Cut Through the Market Noise: The Four Drivers of This Rally

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The Four Drivers of This Rally: Start a free trial of The Sevens Report.

What’s in Today’s Report:

  • Cut Through the Market Noise:  The Four Drivers of This Rally
  • Why Markets Rallied Despite Friday’s Hot Jobs Report
  • Weekly Market Preview:  Fed Speak, Growth Data and an Important Inflation Update
  • Weekly Economic Cheat Sheet:  Data Focused on Economic Growth and Inflation

Futures are modestly lower as Fed Chair Powell’s 60 Minutes interview is being taken as slightly hawkish.

Powell’s 60 Minutes interview is being framed as hawkish but in reality, Powell didn’t say anything new as this was his main message: Rates cuts are coming sooner than later, but a March cut is unlikely.

Economically, China’s January services PMI missed estimates (52.7 vs. (E) 53.0), reinforcing economic concerns.

Today focus will be on the ISM Services PMI (E: 52.1) and the key here is clear:  This number needs to stay above 50 otherwise we will see growth concerns start to rise.  There is also one Fed speaker today, Bostic (2:00 p.m. ET), but he shouldn’t move markets given Powell’s recent interviews.

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Jobs Day (Updated Jobs Report Preview)

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Jobs Day: Start a free trial of The Sevens Report.

What’s in Today’s Report:

  • Jobs Day (Updated Jobs Report Preview)

Futures are solidly higher ahead of today’s jobs report thanks to strong earnings overnight.

META (up 17% pre-market) and AMZN (up 7% pre-market) posted strong earnings while AAPL (down 2% pre-market) underwhelmed, but overall earnings results were good overnight and that’s pushing futures higher.

Today focus will be on the jobs report and expectations are as follows: 187K job adds, 3.8% Unemployment Rate, 0.3%/4.1% wage growth.  Powell pushing back on a March rate cut helped increase the threshold for a “Too Hot” report, so there’s a wider lane for a “Just Right” reading.  But, if job growth remains very strong (so solidly above 200k) and the other details are “Too Hot,” don’t be surprised if yields rise and stocks decline as some investors start to doubt a May rate cut.

Other notable events today include Consumer Sentiment (E: 78.8, 1-Yr inflation expectations: 2.9%) and the last “important” day of earnings, although neither of those should move markets.

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Was the Fed Decision Hawkish? No. Here’s Why.

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Was the Fed Decision Hawkish? Start a free trial of The Sevens Report.

What’s in Today’s Report:

  • Was the Fed Decision Hawkish?  No.  Here’s Why.
  • Do We Need to Start to Worry About Banks Again?

Futures are bouncing modestly following Wednesday’s declines as investors digest the Fed decision and look ahead to important earnings after the close.

Economically, EU Core HICP (their CPI) rose 3.3% vs. (E) 3.2% and that’s slightly reducing rate cut expectations.

Today is another important day of economic data and arguably the most important day of earnings results for the Q4 reporting season.

The most important events today start with earnings as we get AMZN ($0.81), AAPL ($2.09) and META ($4.82) earnings after the close and obviously investors will want to see solid results.   Economically, the key reports today are the ISM Manufacturing PMI (E: 47.4), Jobless Claims (E: 214K) and Unit Labor Costs (E: 2.1%), and markets will be looking for in-line data to keep hard landing worries low.  Finally, we also get a Bank of England rate decision, but no change to rates is expected.

Join hundreds of advisors from huge brokerage firms like Morgan Stanley, Merrill Lynch, Wells Fargo Advisors, Raymond James, and more! To start your quarterly subscription and see how The Sevens Report can help you grow your business, click here.

Key Technical Levels to Watch on Fed Day

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Key Technical Levels to Watch: Start a free trial of The Sevens Report.

What’s in Today’s Report:

  • Key Technical Levels to Watch on Fed Day (Shareable PDF Available)
  • Jobs Report Preview

Stock futures are in the red this morning after mega-cap tech earnings failed to meet overly optimistic estimates (but were not that bad, all things considered), Chinese Manufacturing PMI missed estimates, and French CPI was higher than expected.

On the earnings front, AMD (-11%), GOOGL (-6%), and MSFT (-1%) are all lower in the pre-market despite generally healthy quarterly reports with most earnings and revenue figures topping analysts estimates while some corporate guidance was not as strong as hoped.

Today is lining up to be a very busy day full of catalysts. Starting with the economic data, we get the first look at January labor market data with the ADP Employment Report (E: 130K) while Q4 Employment Cost Index (E: 1.0%) will offer a look at wage pressures from late 2023.

The Treasury will release the official Refunding Announcement details before the open (8:30 a.m. ET) before focus will turn to the Fed with the FOMC Decision (2:00 p.m. ET) and Powell’s press conference (2:30 p.m. ET) in the afternoon.

There are no “Mag7” earnings today, but a few notables to watch include: MA ($3.08), QCOM ($2.37), and MET ($1.95).

Bottom line, equities are on edge in pre-market trade this morning with all of today’s catalysts looming, but, if the Treasury Refunding Announcement supports the bond market (keeps a lid on yields) and the Fed doesn’t not offer a hawkish surprise, we should be able to see markets stabilize. Conversely, any disappointments or hawkish reactions will support further volatility into the back half of the week.

Computer chips

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Why Stocks Rallied on Thursday

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What’s in Today’s Report:

  • Why Stocks Rallied on Thursday
  • Policy Spread Update (Rate Cuts Imminent?)

Futures are slightly lower on digestion of Thursday’s rally and as markets await bank earnings this morning.

Fed balance sheet news overnight was mixed, as total usage of the Discount Window and BTFP dropped to $139 bln from $149 bln, but that’s still very elevated and it underscores there’s still stress in the regional banks.

Focus today will be on economic data and earnings, and the key here remains stability in both sets of reports (so no major disappointments).  Important economic reports today include, in order of importance, Retail Sales (E: -0.4%), Industrial Production (E: 0.3%) and Consumer Sentiment (E: 62.7).

Earnings season starts today and key reports we’re watching include: JPM ($3.41), C ($1.66), WFC ($1.15), PNC ($3.60), BLK ($7.73), UNH ($6.24).

Finally, there’s one Fed speaker, Waller at 8:45 a.m. ET but he shouldn’t move markets (the Fed message is very consistent right now).

Tom Essaye on USA TODAY – His Take on Market and Economy Surge

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“The stock market is relentless in asking the question, ‘What’s next?’ ” says Tom Essaye, founder of the “Sevens Report,” a financial newsletter. “The idea of ‘peak everything’ is a legitimate one. There is a fear that … while things are great right now, it’s as good as it gets.”

Access the full USA TODAY article here.

Why “Credit Impulse” Matters to You, June 21, 2017

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Credit Impulse Explained: There are many analysts and investors who believe that the entire ’09-’17 stock rally is nothing more than the result of a historic, globally coordinated credit creation event from the world’s major central banks. Put in layman’s terms, every major central bank in the world has done QE at some stage over the past eight years, and pumped the world full on cash. So, all they’ve done is create massive asset inflation in bonds, stocks and real estate.

Help your clients outperform markets with The Sevens Report—start your free two-week trial today.

Credit ImpulseQE is Quantitative easing. It is a “monetary policy in which a central bank creates new electronic money in order to buy government bonds or other financial assets to stimulate the economy (i.e., to increase private-sector spending and return inflation to its target).”

First, the theory goes, it was China’s central bank (the PBOC) and the Fed unleashing the initial wave of QE following the financial crisis in ’08/’09. Both central banks kept their foot on the accelerators over the next several years (remember QE1, QE2, Operation Twist, and then QE Infinity). In 2013, the Bank of Japan joined the Fed, PBOC and Bank of England at the QE party, only they came to really party, and upped the ante by creating a huge QE program.

Then, as the US and Chinese economies showed signs of life (finally) in 2015, the Fed and PBOC paused their QE/credit creation programs. And, whether causally or coincidentally, 2015 turned out to be one of the more volatile years in the markets in the last decade… and US stocks largely traded sideways until early 2016.

But by that point, the ECB had joined the QE party, and the PBOC restarted its credit creation machine following the economic scare of 2H 2015. So, even while the Fed has stopped QE, on a global basis the total amount of QE and credit in the system resumed a steep acceleration, as now the PBOC, BOJ and ECB were doing QE.

Again, coincidentally or causally, stocks broke out in February 2016, and they literally haven’t taken a break in 19 months (excluding two one-night scares with Brexit and the US election).

So, again, while there is no hard proof that this global expansion of credit has powered US (and now global) stocks higher, there certainly is at least a casual relationship if we look at history.

The reason I am pointing this out is simple: There are growing signs that the near-decade-long global credit creation/QE cycle appears to be nearing the end. First, there are the central bank actions. The Fed is hiking rates, and likely taking steps to reduce its balance sheet, draining liquidity from the system.

Second, the ECB appears to be on the verge of tapering its QE program, and while that will still result in a net credit increase for the next year, the pace of credit creation will slow. Finally, and perhaps most importantly, China continues to aggressively reduce credit in its economy, and I’ll again remind everyone the last time they did that, we got the volatility in 2H ’15.

This is where the “Credit Impulse” comes in.

Credit Impulse is a term used by various research firms that measures the “Rate of Change of Change” of global credit creation/QE. Put simply, while the global amount of credit may still be rising, the pace of the increase has not only slowed… it’s turned negative. Similar to taking your foot off the gas while you’re still going forward. It’s just a matter of time until you stop.

Getting more granular, UBS has been out front on this issue, and back in February noted that Credit Impulse turned negative. In a much-anticipated report out last week, the firm said that the decline over the past three-to-four months has accelerated, with Credit Impulse dropping to -0.6% annualized over the past three months.

Now, Credit Impulse is a composite of various measures of credit, including loans, loan demand and other metrics, so this is not a hard-and-fast number. And the fact that it has turned negative doesn’t mean we’re looking at an impending collapse in stocks.

But if we look at the entire picture, negative Credit Impulse; a more-hawkish-than-expected Fed that’s apparently committed to reducing its balance sheet, a Chinese central bank that is apparently committed to reducing credit in that economy, and an ECB that will begin tapering QE in 2018… the fact is we appear to be nearing the end of the post-financial-crisis credit expansion, and with economic growth where it is, I cannot see how that will be positive for stocks longer term.

Bottom line, I’m not turning into ZeroHedge (although they are all over this), but the fact is that I sense a lot of complacence regarding the end of this global credit creation cycle.

People seem to think that because the Fed ended QE and hiked rates, and then nothing “bad” happened, that this means things will be ok. The only problem is they fail to consider that at the exact time the Fed stopped QE, the BOJ, ECB and PBOC all ramped up their QE programs. That means global liquidity continued to expand, and stocks and Treasuries have been the massive beneficiary.

So, there’s what keeps me up at night, i.e., what happens in 12 months if the only central bank still doing QE is the BOJ? Maybe nothing, but I can’t be sure, especially considering current economic growth.

We will continue to watch the tectonic movements in the global economy for signs of stress, because while we enjoy quiet markets and low volatility now, we appear to be on the cusp of an unknown period where the global punch bowl slowly gets removed from the party. And, I’m bound and determined to make sure we don’t get stuck with the proverbial bill. Food for thought.

If you feel like at any moment this market could turn around – and in a hurry—subscribe to The Sevens Report!

What the Election Means to Markets (Updated)

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Election Day is just two weeks from this Tuesday, so you’re probably getting the question:

“What does the election mean for the markets?”

Specifically, we want to address, in plain English, what a Clinton or Trump win would mean for:

  • The major asset classes: Stocks, Treasuries, Gold, Oil, the US Dollar and
  • Which stock sectors will be winners or losers

We’re producing this research now because if you’re like advisors who subscribe to The Sevens Report, you’re already getting asked questions about the election, and we want to make sure our paid subscribers have a clear, confident answer if a client or prospect asks about the potential market consequences of a Clinton or Trump victory.   

We’re addressing this for two specific reasons.

  • I haven’t found a good, comprehensive, Plain-English analysis of the election that focuses on the specific implications for all asset classes (not just stocks) and that singles out which stocks or sectors will rise or fall depending on the outcome.
  • The election is obviously a popular topic, and advisors will be talking about it with current clients and prospects. We want to make sure our paid subscribers have the talking points they need to turn those conversations into more assets and more clients
    – because the opportunity will be there for the informed advisor!

That’s why we made sure our election analysis covered all asset classes (not just stocks), because who wins will affect bond prices, oil prices, gold prices and the US dollar.

The election will also produce opportunities in specific stock sectors to outperform into year end, and we want our subscribers well versed in those potential opportunities, so when a prospect or clients asks – they have a specific answer!

As we enter what we believe will be a volatile fourth quarter, we will be dedicated to making sure our subscribers know what’s really driving markets, because we firmly believe volatility is an opportunity to strengthen your relationships with current clients and impress
prospects who are currently with other firms.

We all know that successful advisors grow their books by connecting with high net worth clients, and to build trust with those clients you can’t just repeat company “perma-bull” strategies.

That is why we created The Sevens Report, so that advisors can make sure they have an independent analyst that communicates with them daily, by 7 a.m., and quickly identifies the risks and opportunities for:

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

The Sevens Report is the daily market cheat sheet our paid subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets.

With a monthly subscription cost less than a single client lunch, we are confident that we offer
the best value in the independent research space.

As a courtesy, we’ve included an excerpt from a recent edition of The Sevens Report that provides a roadmap for the markets given a Trump or Clinton victory.

What the Election Means for Markets

Three Market Winners (Regardless of Who Is Elected)

Infrastructure Stocks: Both candidates will likely expand infrastructure spending. Some names to watch (there isn’t a pure play infrastructure ETF): Restricted for subscribers. IGF is a global infrastructure ETF, but the US makes up less than 1/3 of the ETF, so it’s not a pure play (although still not a bad idea as increased government spending is likely across the globe).

Defense Stocks: Both candidates will likely increase defense spending, at least initially as the push to eradicate ISIS. Obviously given their stated policies it’s more positive for defense names if Trump gets elected, but either way this is a sector that should have a tailwind regardless of the outcome. Our preferred Defense ETF is:  Restricted for subscribers.

Gold: Regardless of who wins the outlook from a political and macro standpoint isn’t exactly rosy, so gold will likely catch a mild bid in either case even if it’s nothing more than as a protest vote by investors (neither candidate is exactly wanted by the markets).

Clinton Victory

Macro View:
The market “prefers” a Clinton win solely because it’s more of the same. So, a Clinton victory should be viewed more as “not bad” for stocks rather than “good” (in the short term) compared to the uncertainty of a Trump victory.

Market Reaction: Stocks: A mild relief rally (relief there were no surprises) but nothing particularly bullish. Bonds: Also a mild relief rally. Oil/Gold: Oil little changed, gold likely modestly higher. US dollar: Little changed.

Winners: Hospitals (Thesis: No Obamacare repeal or replacement, ETF: Restricted for subscribers), gun manufacturers (Thesis: Potential restriction on certain firearm sales. No ETF, best stock,
Restricted for subscribers). Alternative energy (Thesis: Continuation of investment in alternative energy programs. ETFs:
Restricted for subscribers.

Losers: Biotech/Pharma (fears of regulation/price ceilings), energy & coal (Thesis: Increased environmental regulation reducing coal and fossil fuel production, ETFs:  Restricted for subscribers. Private prison stocks (Thesis: Clinton said she wants them basically out of business at the debate.  Stocks:
Restricted for subscribers). Notable: Natural gas may be the exception here and worth a look on a dip as natural gas is the favorite fossil fuel of the alternative energy crowd.

Trump Victory

Macro View: The level of uncertainty regarding his policies will be very high, and that will elicit a “sell first, ask questions later” immediate reaction from stocks. But given the period between Election Day and Inauguration is usually a quiet one for the President Elect, I don’t think a Trump victory will, by itself, cause a material selloff into year end.

Market Reaction:
Stocks: Likely a mild-to-modest selloff, but not a bearish game changer. Bonds:  Treasuries lower near term but not a bearish game changer. Dollar: Lower as markets price in potentially contentious trade deals. Gold/Oil:  Both up (potentially materially) on uncertainty (the former more so than the latter).

Winners: Coal (Thesis: Reduced regulation on coal production and sales. ETF: Restricted for subscribers), energy (Thesis: Relaxed regulatory environment. ETF: Restricted for subscribers), pharma/biotech (Thesis: No risk of price controls or ceilings. ETF:
Restricted for subscribers), banks (Thesis: Potentially higher rates, rollback of certain Dodd-Frank regulations. ETF: Restricted for subscribers).

Losers: Hospitals (Thesis: Potential healthcare law changes. ETF: Restricted for subscribers). Alternative energy (Thesis: less funding for programs. ETFs:  Restricted for subscribers).

The Worst Election Outcome for Stocks

Given the large shift in the polling towards Clinton over the past few weeks, there are two new threats to the market from the election that I want to cover.

First, the Democrats sweep and win the presidency, Senate and House.

Second, and more likely, the Democrats win the presidency, Senate and shrink the Republican majority in the House.

Now, to be very clear, calling this a threat to markets has nothing to do with politics. These events aren’t a threat to markets because of the Democrats. Instead it’s because the market generally prefers a divided government that can’t really do anything. One party in full control is the opposite of that desire.

So, turning back to the first scenario where the Democrats sweep, that could be at least a temporary market negative because the government wouldn’t be divided and would likely be very active over the next two years.

The second scenario, where the Democrats win the presidency and Senate would still leave us with a divided government.

But, it would also vastly increase the chances of multiple budget/government shutdown dramas over the next two years. I say that because the Republicans would only be able to use the withdrawal of funding to influence policy (similar to what we saw in ’08 to ’12). And, to that point, current government funding is due to expire December 9th, so if this is the outcome of the election, that date will all of a sudden become more important.

Bottom line, Elections can move markets.

In 2012 the S&P 500 dropped 7%
ahead of and after the election, and if we get a negative surprise this year, a similar decline could easily turn the S&P 500 negative year to date.

If you don’t have a morning report that tells you, in plain English, what the election means for all asset classes, and doesn’t specifically identify sectors and stocks that will rally or decline based on the outcome, then please consider a quarterly subscription to The Sevens Report.

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

If all we do is help you avoid any election related pullback in stocks, or give you a tactical idea that can outperform into year end, it will be well worth the quarterly subscription cost!

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 and learn the 10 ETFs and 6 stocks we think will outperform or underperform depending on the election results.

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:

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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

Buy, Sell or Hold? (What’s Next for the Markets)

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People on Wall Street have a great sense of humor.

I remember thinking that years ago when I started my career at Merrill Lynch, and despite the fact that we’ve witnessed a lot of changes in this business over the years (most of them not good, in my opinion) I’m happy to say there are still a lot of funny people in this industry.

One of them is this guy “IvantheK” who I think is a trader (you never can tell on Twitter).

After the Fed meeting last week, he tweeted this image:

That’s a pretty accurate description of most people’s opinion of Fed policy!

Unfortunately, a dysfunctional Fed isn’t an excuse for advisors (or analysts) to underperform, and blaming a confused Fed for not having a good year won’t keep a client.

So, to keep growing both our businesses (yours and mine), we’ve got to get this market “right’ regardless of how difficult it is.

Given that, I’m happy that we again cut through the noise last week and gave our subscribers the need-to-know information about the Fed and BOJ.

Last week, we said the risk going into these central bank decisions wasn’t that they’d cause a pullback.

Instead, it was that they’d inadvertently put a “cap” on future stock gains.

And, we think that fear was realized because neither central bank was dovish enough to make us think global bond yields will drop towards post-Brexit lows.

And, without that tailwind, our fear is that the S&P 500 is now “stuck” at 2200.

Without the US 10-year Treasury yield heading towards 1%, there isn’t any justification to buy the S&P 500 above 17X earnings (I say the S&P 500 is stuck at 2200 because 17 * $130 (the 2016 S&P 500 EPS) = 2210).

So, in last Thursday’s Report, we said that while the post-FOMC rally was enjoyable, it was just a “relief” rally (relief that the BOJ and Fed weren’t outright “hawkish”) and not indicative of a new bull market.

And, over the past two trading days, the market has validated that analysis as the S&P 500 has retraced the entire post-FOMC rally.

Over the last week, we gave paid subscribers:

  • Central bank previews that they used for talking points when discussing interest rates and the Fed with clients and prospects.
  • Analysis they could send to clients immediately following the central bank decisions that showed they understood markets and were in control of portfolios.
  • Marketing material they can use with clients and prospects that shows their analysis of those decisions was right!

And all it took was a 7 minute read each trading day at 7 a.m.!

That’s how we turn our daily macro report into a tool advisors use to grow AUM.

Now that the key events of September are (mostly) behind us, focus is shifting towards the fourth quarter, and while the general consensus on Wall Street is that it could be a quiet few months, there are still several key events looming between now and December 31
that will decide whether the S&P 500 finishes 2016 positive or negative, and we’ve offered an excerpt of that list as a courtesy.

What’s Next for Markets: 5 Key Questions

Nearly six weeks ago in mid-August, when almost every analyst on Wall Street was trying to cram in a little extra vacation time, we told our paid subscribers (and you via these free excerpts) that the period of low volatility was about to end, because starting with the Fed’s Jackson Hole Conference (in late August) we were entering a critical stretch of key events that would largely decide whether stocks resume the July rally or not.

Since then stock volatility has risen sharply and the upward momentum in stocks has been broken.

Now, we’re saying it again:

The rest of the year will likely not be smooth sailing, and there is a lot of potential for volatility.
And with the S&P 500 up just over 4% year to date, there’s not a lot of room for error from a performance standpoint.

We have identified five key questions that, depending on their outcome, will ultimately decide whether the S&P 500 ends 2016 positive or negative:

Question 1: Will the ECB Extend QE? It’s widely assumed the ECB will extend its current QE program in December, but that’s not a given, and if they disappoint markets, we could see a sharp pullback at the worst time – three weeks until year end.

Question 2: Will the BOJ Taper QE This Year? The Bank of Japan basically admitted it’s “out of bullets” last week, so now it’s just a matter of time until they actually reduce their QE program (it’s not working and risks doing more harm than good). If/when the BOJ does taper QE, that will hit stocks.

Question 3: Does the Italian Referendum Pass? This is easily the most important issue for markets you likely haven’t heard about. This vote isn’t the Italian version of Brexit, but it isn’t very far from it, either. Later this year Italy will vote on a series of constitutional reforms, and if the vote fails, that will set up a “Brexit” type vote in 2017.

Question 4: Does the US Election Cause a Surprise? Even after last night’s debate this election will be closer than anyone thought possible, and it has the potential to cause a surprise and rattle markets.

Question 5: Does OPEC Cut Production: Falling oil is still a weight on stocks, so if OPEC does not cut or cap production at tomorrow’s meeting, the last date to do so in 2016 will be in late November. Plunging oil caused a drop in stocks last December, and the potential is there for a repeat.

In tomorrow’s paid subscriber edition of The Sevens Report, we will tell our subscribers the “Need to Know” on each of these looming events including:

  • Key Dates to Watch
  • What Will Make Each Event Bullish or Bearish
  • What Assets and Sectors Could Benefit or Get Hurt?

It is our hope that subscribers print this section of the report out and tape it to their desks, as it literally will be a road map to help advisors and investors navigate the remainder of the year.

Finally, our paid subscribers know we will monitor these looming events, but more importantly we’ll be watching for macro surprises that aren’t on the calendar – including:

  • European bank concerns (DB is in trouble)
  • US economic slowdown (notice economic data has been soft lately?)
  • Unexpected Chinese economic slowdown

That’s how we are going to help subscribers successfully navigate a volatile fourth quarter, so they can continue to focus on growing their business and strengthening client relationships.

The fourth quarter helps you lay the foundation for more allocations in the New Year, and we’re determined to help advisors “win” in Q4!

What Does This Mean for Markets (Stocks, Bonds, Commodities, Currencies)?

The S&P 500 being capped at 2200 does leave the markets vulnerable to macro shocks.

In fact, this market environment is starting to look at a lot like last year.

From May 2015 to July 2016 the S&P 500 was “capped” at (basically) 2100, and because it was capped, it was susceptible to sharp macro-economic inspired pullbacks:

  • August 2015: The S&P 500 dropped 10.5%
    in a month peak to trough on worries about the Chinese economy.
  • December 2015: The S&P 500 dropped 4.3%
    in two weeks on plunging oil and junk bond concerns.
  • January 2016: The S&P 500 plunged 13%
    in a month on falling oil, negative interest rates and a volatile Chinese yuan.

Obviously the market has recovered from these dips, but if an advisor had been able to tactically reduce exposure during just part of these declines, the cumulative effect on performance would be huge, and that means happy clients and more assets!

That is what we are very focused on doing for our paid subscribers over the next three months.

We are going to make sure they:

  1. Have someone carefully watching the macro horizon to alert them to any potential risks (more on that below) and
  2. Provide tactical idea generation that can help protect portfolios in a falling market, or outperform in a stable-to-rising tape.

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 fourth quarter 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.

Increased Market Volatility Will Be an Opportunity for the Informed Advisor and Investor
We aren’t market bears, but we said consistently that things were going to be volatile in 2016, and we were right!

And, as we approach the biggest event for markets since Brexit (the BOJ meeting next Wednesday) 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 paid subscribers grow their books 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 Essaye
Editor, The Sevens Report

Is the Bond Bull Market Over? (Central Bank Preview)

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SL: Is the Bond Bull Market Over? (Central Bank Preview)

In the next 24 hours we’re going to get the answer to two very important questions:

  1. Is the Bond Bull Market Over?
  2. Have We Seen the Highs in Stocks for 2016?

And, it’s the Bank of Japan that likely will decide the answers to those questions, which will decide whether we see a potentially sharp decline in both stocks and bonds.

I’m not one for patting myself on the back, but I don’t know of many other research firms that were pounding the table back in August (when the market was quiet) saying:

  1. The July rally in stocks was in trouble because global bond yields were moving higher (they did, and the S&P 500 is down 2% from the August highs), and
  2. That the Bank of Japan and ECB were more important to US stocks than the Fed (the ECB caused a pullback two weeks ago and the Bank of Japan may do so tomorrow).

So, now I’m reiterating that tomorrow is a potentially very important day for clients’ stock and bond holdings, because even if we don’t see a lot of volatility immediately following the meetings, the Bank of Japan decision may mean the continuation of this rally in global bond yields, and the decline in stocks.


And, that could have significant consequences on clients returns as we enter the fourth quarter.

We are committed to making sure our paid subscribers know, before their competition, whether the Bank of Japan will cause global bond yields to move higher or lower, because that will be the key to getting clients properly positioned to outperform in Q4.

We’ve already delivered our Plain-English BOJ Preview to paid subscribers and they already know:

  1. What The Market Expects from the BOJ
  2. What will Make the Meeting “Dovish” and the likely market response
  3. What will Make the Meeting “Hawkish” and the likely market response

So, tomorrow, while other advisors and investors are searching WSJ.com, MarketWatch or CNBC to try and determine whether the meetings were bullish or bearish for stocks and bonds, our subscribers will already know.

But, more importantly, our subscribers know that at 7 a.m. Thursday morning we will deliver clear, Plain-English analysis of what the meetings mean for all asset classes (Stocks, Bonds, Commodities, Currencies) in the short and long term, and what tactical ETFs or general allocations we think will outperform in Q4 and beyond (and if that means raising cash, we’ll say it!).

Our paid subscribers won’t have to wait for a delayed, compliance-approved recap from their brokerage firm that just explains what the BOJ or Fed did, and ignores how to either protect gains or profit from the decisions.

We are going to tell our subscribers (at 7 a.m., and in plain English): 1) What Happened, 2) What it Means for Client Holdings (Stocks, Bonds, OI, Gold, the Dollar) and 3) How We Think We Can Make Money from It.

And, because this is such an important time for markets, we will be hosting a special webinar this Thursday at 1 P.M. EDT titled: “Breakout or Breakdown? 4th Quarter Market Preview.”

We will discuss the outlook for both stocks and bonds (and how we think investors should be positioned) heading into the 4th quarter.

There are a lot of moving pieces to tomorrow’s BOJ meeting and there aren’t a lot of clear, easy-to-read previews out there, so I’ve included an excerpt of our BOJ Preview as a courtesy:

 

BOJ Preview: What’s Expected

The fear going into tomorrow’s meeting will be that the BOJ will tacitly admit that it is indeed out of bullets, and is no longer able to provide meaningful stimulus to the Japanese economy. And while Japan is a unique case, this matters to all developed stock markets for two reasons.

  • First, and most directly, if the BOJ raises a symbolic white flag tomorrow, Japanese Government Bond yields will keep rising, which will make US Treasury yields rise, and that will keep a headwind on stocks.

  • Second, global stock markets have been supported (or propped up, depending on your definition) by the idea of ever more accommodative central banks. If the most aggressive central bank just declared itself impotent to spur further growth or inflation, what does that say about the ability of other central banks to support stocks prices/the economy if we see a slowdown? I often say at its heart, the market is little more than a confidence indicator, and a BOJ that disappoints markets again will strike a big blow to market confidence.

Bottom line, for global stock and bond markets that have been driven higher by the expectation of forever-low rates and ever-increasing central bank stimulus, having the most active player tacitly admit defeat is not good.

Now that we have the context, let’s look at what’s expected (there are a lot of moving pieces here, so bear with me):

  • QE: The first thing I will look at when I get up Wednesday will be to see if the BOJ increased the amount of QE. What’s Expected: No change to QE. If there is no change to QE, this BOJ decision will be at best neutral for stocks.
    • Dovish If (and Likely Market Reaction): Restricted for Subscribers
    • Hawkish If (and Likely Market Reaction): Restricted for Subscribers

     

  • Interest Rates:
    What’s Expected: Deposit Rate Cut from -.1% to -.3%.

     

    • Dovish If (and Likely Market Reaction): Restricted for Subscribers
    • Hawkish If (and Likely Market Reaction): Restricted for Subscribers

Wildcard to Watch: If the BOJ increases the inflation target from 2% to 3% (or close to 3%) that will be a surprise dovish move, and be taken as an unexpected positive (positive for stocks, negative for global bond yields).

 

Have a Plan In Place If Yields Keep Rising (and Stocks Keep Falling)

If you’re like me, and most advisors and investors, the biggest risk for tomorrow’s meetings is that global bond yields keep rising and stocks keep falling, creating an extension of the past 10 days where both stocks and bond holdings are falling together.

Given that risk, we spent last week providing subscribers with our “Higher Rate Playbook” they can refer to if we see that negative outcome, because in that scenario protecting profits and finding sectors that can outperform will be critically important! Paid subscribers already have this tactical playbook they can refer to, because we all know thinking clearly gets much more difficult when markets are falling!  

Play #1: Get Short the Long End of the Yield Curve, and/or Reduce the Overall Duration in any Bond Ladders

If we see a sustained decline in bonds/rally in yields, the belly and long end of the yield curve will get hit much harder than the short end of the yield curve.

There are two reasons for this:

First, the long end (say beyond 10 years) is over inflated because of foreign money, and as such has a lot further to fall before we get to compelling values.

Second, the short end of the curve (really 2 years or less) trades off Fed expectations, and the Fed simply isn’t going to raise rates quickly regardless of what happens in the markets (and especially if we see a selloff in stocks). So, the Fed will anchor the short end of the yield curve while the longer end rises, meaning the declines in short-term bonds will be less than in longer-term bonds.

ETFs to Get “Short” the Long Bond (there are many ETFs to do this but this is a list of the most liquid and targeted): Restricted for Subscribers

What to Buy in the Bond Markets: Restricted for Subscribers.
We don’t think everything in the bond market is toxic and we continue to have a top pick in the fixed income market for incremental capital that is less than five-year duration and the best alternative in a bond market that may be broadly declining.


Play #2: Focus on Good (but not Great) Credit Quality in Corporates

First, I think there may be opportunities for additional yield in the tier right below the top end of investment grade.
Point being, I would take the extra yield in that space between AAAs and junk, because barring a broad economic slowdown, corporate balance sheets are as strong as they’ve been in years.

Second, if I had a large allocation to junk bonds, I would rotate into higher-quality corporates because junk will get hit, and hit hard, in a declining bond market (think of junk bonds as the “subprime” of the bond market). Yes, junk pays a good yield, but in a rising rate environment it’s not worth the incremental risk.

How to Get Short Junk Bonds: Restricted for Subscribers.

How to Put on a Long Investment Grade/Short Junk Spread:
Restricted for Subscribers.


Play 3: Shift Exposure in US Stocks Out of “Yield Proxy Sectors.” (Know the difference between high-yielding sectors and truly defensive sectors).

If bonds and stocks keep falling, sector selection is going to become very important, and knowing the difference between truly “defensive” sectors vs. sectors that pay big dividends will matter for performance.

We provided the specific defensive sectors we like to paid subscribers in a report last week.

Play 4: Get a General Hedge Against “Risk Off.”

For over a year now we’ve used a specific inverse ETF as a broad hedge against a “risk-off” move in stocks, as this ETF has direct, specific exposure to some of the weakest sectors of the market, and as such can cushion any broad declines in the markets (like we saw in August/December 2015 and in January/February 2016).

We provided this specific ETF to subscribers once again in a report last week.


To be clear, I’m not advocating taking any of these steps right now, as it’s simply not clear that the bond market has indeed turned. So, we have to be wary of (another) head fake in this multi-year bull market.

But, if the bond market does turn and 10-year Treasury yield moves towards 2%, it is important that advisors have a plan before the declines start, because things could get ugly quickly.

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 BOJ and Fed decisions tomorrow, 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.

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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.

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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