WTI crude oil futures continue to trade heavy following last week’s breakdown through a 7-week-old supporting uptrend line. There is initial support at $43.50/barrel however a violation could see futures fall swiftly towards the $40/barrel mark.
Eight years ago today, Lehman Brothers declared bankruptcy and, in my opinion, this business hasn’t been the same since.
That event, and the subsequent fallout, forever changed the way I analyze and invest in the markets, and I bet that’s true for you and your clients as well.
For me, the biggest change pre-Lehman to post-Lehman was the realization that the worst-case scenario can happen, so you can’t be dismissive of it regardless of how low the probability.
That’s one of the reasons that I produce The Sevens Report
– because I want to make sure our subscribers have someone watching their back and looking for risks to client portfolios across asset classes.
And, that’s sometimes why some people think I’m bearish.
I’m not bearish, but one of my main jobs is to make sure that my subscribers aren’t blindsided by seemingly obscure macro risks (like the ECB or BOJ).
That’s also why we spend hours each day watching stocks, bonds, commodities, currencies and economic data so that we can tell our subscribers when risks are materializing, and so we can suggest strategies to protect client portfolios and profit from market conditions.
And, that’s why three weeks ago we told subscribers not to be fooled by a quiet market, and alerted them to the fact that there were critical central bank events looming in September.
So far, we’ve been right:
You know by now that next week’s meetings are key because if the Bank of Japan disappoints markets and the Fed is “hawkish,” bond yields will keep rising and stocks will keep falling.
But, just knowing that isn’t enough.
Advisors needs to have a plan in place to protect client portfolios if the selling gets worse.
That’s why earlier this morning we included, in the regular daily Sevens Report, a “higher rate” playbook of ETFs that will protect client portfolios if the decline in bonds and stocks continues or accelerates.
So, not only have we given our paid subscribers:
1) The information and talking points that show clients and prospects they understand the markets and weren’t surprised by the volatility, but also
2) A specific, tactical plan to protect client portfolios and maintain performance, should these events cause a significant pullback in stocks and bonds.
That’s how we make The Sevens Report
more than just a daily research report, and instead make it a tool that advisors use to get more assets and grow AUM.
Understanding how to be positioned should we see a continued decline in both stocks and bonds is critically important if an advisor or investor wants to successfully navigate these markets in the fourth quarter, and I’ve included an excerpt of that research below as a courtesy.
Higher Rate Playbook Part 1 (Sevens Report Excerpt)
Let me be perfectly clear: The major risk I see to portfolios right now is that we see a continuation of last week – namely both stocks and bonds decline together.
Given that, I want to lay out a general “playbook” of what to do if we do see bonds breakdown materially (which likely will drag stocks down).
Now, to be clear, I’m not saying execute on this today. But I do want to produce a list of ETFs and strategies that everyone can refer back to should we see bonds drop further.
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: 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 5-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
On the corporate side, there will be broad pressure on all corporate bonds if Treasuries decline, but that doesn’t mean there won’t be attractive yields in certain corners of the corporate bond market.
Money will likely initially rotate into very high-quality corporates as it exits Treasuries, so we could see yields in AAA bonds fall and become unattractive. But 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.
That said, I would not reach for yield into the junk market.
In fact, 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).
Included in tomorrow’s paid edition of The Sevens Report.
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 will detail the specific defensive sectors we like in tomorrow’s report.
Play 4: Get a General Hedge Against “Risk Off.”
Included in tomorrow’s paid edition of The Sevens Report.
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).
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.
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
Tom Essaye
Editor, The Sevens Report
Another great “The Market’s Bell” with Special Guest Randy Frederick, Charles Schwab’s Head of Trading:
-Randy like “collars” on stock positions –long put/short call– ahead of several upcoming events
-Argues our obsession with The Fed is totally out-of-hand
-Explains why too many of us leave money on the table long-term.
Get updates at – http://www.MarketsBell.com
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:
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
Stocks surged back yesterday after dropping the most in nearly three months on Friday. The environment remains volatile and that is poised to continue with the next two critical catalysts coming next week: the Fed and BOJ.
WTI crude oil futures approached a technical tipping point yesterday as they rallied into a near-term, downtrend resistance level. Where futures close today will be important for the near-term direction of energy prices
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:
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
After Friday’s lukewarm jobs number and the two ISM data “whiffs” in the last few days, gold futures have legged higher, holding a key trend-line that has been in place since January.
One of the most enjoyable parts of my morning routine is reading about the history of each day, because doing this task daily shows you that indeed, history doesn’t necessarily repeat, but it does rhyme—and that was true again this morning.
Since Friday, stocks have been under modest pressure
as expectations for a 2016 rate hike go up, but the selloffs have been mostly contained, because at the Jackson Hole Fed conference last week Fed Chair Yellen declared that regardless of when the Fed hikes rates, overall interest rates will remain historically low for many, many years.
Well, today’s date in history offers a pointed example (one that was much more important than monetary policy) that the best of intentions sometimes simply can’t be fulfilled.
On this day in 1935, then President Franklin D. Roosevelt signed Senate Joint Resolution 173, better known as the “Neutrality Act.”
It was a well thought out, well supported law that showed clearly the US had no intention of entering into any potential war in Europe. It was the right thing to do at the time and the intentions were clear.
And, we all know what happened a few years later.
My point?
You can have a carefully crafted set of polices built on the best of intentions, but a lot can change in just a few months.
The reason this event in history caught my attention is because over the past several days, in the wake of Fed Vice Chair Stan Fischer’s “hawkish” comments Friday and yesterday, the bulls started to downplay any potential negative influence of a rate hike because it’ll be what they call a “Dovish Hike,” or, a single rate hike followed by no hikes for a very, very long time. As such, the rate hike itself won’t be bearish for stocks.
Maybe that’s true, but the fact of the matter is the Fed has a very bad record of long-term forecasting (more on that below), so as the “Dovish Hike” scenario grows in popularity as a justification to buy stocks regardless of what the Fed does, I want to make sure that investors and advisors know:
1) What a “Dovish Hike” is,
2) What a “Dovish Hike” means for stocks, and
3) Why We Don’t Think a “Dovish Hike” Is a Reason to Buy Stocks
I know the long weekend is approaching and the last thing anyone wants to do is try and game the near-term path of interest rates, but the fact of the matter is we are approaching a tipping point in the bond market, and how it goes will have significant consequences on investor’s portfolios… because if this bond market breaks down and bond yields move higher, that will cause both stocks and bonds to drop at the same time.
So, it’s critical that investors understand, at least generally, what issues are facing the bond market and that you are following an analyst who understands what will move the bond market and who is watching it every day, because with 6 potential market moving events looming over the next month, waiting for a generic, dated, perma-bull piece from your custodians CIO isn’t going to cut it… not with a bond and stock market that are both still very extended.
We’ve included an excerpt of recent bond research for you below. Full, paid subscribers to The Sevens Report
received this information earlier this week along with specific tactical ETF suggestions to navigate the current environment.
What Is A “Dovish Hike?” (And Is It Good for Stocks?)
If the Fed is planning on executing a “Dovish Hike” it won’t be a medium- or longer-term headwind on stocks, but if it’s not a “Dovish Hike” and it’s the first of several, that will be an unanticipated headwind on stocks—so I want to make sure everyone is aware of what a “Dovish Hike” is, and why it’s not bearish short term, but at the same time also is not a reason to buy stocks.
What Is a Dovish Hike? A “Dovish Hike” is a clever title for a monetary policy strategy whereby the Fed raises Fed funds 25 basis points, but then explicitly says that the ceiling for the Fed funds rate is much, much lower than it was in the past (say 3% vs. previous 6%). So while the Fed is hiking rates, it can’t hike them very far given the economy.
What Does a “Dovish Hike” Mean for Stocks? Ostensibly, it’s positive beyond the short term. Yes, the idea that the Fed may raise rates sooner than later would be a potential short-term headwind. But beyond that, the idea that interest rates can’t return to pre-crisis levels is, supposedly, fundamentally dovish and it would help fuel a continued “low-rates-forever” rally. Assuming neither the BOJ nor ECB surprise markets hawkishly in September, a dovish hike in September would not mean that the rally cannot continue into the fourth quarter.
That Said, Is a Dovish Hike a Reason to Buy Stocks? No, We Don’t Think So (at least not for medium- or long-term investors). First, the Fed is no longer in control of longer-term interest rates, at least in the near term, so regardless of whether they keep Fed funds low over the next several years that likely won’t have that much effect on the direction of longer-term rates… and those rates are the key to the next move in stocks.
Second, the Fed’s longer-term forecasting ability is, frankly, terrible, so I’m hesitant to believe them when they say they know the new “long-term” ceiling for interest rates. As a reminder, in 2012, when the Fed first released the “dot” projections, many Fed officials had the Fed funds rate above 1% in 2014, and several had it above 2%… in 2014!
Point being, no one at the Fed knows what’s going to happen over the very longer term. They may believe that they’ll stay dovish for longer, but that simply may not be possible depending on a variety of factors, including what the ECB or BOJ do with policy, the global economy, inflation, etc. Bottom line, buying (or selling) stocks based on the Fed’s longer-term forecasts has not been the most successful investment strategy, and I don’t think this time will be different.
So, while the idea of a “Dovish Hike” could be a short-term catalyst for stocks, we do not see that as the catalyst for a real, sustained move higher unless it’s accompanied by very dovish actions by the BOJ or ECB. Until then, we will remain cautious and continue to contend that better economic growth is the key to a real, sustainable rally in stocks, not perma-low rates to compensate for anemic growth.
Bottom line, despite the media focus on a September or December hike, the more important issue with Fed policy is what they do after the next hike, as that will be a major factor in whether the S&P 500 can make significant gains from current levels.
What to Do Now: Tactical Allocation Ideas
The “Dovish Hike” scenario may not have a major influence on the broad markets initially, but it will have a continued influence on sector trading, specifically whether we see, finally, the start of a “Great Rotation” out of income-oriented sectors and into more cyclical sectors.
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 proven wise, because since then that ETF has rallied almost 9%, outperforming other cyclical sectors be nearly 5% and outperforming the S&P 500 by over 11% in just under two months!
If we do see a sooner-than-expected rate hike from the Fed, regardless of whether it’s a “Dovish Hike” or not, this ETF will continue to significantly outperform the S&P 500 and defensive, income-oriented sectors more generally, and we have continued to remind paid subscribers of this specific ETF.
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.
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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 a series of 6 critical macro events, starting with Friday’s Jobs Report, 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
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:
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:
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:
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
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
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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.
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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