The Oil Market: Then and Now

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The Oil Market: Now and Then

We have included in today’s report a chart that was featured in a Forbes article yesterday regarding the two main influences on the oil market right now: rising US output and OPEC/NOPEC production cuts. At first look, the chart suggests that using hindsight as a gauge, US production lags the rise in rig counts which supports the argument that US production will not rise fast enough to offset the OPEC/NOPEC efforts. But we think that argument is flawed and here is why.

During the last aggressive expansionary phase for US oil production (rising US rig counts/increasing output) which lasted from 2009 to 2014, oil prices were wavering between about $80 and $110/bbl. The correlation between the pace of rig count growth and production growth was rather low as you can see by the difference between the slopes of the two lines in the chart. The likely and simple reason for that low correlation is the fact that there was a lot wild cat drilling, thanks to a surge in industry investment, that turned out to be unsuccessful.

In today’s lower price environment, efficiency is key and exploratory drilling, especially in unconventional areas, is at a minimum while producers focus their time, efforts, and investments on reliable sources of oil with considerably lower lift costs. If this is indeed the case as we believe it is and a good portion of the increasing rig counts that are being reported by BHI are actually DUCs (Drilled but Uncompleted wells) in proven areas, then the relationship between rig counts and production should have a tighter correlation than it did 5-10 years ago.

Bottom line, the fundamental backdrop of the energy market is different right now than it was between 2009 and 2014 and because investment in energy is much lower while the industry remains focused on efficiency, we are more likely to see a tighter correlation between rising rig counts and rising US production which would result in a faster pace of production growth. That in turn would offset the efforts of global producers who are trying to support prices and as a result, leave us in a “lower for longer” oil environment.

 

Stock Market Update: January 17th, 2017

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Stock Market UpdateStock Market Update excerpt from the Sevens Report: Foreign markets were open yesterday, and generally traded lower on consolidation, but overall the weekend was quiet and nothing negative occurred.

Stocks finished last week little changed, as a Friday rally helped recoup losses from earlier in the week. Some of the shine was taken off the “Trump Trade” following a disappointing press conference. The S&P 500 slid 0.10%.

The important price action last week didn’t come until Wednesday, when Trump’s first press conference as president-elect failed to deliver any specifics on timing for tax cuts, infrastructure spending or deregulation. Following the press conference on Wednesday, stocks immediately dropped and turned modestly negative, although buyers stepped in and the markets recovered in the afternoon to close slightly higher.

Then, stocks dropped nearly 1% in early Thursday trade, again on Trump disappointment. But support at 2250 held, and stocks were able to recover most of the day’s losses to finish down slightly (-0.28%).

On Friday, markets rallied thanks to generally “ok” economic data, and following the two resilient performances following the Wednesday/Thursday sell-off. Stocks were higher most of the day, although they gave back some of their gains Friday afternoon to finish slightly higher.

Stock Market Update: Trading Color

Tech and healthcare remain the two surprise star performers of 2017. Tech was driven higher by internet stocks (which have become the recipient of capital inflows again as investors search for value in an extended market) as (ETFs Restricted to Subscribers) our preferred internet ETF, rose more than 1%. Semiconductors also traded well despite a profit warning from TSM.

Healthcare, meanwhile, weathered a surprising negative comment by Trump and still rose last week. Healthcare remains one of our preferred contrarian allocations for 2017 based on too-negative sentiment, valuation and overdone political risk.

Looking at broad trends, the Trump trade sectors took a breather last week as banks rose slightly while energy declined on the fall in oil, and industrials underperformed. However, despite the slight decline in stocks, defensive sectors lagged as utilities and consumer staples finished modestly weaker. We expect that consolidation of the Trump trade to continue until there are hints of policy specifics.

Bigger picture, there was no clear rotation out of defensives and into cyclicals, and sector trading has been more catalyst driven in 2017. From an activity standpoint, volumes have returned to pre-holiday levels and we expect that to continue.

Stock Market Update: Bottom Line

Some shine came off the Trumpenomics rally last week due to his lack of specifics on tax cuts, deregulation and infrastructure spending at his press conference. But as we said in the Report last week, and as the resilient price action confirmed, the market will continue to give Trump/Republicans the benefit of the doubt through most of Q1. As a result, policy disappointment alone will likely not cause a near-term pullback in stocks. However, it is important to realize that the single-biggest medium/longer-term threat to the markets is political disappointment (which could cause a steep pullback in Q2/Q3).

Focusing on the near term, there are two specific reasons that the market is giving the new administration/government leeway. First, economic data was getting better pre-election, and if the data continues to improve, that means that one of the two reasons behind the Q4 rally will remain in place. Second, the market knows Washington is slow, even with one party in power. So, it’ll take something besides lack of policy clarity to cause a near-term pullback in stocks, (some risks to watch there are slowing economic data, more than three Fed rate hikes in 2017, or Chinese trade tensions).

On the flip side, if stocks are to break materially higher, we will have to get specifics on corporate tax cuts in the coming weeks. The other two pro-growth initiatives championed by Republicans (deregulation and infrastructure spending) aren’t as critical as corporate tax cuts, and that remains the key to helping the S&P 500 break materially above 2300.

From a tactical standpoint, we would continue to hold broad allocations to stocks. If you’re putting new money to work, we would focus on the value sector of the market (ETFs Restricted to Subscribers) over cyclicals or defensives.

Tactically, Europe (ETFs Restricted to Subscribers) and healthcare (ETFs Restricted to Subscribers) are two attractive contrarian opportunities, in our opinion, while banks (ETFs Restricted to Subscribers) remain attractive longer term but seem to be consolidating. We therefore wouldn’t initiate a position here (we’re holding our position and waiting for a further pullback to add to it). Bottom line, lack of policy specifics won’t reverse the rally, but some specifics have to emerge soon if this rally can continue.

This Week

Earnings come into focus this week, as it’s the first week of major company reports from virtually every sector. Unless the results are terrible or fantastic, they shouldn’t move markets too much, as potential fiscal stimulus remains the key focus right now.

From a macro standpoint, there is consistent economic data throughout the week, but CPI on Wednesday is the key number. Then we have Yellen making two speeches (Wednesday and Thursday), and comments on policy could pop up given the topic of both speeches.

Finally, as if I needed to remind anyone, Inauguration Day is Friday, and though it likely won’t have any direct market impact, it is a positive in so much as we will move forward (hopefully) towards some policy clarity.

Our paid subscribers know we will give them the succinct analysis they need to communicate effectively with their clients and strengthen their relationships.

Did you enjoy the “stock market update” excerpt?

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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.

To start your quarterly subscription, and to see for yourself how The Sevens Report can help you grow your business, click here.

 

Stock Market Update: Trumponomics

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Wednesday was volatile as Trump’s press conference induced a mid-day sell off, but stocks recovered after lunch to finish with moderate gains.  The S&P 500 rose 0.28%.

The markets are now experiencing “Trumponomics.”  The Sevens Report, a daily macro-economic report for financial advisors, just released it’s “Stock Market Update:  Investors Guide to Trumponomics.”

Stock Market Update

stock market updateStocks were basically flat throughout the morning yesterday in what was very quiet trading.  Trump really dominated the narrative all day yesterday as the Russian “dossier” story weighed on sentiment slightly pre-open on Wednesday, and that was made worse by the fact that there was no economic data or corporate news to distract from the Trump story.

So, stocks opened basically flat and chopped sideways ahead of the Trump press conference at 11 a.m..

As we said earlier this week, this event had the potential to move markets and, at least temporarily, it did not disappoint.

The press conference was full of figurative fireworks but the fact that there was absolutely no mention of fiscal stimulus or tax cuts hit stocks (as we cautioned it might in our preview on Wednesday). First, Trump’s left field comment about reducing the cost of drug prices sent biotechs into mini free-fall, and that took healthcare lower which weighed on the whole market.  Then, after a brief rebound, stocks rolled over again after Trump failed to imply a timeline for tax cuts of fiscal stimulus.

But, the market is giving Trump and the Republicans the benefit of the doubt and his omissions weren’t damming yesterday (yet).  So, stocks rebounded after lunch and rallied throughout the final two hours of trading to close basically at the higher of the day.  Oil, which accelerate higher during the afternoon, also helped stocks rally, as oil remains an important short term influence over stocks.

Stock Market Update: Trading Color

Trump dominated sector trading as well yesterday as this comments about “bidding” for drug prices hit biotech stocks (NBI dropped nearly 3%) and healthcare more broadly (XLV fell 1%).   XLV the only SPDR we track to finish negative yesterday.

But, it wasn’t just the biotech comments as the quasi disappointing press conference did cause some defensive outperformance as utilities rose 1%. Besides energy (XLE), which was up on the oil rally, utilities were the best performing SPDR in the markets yesterday.

Continuing that cautious theme, cyclical sectors also rose (again every SPDR except healthcare was higher yesterday) but banks, tech and industrials were up just .5%., so clearly there was no real, cyclical outperformance.

So, Trump’s comments (or lack thereof regarding tax cuts of stimulus) took some wind out of the cyclical led “Trump Trade” sails yesterday.

Bottom Line

Yesterday’s price action after the press conference gave us some important insight into how we can expect stocks to trade over the next few weeks:

The fact that there was no mention of tax cuts, infrastructure spending or de-regulation by Trump weighed on stocks temporarily Wednesday, and bigger picture that lack of specifics does threatens to undermine the post Election rally.

But, while stocks are lower this morning mostly because of that disappointment, yesterday’s press conference likely won’t cause a material unwind of the “Trump Trade” because the market is still willing to give Trump/Republicans the benefit of the doubt on a lack of policy specifics.  So, this morning’s dip aside, don’t expect lack of policy clarity alone to cause a pullback near term (it’ll take something additional like Chinese currency volatility, bad economic data, etc.).

But, beyond the short term (and I mean the next 2-4 weeks) the biggest risk to stocks is the gap between market expectations of tax cuts and pro-growth policies, and the potential political reality.  And, yesterday’s press conference did nothing to reduce that risk.

As I said in the Trump Press Conference Preview, if the market does not get some evidence that corporate tax cuts are progressing and forthcoming by the middle of Q1, that will begin to weigh on stocks.

In the mean time, the benefit of the doubt remains with the bulls but the S&P 500 is still at a valuation ceiling at 18X forward earnings, and it’s going to take evidence of looming pro-growth policies to help stocks punch materially through recent highs.

Thoughts on Healthcare

Trump’s surprise comments on bidding for drug prices caught markets by surprise and hit healthcare and biotech stocks yesterday, but at this point that general rhetoric isn’t enough to make me abandon my long position.

That may change once we get some actual policy specifics but for now that comments seemed more like populist rhetoric than anything actually concrete, and I imagine the complicated Obamacare repeal will likely dominate any healthcare related policy in the first half of 2017.  Put another way, they will have enough to worry about ensuring that coverage continues for Obamacare recipients, never mind changing national drug pricing structures to the detriment of biotech firms.

 

 

Stock Market Reaction & Strategy to Trump’s Win

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Stocks saw their biggest drop since Brexit early this morning while currency and bond markets made historic moves overnight, and I have no doubt that clients are calling you asking:

“What do we do?”

I basically didn’t sleep last night making sure we could help our subscribers answer that question when clients called today.  

So, in today’s paid edition of The Sevens Report (which was delivered shortly after 7 a.m.), we explained:

1.    Whether the Trump victory is a “Lehman Moment” that requires massive de-risking across asset classes (We do not think so at this point).
2.    What key index and level we are watching to tell us when this might become a potential “Lehman moment” and require much more defensive positioning.
3.    What we would consider buying TODAY amid the volatility.
4.    What specific level we would consider buying this dip in stocks based on valuations (it’s lower than current levels).

I never like to see markets down like this, but I am happy that our “Election Preview” detailed, specifically, what would happen if we got a surprise Trump victory, and so far, much of our preview has been spot on.  

So, despite the hysteria in the financial media today, our subscribers were not blindsided by that result and I’m sure that’s helping them today in conversations with their clients.  

Going forward, everyone wants to know how this will affect markets and the amount of uncertainty regarding a Trump administration will be significant.  

We will cut through that noise for our subscribers and deliver the information they need to successfully navigate this environment.  

While the financial media (both TV and online) is going to be hysterical for the next few days about the impacts of this historic vote, there are three key issues we need to watch to tell us what to do from an allocation standpoint:

•    Does the uncertainty of a Trump victory paralyze the markets for the rest of 2016?
•    Will the Fed delay a rate hike due to stock market turmoil?

•    Will the selloff in Treasuries accelerate and send the 10 year yield to and through 2%?

If the answers to all three of these questions are “No,” then the market impact of this will be temporary -and we will be watching each of these issues for our subscribers and will alert them to any changes.  

That’s how we will help them cut through the noise and navigate this market.  

Mornings like today are why I created The Sevens Report, so that our subscribers can turn market volatility into an opportunity to demonstrate their value to their clients, and in doing so increase AUM via more allocations and more referrals.
 
While some advisors are avoiding client calls or searching for something to tell nervous clients, our subscribers know what is driving the markets and are using this as an opportunity to show their clients they are in control of the situation.

The most important thing for financial advisors to do in this volatile
environment is to show clients that they:

•    Know what is going on in markets,
•    Are in control of client portfolios, and
•    Know what to expect next.

Because if you don’t, you will lose those clients to someone who does.

Today will be a difficult day in the markets and we want to make sure people have a clear understanding of what’s actually driving markets and what the key catalysts are going forward.  We’ve included an excerpt of our post-election research as a courtesy below.  We hope it makes your day a bit easier.

 

What the Election Means for Markets: Sevens Key Takeaways.


The events of last night largely met our “Ugly” scenario, and as such we saw a “Brexit-style” reaction as markets traded sharply lower overnight, although notably they are well off those lows this morning.

From an analysis stand point I want to focus on immediate takeaways and trying to answer questions you may have (or questions you may get from your clients regarding this event):

Takeaway 1: The Trump victory is not a bearish game changer for markets, at least not yet. From a macro standpoint, we are seeing that “sell first/ask questions later” reaction from markets that we predicted. But, despite the reaction we do not view the Trump victory as a material, bearish gamechanger and we are not reducing medium/longer term allocations to stocks on the news or market reaction.

I say that for one main reason: Beyond the short term, with total control of government, Trump will be able to enact potential pro-growth policies and the new US government will be business friendly, which longer term is a positive.

Takeaway 2: Does the Trump win imperil a yearend rally in stocks? Yes. To put it lightly, a lot of policy uncertainty needs to be clarified over the coming months. So, from a practical standpoint, that uncertainty means a material year-end rally is unlikely. While some analysts are calling for a Brexit-style bounce following this initial selling, as the market digests Trumps pro-growth policies, we do not see that happening this year (i.e. the remainder of 2016) as there are simply too many unknowns about his policies and the makeup of his administration.
From a broad level, until the market knows more, stocks will have a very hard time rallying materially.

Takeaway 3: The Fed may not hike rates in December. Treasuries are down sharply this morning but the longer-term decline in bonds has potentially stalled for 2016, as we don’t know whether the Fed will hike rates in December given this political upset and market fallout. We are not adding to inverse bond positions although longer term the trends of inflation and growth should continue to push yields higher.

Takeaway 4: Gold is a clear winner, and will likely rally until there is more clarity on Trump’s policies, and that’s one of the clear winners of this outcome.

Takeaway 5: Make Sure You Have a Tactical Hedge in Case this Market Rolls Over. Restricted for Subscribers.

Takeaway 6: Sector Winners and Losers:
Restricted for subscribers.

Takeaway 7: Which Two Sector ETFs We Are Buying Today. Restricted for Subscribers.

Takeaway 8: What Makes This A Bearish Game Changer.
Restricted for Subscribers.


Having daily, accurate, up to date information on the key leading indicators for this market will be the only way to successfully navigate this environment, and that is what we are going to do for our paid subscribers.  

If you are not confident that your brokerage supplied research or subscription research will help you successfully navigate his environment, then please consider a subscription to The Sevens Report.  We will make sure our paid subscribers have the independent and timely analysis they need to turn the coming volatility into an opportunity to strengthen client relationships and grow their businesses!  

Given the market volatility, we are extending a limited time, special offer to new subscribers of our full, daily report that we call our “2-week grace period.”

If you subscribe to The 7:00’s 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 here to subscribe and ensure you have a team of analysts working every day to help you and your clients navigate this difficult market environment!

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! 

As we enter this critical stretch into year end, the advisor who can 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.

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 dollars.  To sign up for an annual subscription, simply click here.

Best,
Tom

Tom Essaye,
Editor of 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!

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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

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.

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

 

 

 

Higher Rate Playbook

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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:

  • Fed Jackson Hole Conference August 26th: Will Yellen be “dovish” in her speech? Result: Bearish. Yellen was dovish, but Fed Vice Chair Fischer was “hawkish” and put a September rate hike on the table, causing a drop in stocks.

  • The ECB Meeting September 8th: Will the ECB hint at more stimulus (bullish) or not (bearish)? Result: Bearish. The ECB did not hint at more stimulus and that has contributed to this pullback in stocks.

  • The Fed Meeting September 21st: Will the Fed hike rates (very bearish), hint at hiking rates in December (bearish) or stay ultra-dovish (bullish)?
  • The Bank of Japan Meeting September 21st: Will the BOJ adopt “Helicopter Money Light” (bullish), or just do another inconsequential easing like in July (bearish).

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

ECB Preview

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1) What’s Expected,

2) What Will Make the ECB Dovish and

3) What Will Make the ECB Hawkish.

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

ECB Preview (Sevens Report Excerpt)

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

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

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

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

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

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

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

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

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

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

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

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

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

Click this link to begin your quarterly subscription today.

 

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

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

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

 

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

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

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

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

1) What’s driving markets

2) What it means for all asset classes, and

 

3) What to do with client portfolios.

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

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

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

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

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

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

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

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

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

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

Best,
Tom

Tom Essaye
Editor, The Sevens Report

 

  

WHY STOCKS DROPPED YESTERDAY

/in , , /by

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Next Six Weeks Will Be Critical for this Rally

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

If you subscribe to The Sevens Report
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Tom Essaye
Editor, The Sevens Report


Bond Bubble

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It’s the calm before the storm.

That’s what this market feels like to me right now, because the fact is that the events of the next six weeks have the potential to either 1) Ignite an acceleration of the recent rally or 2) Cause a sharp pullback.

While I admit these markets are downright dull at the moment, it’s important for advisors and investors not to get too complacent, because through the end of September we will get three key central bank decisions that will determine whether bond yields keep grinding lower, or finally reverse higher.

That’s going to be critically important for how stocks and bonds perform in Q4, and the potential is 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).

The next six weeks 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.

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.

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, to a point, at the mercy of the BOJ, ECB, Italian banks, Chinese policy makers, etc., and that’s why, every day, we make sure our paid subscribers know the key trends in:

  • Stocks
  • Bonds
  • Commodities
  • Currencies
  • Economic data

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

Earlier this week we outlined the three key central bank decisions that are coming in the next few weeks, and we’ve included an excerpt of that research for you below:

Three Key Events to Watch (Sevens Report Excerpt)

With yesterday’s FOMC minutes and today’s ECB minutes, stocks have now entered a five-week central bank gamut that will ultimately decide whether this market can grind higher
into Q4, or see a potentially violent reversal
of this low-rates-forever rally.

I say that because over the next several weeks, we will hear from

1) Fed Chair Yellen,

2) The ECB (again) and

3) (most importantly) the Bank of Japan.

Key Date #1: September 26. The Bank of Japan’s “General Assessment.” You’re probably not hearing a lot about this given the Olympics and political focus of the media, but this is easily the most important event for markets over the next six weeks.


The reason this is the most important date over the next six weeks is this:

A few weeks ago the BOJ again disappointed markets and announced they would be doing a “Comprehensive Assessment” of policy on Sept. 21. “Comprehensive Assessment” in this instance is central bank code for, “We’re going to change our strategy.”

The reason the BOJ needs to change its strategy is because their QE program has become so big that it’s dominating the Japanese Government Bond market, raising the risk of some sort of market dislocation, and it’s still not stimulating inflation or growth. So, put in plain English, their QE program isn’t working anymore, and making it bigger will only increase the chances that they form another massive bubble.

So, the BOJ needs to come up with a new strategy, and that’s what the “Comprehensive Assessment” is all about.

People think one of two things will happen at this Comprehensive Assessment:

Option 1: The BOJ will change the duration of JGBs it’s buying for QE from the current 7-12 years to something longer dated (beyond 12 years).

Option 2: (This is the potential negative outcome): The BOJ could “abandon” QE and instead just commit to keeping longer-term interest rates low by making targeted purchases on the long end of the yield curve. It’s the second option that scares markets, because while it’s still stimulus, it’s basically a tacit admission that QE has limits and has failed.

Why This Matters to US Investors: If the BOJ takes option 2, it could cause a spike in Japanese bond yields and could be the catalyst for a massive unwind of the global money flows into US Treasuries. That, in turn, will undermine the entire low-rate-forever rally in US stocks, as the most aggressive central bank in the world (the BOJ) waves a white flag. And, in this scenario, conservatively the S&P 500 could trade back to the initial breakout down in the upper 2000s (a 5% – 7% correction).

Key Date #2: September 8
The Next ECB Meeting. This ECB meeting is important because it’s been assumed (and priced in) to markets that the ECB would be more accommodative post Brexit. But, that hasn’t happened yet. If inflation and growth estimates released at this meeting are stronger than expected, then expected ECB policy will be more hawkish than thought.

Why This Matters to US Investors: If the ECB estimates are good and the ECB hawkish, it could cause a spike in German bond yields and could be the another catalyst for a massive unwind of the global money flows into US Treasuries. That, in turn, will undermine the entire low-rate-forever rally in US stocks, as European investors unwind Treasury long positions. And, in this scenario, conservatively the S&P 500 could trade back to the initial breakout down in the upper 2000s
(a 5% – 7% correction).

Key Date #3: August 26. Yellen’s Jackson Hole Address. Yellen won’t be “hawkish” in the commentary but the extreme complacency in Fed expectations does lend itself to a surprise. Despite recent hawkish commentary, there is still less than a 50% chance the Fed hikes rates in December! So, if Yellen implies a December rate hike (December, not September) in her remarks in late August that will cause a serious readjustment to the market’s Fed expectations.

Why This Matters to US Investors: If Yellen points to a December rate hike, that, combined with what could potentially happen in German bunds and Japanese bonds a few weeks later will undermine the entire low-rate-forever rally, as US, European and Japanese investors unwind Treasury long positions. And, in this scenario, conservatively the S&P 500 could trade back to the initial breakout down in the upper 2000’s (a 5% – 7% correction).

Markets Nearing Tipping Point: How these events turn out will create a pretty sustainable glide path for stocks to start Q4.

On one hand, if all of these events turn out benign, that will be bullish for stocks into year end and a very reasonable target will be 2240 in the S&P 500, and perhaps 2340. And, certain specific sectors should handily outperform into year end, offering smart advisors the opportunity to outperform.

On the other hand, if Yellen isn’t dovish and the ECB and BOJ are “hawkish,” that will undermine the entire reason for this 8%, post-Brexit rally, as it will cause bond yields to rise and stocks to fall. Avoiding that potential pullback will give advisors the chance to close a performance gap and redeploy capital at more favorable levels.

So, bottom line, getting these events right will be a big key to outperforming in Q4 and finishing the year with strong numbers, regardless of the environment.

We are going to make sure that our paid subscribers know what each of these events means for the broad market and, more importantly, what tactical sectors we think can outperform the market into year end. We are very focused on helping subscribers be properly positioned for the fourth quarter.

Click this link to begin your quarterly subscription today and make sure you’ve got an analyst team working to help you outperform into year-end.

What We’re Doing Now

We continue to slowly and methodically add tactical bank exposure, as that will be a sector that will handily outperform if bond yields do rise. Now, is that our biggest holding? No, of course not, but it’s a tactical long that has outperformed the broad markets
and will continue to outperform if yields drift gradually higher or any of the above events contain a “hawkish” surprise.

And, with bank stocks still generally down YTD and trading at historically low valuations, it’s not like we’re adding to some high valuation tech name or over-extended, “over-loved” sector.

From a risk/reward standpoint, if you’re looking to add a position or sector that still offers some relative value and the chance to significantly outperform if yields ever do rise, banks remain attractive from a risk/reward standpoint.

And, our preferred bank ETF does not have any European bank exposure, nor does it have any broad-based financial exposure to insurance companies or REITs – two sectors that are not trading at relatively cheap valuations.

Make sure you’ve got an analyst team that’s watching the macro horizon while at the same time focusing on sectors and tactical ideas that can help advisors and investors outperform.

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.

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Actual subscribers to The Sevens Report have told me that discussing the information contained in the Report with prospective clients has helped them land accounts as big as $25 Million!

2015 was a volatile year, and things have gotten worse so far in 2016. Subscribe today and give yourself the market intelligence you need to help strengthen relationships with clients, and acquire new ones.

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Sevens Report right now by simply clicking the button below:

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