocks. But, that’s not going to cause a real breakout in the markets
because what happens to US interest rates is as much a function of global events as it is Fed policy.

The risk tomorrow is that Yellen offers a “hawkish” surprise for markets, and that surprise combines with recent hawkish Fed rhetoric to cause a low volume, potentially sharp decline in stocks.

In tomorrow’s full, subscriber-only edition of the Report, we’re going to detail:

  • What to Expect from Yellen’s Comments
  • What specific comments or phrases will make her speech more “dovish” than expectations, and therefore short-term positive for stocks.
  • What specific comments will make her speech more “hawkish” than expectations, and thus increase the risk of a pullback.
  • And what specific policy will frankly “spook” markets and cause a decline.
  • And, most importantly, what sectors and ETFs will outperform regardless of the speech.

Paid subscribers to The Sevens Report will have this information at 7 a.m. tomorrow, in plain English and it’ll take them only a few minutes to read it, so they will be prepared to quickly and confidently answer any client questions about the Fed, and propose tactical ideas for how to potentially profit from a “dovish” Fed or protect portfolios from a “hawkish” Fed.

We will give our advisor and investor subscribers the plain English talking points to help them turn any Fed or central bank based volatility into an opportunity to demonstrate their knowledge of markets and impress current clients and prospects.

And, we are going to provide that same level of analysis for the remaining 5 key events that are coming in September, events that will decide whether this rally extends into the fourth quarter

  • The ECB Meeting September 8th: Will the ECB hint at more stimulus (bullish) or not (bearish)?
  • The Fed Meeting September 21st: Will the Fed hike rates (very bearish), hint at hiking rates in December (bearish) or stay ultra-dovish (bullish)?
  • The Bank of Japan Meeting September 21st: Will the BOJ adopt “Helicopter Money Light” (bullish) or just do another inconsequential easing like in July (bearish).
  • First Presidential Debate September 26th: Will Trump get back into the race (bearish short term – and this is not a political opinion) or will Clinton maintain a comfortable lead (not bearish).
  • International Energy Forum September 26th: Will OPEC and Non-OPEC members agree on a global production but (bullish oil) or not (very bearish oil).

If all we do is help you navigate the month of September correctly and help you get properly positioned in client accounts for the fourth quarter, we will have more than covered our subscription costs.

If you do not have a morning report that is going to give you the plain English, practical analysis that will help you navigate the coming six weeks, then please consider a quarterly subscription to The Sevens Report.

There is no penalty to cancel, no long term commitment, and it costs less per month than one client lunch!

With thousands of advisor subscribers from virtually every firm on Wall Street and a 90% initial retention rate, we are very confident we offer the best value in the private research market.

I am continuing to extend a special offer to new subscribers of our full, daily report that we call our “2-week grace period.”

If you subscribe to The Sevens Report
today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Click this link to begin your quarterly subscription today.

 Value Add Research That Can Help You Grow Your Business in 2016

Our subscribers have told us how our focus on medium-term, tactical opportunities and risks has helped them outperform for clients and grow their businesses.

We continue to get strong feedback that our report is: Providing value, helping our clients outperform markets, and helping them build their books:

“Thanks for your continued insight; it has saved my clients over $2M USD this year… Keep up the great work!” – Top Producing FA from a National Brokerage Firm.

“Let me know if there is anything else that you need from us. Thanks again for everything. I really enjoy the Report – it is helping me grow my business and stay on top of things.” –  Independent FA.

“Great service from a great company!!” – FA from a National Brokerage Firm.

“Great report. You’ve become invaluable to me, thanks for everything…!  –  FA from a Boutique Investment Management Firm.

Subscriptions start at just $65 per month, billed quarterly, and with the option to cancel any time prior to the beginning of the next quarter, there’s simply no reason why you shouldn’t subscribe to The Sevens Report right now.

Begin your subscription to The Sevens Report right now by clicking this link and being redirected to our secure order form.

Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65. To sign up for an annual subscription simply click here.

Best,
Tom

Tom Essaye
Editor, The Sevens Report


What’s the TINA Trade?

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Do you know what the TINA trade is?

I ask that, because I’m pretty sure talking about the TINA trade would have just gotten me new clients, if I was a financial advisor.

I just finished giving a presentation on the economy and markets to a group of business executives. While most of the presentation was spent talking about the lackluster fundamental backdrop for the markets, I told them that the reason the stock market was making new highs seemingly every day was because of the TINA trade.

TINA stands for There Is No Alternative, and it’s an acronym to explain why capital is funneling into stocks despite uninspiring economic activity and declining earnings growth.

The TINA Trade: There Is No Alternative to Stocks!

The discussion of the TINA trade generated, by far, the most response and excitement from the crowd.

After my speech, many prominent doctors, lawyers and business owners came up to me to discuss the TINA trade, and I couldn’t help but think that if I was a financial advisor, I would have just gotten a lot of really hot leads, because all of these men and women were asking me… “What do we do?”

I know it’s a dull market right now, but sophisticated investors I speak with know that something here isn’t right, and that markets are still risky. Because of that they want to know their advisor knows the markets and is watching their backs—and that he is not just some salesman pushing the firm’s structured products or sponsored ETFs as the market goes whistling past the graveyard.

That’s why the TINA trade discussion got so much response, and again, if I were an advisor I’m pretty confident I’d be getting some new clients out of that breakfast.

We produce The Sevens Report
so that advisors always have the talking points they need to impress prospects and show clients they are not just touting the company line—and it’s that independent analysis our advisors reference during meetings that helps turn prospects into clients.

That’s why thousands of financial advisors and investors read the full, paid version of our daily research report, because it tells them everything they need to know about Stocks, Bonds, Commodities, Currencies and Economic Data.

We provide the succinct analysis that allows advisors to

1) Save an hour
of research time each day

2) Increase their knowledge
about the markets

3) Have the talking points
to impress prospects and reassure current clients.

And we do this all for a monthly cost of less than one client lunch.

That’s why we say we offer the best value in the paid research space, and our over 90% initial retention rate confirms it.

Stepping back, do we think this rally is heralding a new bull market in stocks?

No, we don’t.

The risks to this market are generally unchanged from three weeks ago, and we’re continuing to monitor those risks for our subscribers.

But clearly, the near-term trend is higher, and you learn quickly in this business you have to invest in the market you’ve got, and not the one you think you should have!

So, the key question remains whether investors need to abandon those defensive equity positions and rotate into higher-growth/higher-beta sectors like tech/consumer discretionary and basic materials. 

That’s a pretty important question from a performance standpoint, because defensive sectors have outperformed cyclical sectors in 2016 – and if we are going to see a massive rotation back in to cyclicals, then advisors need to know that to maintain outperformance.

We discussed the potential for that rotation in a recent edition of The Sevens Report
and have included an excerpt for you here below.

Tactical Sector Update: Great Rotation or Not?

Post Brexit, one of the topics we’ve been very focused on covering was the possible “Great Rotation” by investors out of defensive, higher-yielding sectors (staples, REITs, utilities) and into more cyclical sectors (consumer discretionary, banks, tech), because if that rotation does occur, it could have a profound impact on whether an advisor can outperform into year end.

To that point, while the S&P 500 is up nicely this year (a little under 7.5% after yesterday’s close), being over-allocated to defensive sectors throughout 2016 has been a recipe for outperformance. Case in point, our “Defensive” broad allocation suggestion (which is 2/3 defensive sectors, 1/3 cyclical sectors) has outperformed the S&P 500 by nearly 2% year to date and has been less volatile.

But given the breakout in stocks post Brexit, and the prevalence of the TINA trade in stocks (TINA=There Is No Alternative), that defensive outperformance could easily reverse.

Over the past month, there are hints of that starting, and recently we’ve seen a slight rotation out of safety and into cyclicals (including yesterday). Since July 12, the S&P 500 is up about 1.5%, and more cyclical sectors are up anywhere from 0.7% (consumer discretionary, XLY) to 5.27% (tech, XLK). Conversely, traditional safety sectors are all down slightly (staples off less than 1%, utilities down less than 1%).

Looking more broadly, since July 12, SPHB (S&P 500 high beta ETF) is up 2.4% while SPLV (S&P 500 low beta ETF) is down 0.9% (although SPLV is still up 10.4% YTD while SPHB is up 7.5%, the gap is closing). So, with some evidence of this rotation, the question we are addressing is whether we should begin to sell some of our defensive sectors and re-allocate to more cyclicals sectors.

So far, the answer is “no,” and for three reasons:

1. Where would we go?
If you or your clients have owned staples and other defensive sectors for part or most of the year, it doesn’t make sense to sell them yet because no other sectors in the market offer a comparable yield and less volatility (remember, if you’ve owned them for a while the realized yield is higher than the current yield because you have a lower cost basis).

2. Economic growth isn’t breaking out.
Cyclicals generally outperform in a rising economic tide, but we’re stuck in stagnant water (and have been for years). Despite hopes, GDP is still looking to be on trend at an uninspiring 2%-ish growth for Q2 and Q3. That favors defensives.

3. The 10-year yield hasn’t broken out.
Think of the logic—the reason the stock market has rallied is because of the expectation of “forever-low” interest rates amidst slow/stagnant global growth. Well, beyond the short term, if rates are forever going lower, wouldn’t I want to hold my higher-yielding equities? It’s only when the 10-year Treasury yield breaks out to the upside that I would want to truly exit higher-yielding sectors and move into cyclicals.

Now, shorter-term underperformance is to be expected, and that’s why, several weeks ago we bought a regional bank ETF that we believed would help reduce any relative underperformance if we saw the start of a rotation out of safety and into cyclicals.


That decision has proved wise, because since then that ETF has rallied almost 5%, handily beating the S&P 500 and cushioning the relative underperformance of defensive sectors.

If you are heavy in defensive sectors, then I would advocate buying this regional bank ETF here because it will go up more than other sectors if rates start to rise.

Finally, we understand that getting this potential rotation right could be the difference between outperforming in 2016 and underperforming. So, we will continue to watch closely, and we will alert paid subscribers when, and if, we think it makes sense to exit defensives and move into cyclicals—including which specific ETFs we would allocate to with tactical funds to make sure you maintain outperformance.

These are the dog days of summer but this dull market isn’t going to last much longer, and volatility could make a big comeback starting in the next few weeks:

  • Fed Chair Yellen’s speech on August 26th may reset interest rate expectations and cause a pullback in stocks.
  • The US political election looks one-sided at the moment but polls always tighten into the election and the first debate is coming up (also in late September).
  • In Italy, a key election is looming this fall and if it goes against expectations (like Brexit) it could spark another banking crisis in Europe.
  • Chinese economic data last week was lackluster, and if we see a loss of momentum that will become a headwind on stocks.
  • Markets are losing confidence in central banks, and if that gets worse through more ineffective policies this fall, that will cause volatility.

We’re committed to making sure subscribers to our full morning report have the independent analysis they need to navigate macro risks
while at the same time having the tactical idea generation that can help their clients outperform.

If your paid subscription research isn’t giving you talking points to discuss with clients, monitoring the macro horizon to keep you aware of risks, and providing tactical allocation suggestions and idea generation, then please consider a quarterly subscription to The Sevens Report.

If all we do is help you get one client, that will more than pay for the subscription!

I am continuing to extend a special offer to new subscribers of our full, daily report that we call our “2-week grace period.”

If you subscribe to The Sevens Report
today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Click this link to begin your quarterly subscription today.

Value Add Research That Can Help You Grow Your Business Into Year-End

Our subscribers have told us how our focus on medium term, tactical opportunities and risks has helped them outperform for clients and grow their books of business.

We continue to get strong feedback that our report is: Providing value, Helping our clients outperform markets, and Helping them build their business:

“Thanks for your continued insight; it has saved my clients over $2M USD this year… Keep up the great work!” – Top Producing FA from a National Brokerage Firm.

“Let me know if there is anything else that you need from us. Thanks again for everything. I really enjoy the Report – it is helping me grow my business and stay on top of things.” –  Independent FA.

“Great service from a great company!!” – FA from a National Brokerage Firm.

“Great report. You’ve become invaluable to me, thanks for everything…!  –  FA from a Boutique Investment Management Firm.

Subscriptions start at just $65 per month, billed quarterly, and with the option to cancel any time prior to the beginning of the next quarter, there’s simply no reason why you shouldn’t subscribe to The Sevens Report right now.

Begin your subscription to The Sevens Report right now by clicking this link and being redirected to our secure order form.


Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65 dollars.  To sign up for an annual subscription, simply click here.


Best,
Tom

Tom Essaye,
Editor
The Sevens Report

Could the Yield Curve Invert?

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Yesterday, a subscriber called to tell me about a successful meeting he had with a client this week, in which the advisor explained:

  • What the Equity Risk Premium was,
  • Why it was driving stocks higher, and
  • Why the 10-year yield is now a leading indicator for a potential correction in stocks.

The client asked him “How’d you Know That?”
because the advisor sends this client virtually all of compliance approved firm research materials, and they didn’t say anything about the Equity Risk Premium.

The advisor’s answer: “The Sevens Report.”

This advisor went on to tell the client that he uses
the daily publication as an independent research “check” on the firm-provided research to help formulate his overall investment strategy and make sure his clients are protected from macro risks.

Most importantly, the subscriber told me his client left the lunch happy and confident that his account was in capable hands.

So, what information did you have this week to impress clients?

The Sevens Report isn’t just another research tip sheet that’s designed to tell you whether stocks are going to go up or down. Rather, it’s a tool we have created for the purpose of helping advisors:

  1.  Attract more clients
  2.  Increase assets under management
  3.  Improve retention

In fact, The Sevens Report helped thousands of your colleagues and competitors at wire house firms and smaller RIAs be more efficient and more effective in finding and closing new clients since we launched in 2012, and we did it again in 2016.

Affluent clients want communication on the markets that is not just a “boiler plate” strategy update from your broker dealer.  They are expecting you to know what is happening in the markets and how it is affecting their portfolios, especially in this difficult environment. 

We created The Sevens Report, so that advisors can make sure they have an independent analyst that communicates with them every day and quickly identifies for them the risks and opportunities for:

  • Stocks
  • Bonds
  • Currencies
  • Commodities, and
  • Interprets what economic data means for the market. 

Most of our subscribers are not actively trading clients’ accounts.  However, they can demonstrate to their clients that they weren’t blindsided by the recent volatility
thanks to The Sevens Report.

That’s the kind of analysis that leads to More Clients and ultimately More AUM.

Easily the most important thing that’s happened this week has been that the Bank of England’s QE program basically “failed” on Tuesday, and we’ve included an excerpt of that research for you below:

Implications of a Failed GILT Purchase Program

Most advisors don’t follow global bond markets, but the most important thing that happened this week was in the British bond market and it’s important for your clients because:

  1. It’s another sign that global central bank policies around the globe are becoming less and less effective (which is a problem for an equity rally based on central bank help), and
  2. Further easing by the Bank of England or other central banks will have real world implications on US bonds, including potentially inverting the yield curve
    (which is a historic warning sign for stocks).

What Happened: On Tuesday, the Bank of England became the latest central bank to have egg on its face when, on the second day of its newly expanded QE program, the bank was not able to buy its daily quota of long dated bonds. The BOE sent bids for 1.17 billion pounds worth of 15 year and longer GILTS (British Government Bonds), but it only received offers for 1.118B of GILTS, falling short by over 52 million pounds worth of debt.

Because of how screwed up the global bond markets have become, holders of long term GILTS were literally unwilling to sell to the BOE because they know that 1) There’s nowhere else in the market to generate a decent yield, and 2) These GILTS are just going to keep going up. This is a prime example of where economic theory unfortunately meets market reality.

Why It Matters:

Reason One: Eroding Central Bank Confidence is a Longer-Term Problem for Stocks.

Japan has been ground zero for this eroding confidence as the Bank of Japan, over the first eight months of 2016 has largely admitted that, practically speaking, it is out of bullets to stimulate the economy. And that any further material easing: 1) Can’t be effectively executed because of the size of various markets, or 2) Will cause more harm than good
(like when negative interest rates sent global stocks plunging last week).

Bigger picture, for those investors with larger time horizons, I feel like even lower yields and more and more easing is becoming a virtual pressure cooker, and as yields grind lower the cooker is starting to shake and screws and nuts are starting to fly off as the pressure gets too great.

Perhaps that’s a bit over the top, but there are anecdotal signs that this entire system is starting to show signs of serious stress, and with global bonds, stocks and real estate all at all-time high prices, I honestly fear for the global economy if this thing blows up. I hope I am wrong.

Reason 2: The Yield Curve Might Invert, Signaling a Looming Recession.

We’ve talked for weeks now about the compression of the 10’s -2’s Treasury spread, and that if the yield curve inverts, that’s historically a sign of impending recession—or in this market, something worse.

And, that fear has been elevated after the BOE this week.

That’s because while the BOE was unable to fill its quota of long-term debt, it easily bought more medium-term debt (GILTS that don’t yield as much).

That’s important for three reasons:

First, it’s created more downward pressure on 30 year Treasury yields. BOE QE makes the 30-year Treasury even more attractive because the yield of over 2% is much, much better than anything else out there right now. So, that will keep downward pressure on 30-year yields.

Second, it puts more downward pressure on 10-year Treasury yields. BOE QE will make the US 10 Year Treasuries even more attractive because the yield at 1.5% is much, much higher than anything comparable in the market, so that will keep pressure on the 10-year yield.

Third, it will not put pressure on 2-year Treasury yields. Finally, with economic data consistently coming in better than estimates (including last week’s jobs report), a Fed hike can’t be delayed any further than is currently expected.

So, the likely direction of the 2-year Treasury yield is flat to higher, unless economic data gets worse—and at that point we’ll be facing a recession
(which is obviously bad for stocks).

I realize that most financial advisors didn’t have “Global Sovereign Bond Markets” in their broker training program. But, this is what’s moving markets right now, so you need to be on top of it.

This research was already sent to our paid subscribers at 7 a.m. in the full, paid edition of The Sevens Report, and I’m confident some of them are using this analysis to impress clients and prospects.

Make sure you have a daily research document that gives you peace of mind in volatile markets.

We’ll directly tell you (in plain English) what’s truly important in markets and provide consistent tactical idea generation so you can outperform for your clients, regardless of the environment.

I am continuing to extend a special offer to new subscribers of our full, daily report that we call our “2-week grace period.”

If you subscribe to
The Sevens Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Click this link to begin your quarterly subscription today.

Value Added Research That Can Help You Grow Your Business in 2016

Our subscribers have told us how our focus on medium-term, tactical opportunities and risks has helped them outperform for clients and grow their businesses.

We continue to get strong feedback that our report is: Providing value, helping our clients outperform markets, and helping them build their books:

“Thanks for your continued insight; it has saved my clients over $2M USD this year… Keep up the great work!” – Top Producing FA from a National Brokerage Firm.

“Let me know if there is anything else that you need from us. Thanks again for everything. I really enjoy the Report – it is helping me grow my business and stay on top of things.” –  Independent FA.

“Great service from a great company!!” – FA from a National Brokerage Firm.

“Great report. You’ve become invaluable to me, thanks for everything…!  –  FA from a Boutique Investment Management Firm.

Subscriptions start at just $65 per month, billed quarterly, and with the option to cancel any time prior to the beginning of the next quarter, there’s simply no reason why you shouldn’t subscribe to The Sevens Report right now.

Begin your subscription to The Sevens Report right now by clicking this link and being redirected to our secure order form.

Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65. To sign up for an annual subscription simply click here.

Best,
Tom

Tom Essaye
Editor, The Sevens Report

What is Earnings Per Share?

/in , /by

“It’s a good thing I’m retiring soon, because after almost 38 years in the business almost nothing makes sense in the markets anymore. So it’s a good thing I have you, who understands the way things work today.”

That’s what Reed, an advisor and subscriber, wrote to me yesterday.

If a guy with nearly four decades of experience in the business is confused by today’s markets, it’s a reasonable assumption that a lot of advisors feel overwhelmed and confused by a market that seems to be getting more random every day.

But, Reed’s comments reinforced in my mind that our research is helping advisors successfully navigate today’s environment, as thousands of the most successful advisors in the business who felt overwhelmed or confused by the markets over the past few years now use our daily morning report to cut through the noise and stay focused on what’s really driving stocks, bonds, commodities and currencies.

They’ve found that spending less than 10 minutes reading The Sevens Report
each morning gives them time to focus the rest of their day on growing AUM and building their businesses.

As I often do with testimonials, I hung Reed’s comments on my wall, because they remind me that advisors are counting on us to help them continue to grow their business by making them more efficient and more effective.

If you’re like most advisors I know, you simply do not have enough time to do the necessary research to understand what’s truly driving these wild markets, because you need to spend the majority of your time meeting with prospects, marketing, hand-holding current clients and dealing with an ever-growing list of compliance and regulatory requirements.

We provide the accurate, plain English, succinct research that allows advisors to dedicate more time to these revenue generating activities, because they know at 7 a.m. every day they will have a report emailed to them that explains what’s important across all asset classes:

  • Stocks
  • Bonds
  • Currencies
  • Commodities

And, we’ve been doing it for our paid subscribers all year long:

  • In December, we alerted subscribers to the deterioration in energy-related credit, and explicitly cited the risks to the high-yield bond market. So, when stocks broke down on a plunge in high yield, our subscribers weren’t caught off guard and they could demonstrate to their clients that they are on top of the volatility and ahead of the markets, which ultimately builds confidence and solidifies relationships.
  • In January we focused on the Chinese yuan as the leading indicator for stocks and told our subscribers that when it stabilized, stocks would stabilize (and that’s exactly what happened).
  • In February and March, we alerted our subscribers to the decline in US oil production and warned that if it continued, oil would bottom as would stocks (it did, and they did).
  • Most recently, we have been monitoring several key leading indicators as we navigate the “post-Brexit” world. So far we have called the market reaction correctly.

Now, there’s a new driver of markets, and it’s an obscure valuation formula called the Equity Risk Premium that large investors are using to justify this grind higher in stocks.

And until the market is fully valued (based on this formula) we continue to think the short-term path of least resistance for stocks is higher, despite underwhelming fundamentals.

We’ve included an excerpt of that research for you below as a courtesy:

What Is the Equity Risk Premium, and Why Is It So Important Right Now?

It’s a bit of “revenge of the nerds” in the markets right now, because one of the stealth factors behind this grind higher in stocks has been a largely academic valuation formula called the Equity Risk Premium.

This matters to you (and your clients) because it will show us:

1) Where (at least fundamentally) this market is overvalued and where we need to begin to reduce equity exposure, and

2) See why a rise in bond yields could kill this rally.

First, though, a primer on the Equity Risk Premium (this is review for those of you recalling your finance of Capital Asset Pricing Model classes). The Equity Risk Premium (ERP) is basically a fancy term for the risk/return setup in stocks (equities). Stocks are obviously historically riskier than bonds, so the ERP is the additional return (or reward) an investor expects when investing in stocks over Treasuries, and for taking on excess risk (higher risk/higher return).

But, depending on a multitude of factors, that expected return on stocks and expected return on Treasuries changes, so the ERP changes. In today’s market, thanks to relative macroeconomic calm, and based on the perception of a global central bank safety net, market consensus for the equity risk premium is about 4%.

Here’s how it’s calculated:

  • First, you find the forward looking S&P 500 P/E, which is currently about 16.75 (2180/$130).
  • Second, you take the inverse of that number (so 1/16.75 = 5.97%). That number, 5.97%, is the return the market is currently expecting from stocks in 2017.
  • Third, to get the Equity Risk Premium, we have to subtract the 10-year yield because we want additional return beyond investing in Treasuries over the next year. The current yield on the 10 year is 1.58%, so our ERP is: 5.97% – 1.58% = 4.39%.

Given that number, we can generate a few conclusions:

Conclusion #1: 2340 in the S&P 500 is a potential top for this market. Assuming macro-economic calm, investors should keep buying the market until the ERP = 4.00. So, assuming bond yields stay low (and that is important) an ERP of 4% = 2340 in the S&P 500 or 7.5% higher from the current level.
If we get to that level (or approach it) I would likely begin to reduce equity market exposure, as beyond that stocks are simply very, very overvalued.

Conclusion #2: If Treasury yields rise to 2% or higher, this market will likely correct (potentially hard). To illustrate how important 10-year Treasury yields are to stocks, you have to understand one point: As Treasury yields rise, the ERP goes down.


As the 10-year yield rises, multiples must come down to keep the ERP above the 4% floor. As a result, so too must the S&P 500. If the 10-year yield moves back to 2.5% (which is a long way away), then to keep the ERP at the 4% floor the S&P 500 needs to trade with a 15.5X multiple, which at $130 EPS is 2015, or 8% lower from here.

Conclusion #3: An 4% ERP is historically very low, and smacks of “exuberance.” I did some digging, and most people think a reasonable/historical ERP is between 5%-7%. In fact, I only found one instance where it dipped below 4%, and that was early 2008! (the data was off the NYU Stern School of Business website).

Given how active central banks are right now, we can probably dip that number below 5%. But if we get an anticipated macro headwind and we see the ERP move back into the mid 4%, that could result in significant downside for the S&P 500 of anywhere between 8% and 14%, depending on the level of the 10-year yield.

Bottom Line

I realize that following the Equity Risk Premium isn’t a priority for most of today’s advisors, but what is important is making sure that both prospects and clients feel confident you understand markets! And, our subscribers have found that reading our daily report (again, emailed every day at 7 a.m.) helps them stay on top of markets while saving them research time.

That creates more time for meetings and calls, which we all know leads to more AUM.

Finally, it’s well documented that affluent investors are weary of this stock market.

Yes, we all know it’s being inflated by the Fed, but many of us feel that this market now is just another bubble that will pop at some point. So, affluent clients want to know their advisor is constantly watching for signs that the bubble is going to pop, because avoiding another pullback in markets will be the key to outperforming over the next several years. Our subscribers know we are watching that for them, and the Equity Risk Premium is just the latest indicator we’re tracking for signs of trouble.

We’ll continue to watch the ERP and adjust it as yields move, and keep you abreast of any changes that are bullish or (more importantly) bearish. In order for this equation to balance, and keep the ERP at 4%, the P/E of the market must decline—which is negative for stocks.

Make sure you have a daily research document that gives you peace of mind in volatile markets.

We’ll directly tell you (in plain English) what’s truly important in markets and provide consistent tactical idea generation so you can outperform for your clients, regardless of the environment.

I am continuing to extend a special offer to new subscribers of our full, daily report that we call our “2-week grace period.”

If you subscribe to The Sevens Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Click this link to begin your quarterly subscription today.

Value Add Research That Can Help You Grow Your Business in 2016

Our subscribers have told us how our focus on medium-term, tactical opportunities and risks has helped them outperform for clients and grow their businesses.

We continue to get strong feedback that our report is: Providing value, helping our clients outperform markets, and helping them build their books:

“Thanks for your continued insight; it has saved my clients over $2M USD this year… Keep up the great work!” – Top Producing FA from a National Brokerage Firm.

“Let me know if there is anything else that you need from us. Thanks again for everything. I really enjoy the Report – it is helping me grow my business and stay on top of things.” –  Independent FA.

“Great service from a great company!!” – FA from a National Brokerage Firm.

“Great report. You’ve become invaluable to me, thanks for everything…!  –  FA from a Boutique Investment Management Firm.

Subscriptions start at just $65 per month, billed quarterly, and with the option to cancel any time prior to the beginning of the next quarter, there’s simply no reason why you shouldn’t subscribe to The Sevens Report right now.

Begin your subscription to The Sevens Report right now by clicking this link and being redirected to our secure order form.

Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65. To sign up for an annual subscription simply click here.

Best,
Tom

Tom Essaye
Editor, The Sevens Report

Market Update: Buy, Sell or Hold

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Last night my wife and I went out to dinner with friends. Shortly after we sat down, the conversation shifted to work, and eventually to what I do each day at The Sevens Report.

When describing the value that The Sevens Report
provides to our paid subscribers, my wife’s friend said, “so you’re basically a navigator of markets” for financial professionals.

It’s really a great analogy, as our goal at The Sevens Report is to wake up each day and help our subscribers navigate these complex markets, and provide the best value in market analysis out there today.

I created this report because I know that most financial advisors and professionals are not glued to blinking screens from 9:00 – 4:00 each day.

They are discussing the financial goals of their clients and mapping a financial course to reach those goals. Most of their time is spent building and fostering relationships, not analyzing Fed commentary, studying the yield curve, or digging through an oil inventory report.

The most successful advisors use tools like The Sevens Report
to stay ahead of the markets (stocks, bonds, currencies and commodities) and to make sure their clients are positioned to both outperform while also being protected from any financial “storm” that may blow up.

Specifically, we take complex macro-economic concepts (like ECB QE, Chinese economic policies, implication of rising interest rates, GDP, FOMC Statements, etc.) and tell you:

1) What you need to know

2) What will move markets, and

3) What will make those events positive or negative for stocks and other asset classes.

Every day at 7 a.m. we deliver this information, so you can show your clients you’re on top of the markets with a plan to outperform, regardless of the environment.

Stocks saw their first decent pullback in weeks Tuesday as an initial spike higher in Treasury yields following disappointment over underwhelming Japanese fiscal stimulus weighed on stocks.

And, with the Bank of England decision looming tomorrow and an important jobs report beyond that, the chances of rates moving higher are rising, and that’s a potential risk to stocks.

As a courtesy we have included analysis on yesterday’s selloff for you today:

Bottom Line—The Danger of Expectations

Yesterday’s surprise dip in stocks isn’t changing the outlook for markets, and including yesterday’s dip we can chalk this recent price action up to consolidation of the recent rally. In fact, part of the reason yesterday’s selloff caught people by surprise was because the market’s gone straight up for some five consecutive weeks.

Beyond the short term, though, I do believe yesterday’s reaction validates what we’ve been saying about this rally since it started after Brexit—namely that it is founded on extreme dovish expectations for central banks, and extremely low expectations for interest rates well into the future (like years in to the future). Given that extreme expectation, markets are at a constant risk of a reset.

To that point, it’s important to understand that over the past few days Japanese authorities have eased policy further.

  • First, the BOJ increased its purchases of ETFs.
  • Second, the Abe administration added 7 trillion yen of new government spending to stimulate the economy.

And, tomorrow the Bank of England will almost certainly cut rates (more stimulus).

But, the actions by the BOJ and only a rate cut by the BOE (meaning no more QE) will underwhelm markets because of the absurdity of expectations with regards to policy.

Literally the only thing that would have pleased markets recently is if The Bank of Japan and Abe administration would have instituted “helicopter money” by:

1) Floating a 50-year bond Japanese government bond,

2) Having the Bank of Japan buy those bonds with printed money and

3) The Japanese government spend the BOJ’s money in the economy!

Ten years ago, even proposing the idea of doing something like that would have made you a candidate for an economist insane asylum!

Now, it’s expected, and the culprit is the central banks themselves who have trained markets that if currencies rise too much and stocks go down enough, they will do whatever it takes to placate the investor class.

That remains one of my biggest issues with this rally. It’s built on the idea of forever-low rates, but central banks have consistently disappointed since Brexit, and the BOE may do it again tomorrow.

This is a theoretical rant, but at some point this system will break.

Maybe we’ll be at S&P 500 2500 before it does, but this relentless appetite by markets for more and more stimulus isn’t healthy longer term, and this week’s price action has made me all the more concerned that unless we get back to some state of normalcy in monetary policy sometime soon, the fallout for all this will be extreme.

Making this rant practical, central banks have consistently underwhelmed markets since Brexit and it’s starting to take its toll as the rally has stalled.

If the Bank of England disappoints markets tomorrow, and Friday’s Jobs Report runs “Too Hot” that will cause a move higher in bond yields, and that could well signal an impending pullback.

Tomorrow’s edition of The Sevens Report will be sent to paid subscribers shortly after 7 a.m. so we can tell them the market implications of the Bank of England decision. And, it’ll include our “Jobs Report Preview” that will directly tell subscribers what specific levels of a jobs report will cause Treasury yields to rise, and stocks to drop.

Click this link to begin your quarterly subscription and make sure you have an analyst team committed to helping you navigate this still challenging market.

Use Market Volatility to Your Advantage

The Sevens Report isn’t just another research tip sheet that’s designed to tell you whether stocks are going to go up or down. Rather, it’s a tool we have created for the purpose of helping advisors:

  1.  Attract more clients
  2.  Increase assets under management
  3.  Improve retention

In fact, The Sevens Report helped thousands of your colleagues and competitors at wirehouse firms and smaller RIAs be more efficient and more effective in finding and closing new clients since we launched in 2012, and we are doing it again in 2016.

We know this because last year, an advisor from Florida called to personally tell us that sharing The Sevens Report with one of his larger prospects helped him land the $25 million account!!!  

He said the independent analysis provided talking points for him to discuss in the meeting, and it helped show his prospect that he wasn’t all about “touting the company line.”

Another FA at an independent firm told us that our analysis of the recent stock market sell-off saved his clients a substantial amount of money.

He wrote, “Thanks for your continued insight; it has saved my clients over $2M USD this year… Keep up the great work!”

These are the results our subscribers are achieving with The Sevens Report.

And, we know our product delivers because we have a nearly unprecedented retention rate of over 90%.

2016 has already been a volatile year, and with divergent central bank policies emerging around the globe, still-volatile oil prices, and important political events (Italian and US elections) looming, markets are going to stay volatile, so consider making a small investment in your business that can:

1) Save You An Hour Each Day

2) Help You Make Better Investment Returns

3) Increase Your Market Knowledge and Confidence When Talking with Prospects

Affluent clients want communication on the markets that is not “boiler plate” strategy updates from your broker dealer.  They are expecting you to know what is happening in the markets and how it is affecting their portfolios, especially in this difficult environment. 

We created The Sevens Report, so that advisors can make sure they have an independent analyst that communicates with them every day and quickly identifies for them the risks and opportunities for:

  • Stocks
  • Bonds
  • Currencies
  • Commodities, and
  • Interprets what economic data means for the market. 

Most of our subscribers are not actively trading clients’ accounts.  However, they can demonstrate to their clients that they weren’t blindsided by the recent volatility
thanks to The Sevens Report.

That’s the kind of analysis that leads to More Clients and ultimately More AUM.

So, why not make an investment in yourself and your business in 2016? We are confident it will produce returns many times greater than the cost (which is less per month than one client lunch).

Because of the great response we have seen, I am continuing to extend a special offer to new subscribers of our full, daily report that we call our “2 week grace period.”

If you subscribe to The Sevens Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Subscriptions start at just $65 per month, billed quarterly, and with the option to cancel any time prior to the beginning of the next quarter, there’s simply no reason why you shouldn’t subscribe to The Sevens Report right now.

Begin your subscription to The Sevens Report right now by clicking this link and being redirected to our secure order form.

Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65. To sign up for an annual subscription simply click here.

Best,
Tom

Tom Essaye
Editor, The Sevens Report