Fed Roadmap

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When I think about what’s become of the Fed, it almost makes me sad.

I’m dating myself a bit by saying this, but when I started in this business the Fed was a revered (and sometimes feared) institution.

  • In the early 80s, “with a tear” in his eye, Volker rose interest rates and broke inflation.
  • In the 90s, Greenspan was the “maestro” that helped support the best economic run in decades.
  • In the late 00s, Bernanke was steadfast through the crisis.

So, when I saw the market reaction to yesterday’s “hawkish” statement, it made me a little sad, because the market clearly no longer respects the Fed.

And, that makes me nervous.

I say that because while the Fed has successfully engineered massive rallies in both stocks and bonds (and, to a degree, real estate again), at some point things have to begin to return to normal, otherwise we’re going to get another bubble burst.

Yesterday’s price action was scary because it implied the Fed has potentially lost control of the markets, and if that is the case then we are going to see a bubble further inflate and then burst across all asset classes (stocks, bonds, real estate).

Given how fundamentally overvalued stocks and bonds are right now, it’s not unreasonable to think that we could see a 5%, 10% or even 15% decline in both
stocks and bonds (like last August, but worse) if the Fed does lose control and then tries to rein markets back in through a knee-jerk increase in rates.

Is that going to happen next week, or even next month?

No.

The trend in stocks is still higher, and 2200-2240 in the S&P 500 remains a very reasonable near-term target.

But, most of us aren’t investing for the next few weeks or months, we’re investing for quarters and years, and the bottom line is that yesterday’s reaction in stocks might be good in the short term, but beyond that—and unless something changes—we’ve got two unattractive alternatives:

  1. The Fed continues to lose credibility
    and asset prices simply run higher as the bubble expands, only to ultimately pop at some point.
  2. The Fed realizes it has lost credibility and shocks markets with more rate hikes than expected, potentially undermining the whole catalyst for the stock and bond rally.

No one knows how it’ll go, but the important thing is to be reading someone who recognizes these risks, and someone who is watching specific assets and leading indicators that will give us warning when this unsustainable situation comes to a head (and importantly, provides tactical guidance on how to protect client portfolios).

Over the coming weeks and months, we’re going to be doing that for our subscribers because our goal at The Sevens Report is to wake up each day and help our subscribers navigate these complex markets, and provide the best value in market analysis out there today.

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

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

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

Specifically, we take complex macro-economic concepts (like FOMC Policy, Brexit, Jobs Report, Italian Bank Risk, etc.) and tell you:

1) What you need to know,

2) What will move markets, and

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

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

Yesterday the Fed produced a “hawkish” statement that undoubtedly was designed to get markets to respect the possibility of a rate hike this year, but the effort failed, and while that likely will fuel incremental upside in stocks, it lays the foundation for a potentially violent pullback down the road if the Fed wants to regain the market’s respect.

As a courtesy, we have included both of those pieces of analysis for you today:

Why Was the Fed Hawkish but the Market Dovish?

In a somewhat shocking turn of events, the dollar declined following the Fed statement yesterday and Treasuries (including the Fed-sensitive 2 year) rose, which is the exact opposite of what should have happened based on the FOMC statement.

The reason for this opposite reaction is clear: the market does not believe the Fed anymore.

An old saying on Wall Street is, “Markets always tell the truth.” And the truth is that after a year of policy whipsaws, conflicting statements and consistent dovish excuses, the Fed has lost all hawkish credibility—and with good reason.

First, we’ve seen this act before. The Fed was hawkish last July, but balked at hiking in September. Then they were hawkish in December and said to expect three-to-four rate hikes. Then the entire month of May, various Fed speakers chastised the markets for being too dovish (yes, we’re talking to you Rosengren), only to have the FOMC produce a very dovish statement in June. So, the logical question is… “Why should we believe them now?”

Second, who cares about one 25 bps rate hike? Whether there is a rate hike in September or December, the market doesn’t believe the Fed will hike rates consistently beyond that one hike, regardless of what happens to economic growth or inflation. And frankly, why should markets expect it? It’s taken the Fed nearly a year to hike another 25 basis points, so why should anyone think that will change next year, especially after the Fed keeps talking “gradual rate increases.”

What will change it? It’s going to take Fed Chair Yellen basically saying she is in support of a rate hike sooner than later to re-establish credibility with the market, because at this point the market simply thinks that while there may be a growing number of hawks on the FOMC, Yellen is not one of them, and it’s her Fed.

Market Outlook: What’s Next

Safety vs. Cyclicals Update. The last two days have certainly caught my attention with regard to whether this rotation out of safety and into cyclicals has finally begun in earnest, but it’s still not enough for me to settle on the idea that it has.

There have been many false starts in this rotation over the past few years, and if the market is really skeptical about the Fed hiking rates near term, then defensive sectors are still attractive beyond the very short term.

So, we are not materially reducing our medium- and longer-term holdings of defensive sectors and won’t until we see a material breakout higher in the 10-year Treasury yield (paid subscribers know the levels we are watching).

However, we are thankful we bought a specific bank ETF as a near-term hedge against safety sector underperformance. Since we bought our specific bank ETF two weeks ago, it’s risen 2%,
and we will likely add to it over the next few days if it can make a fresh closing higher above $40.57. This sub-sector of the banks remains one of the few areas of historical value in the markets.

Next Key Event to Watch:
The Jackson Hole Fed conference, which takes place in late August, has now become pretty important.

If Yellen is going to try and regain the market’s respect or prep investors for a potential rate hike in September or December, she will likely do it at her speech at that conference.

So, that’s a day to pencil in for a potential disruption to this rally, and we’ll be watching the Fed speak closely over the next month to discern any hints about what Yellen will say, because if she forecasts a rate hike, this market rally is going to reverse in a hurry.

Bottom line, the stakes in this market game of musical chairs keep rising, and the Fed is the one controlling the music, so it’s critical you’ve got an analyst working for you who is focused on helping you navigate the remainder of the year, regardless of what the Fed does with policy!

Our paid subscribers had this analysis at 7 a.m. this morning, so when their clients called today and asked, “What did they Fed mean for my portfolio?” they could answer quickly, directly, and confidently.

That’s how advisors use The Sevens Report
to strengthen relationships and close prospects.

If your broker or subscription research isn’t providing you this type of analysis on a daily basis and helping you build your business by saving you research time, increasing your knowledge about markets and giving investment ideas that can impress prospects and help client outperform, then please consider a quarterly subscription to The Sevens Report.

At just $65/month (billed quarterly) with no penalty to cancel, we are very confident we offer the best value in the subscription research space.
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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Our job is to provide you the timely, need-to-know, critical information that will demonstrate to your clients:

1) That you are on top of the markets, and

2) That you are in control of their financial situation.

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!

To be certain, 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 your current clients, and acquire new ones.

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, so there’s simply no reason why you shouldn’t subscribe to The Sevens Report right now.

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

Best,
Tom

Tom Essaye,
Editor, The Sevens Report

The Real Reason Why Stocks Are Rallying

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The music is back on.

Several times over the past few years I’ve referred to the markets as a real life game of “musical chairs.”

We all know the children’s game: When the music plays you run around the chairs and you hope that you have a place to sit when the music stops, otherwise you’re out.

It’s the same thing for central-bank-driven stock markets.

When the Fed is ultra-dovish, you have to “Run” (i.e. be in stocks) because stocks tend to go up regardless of economic fundamentals. But, you just have to hope that you have a seat when the music stops (i.e. the Fed actually gets serious about raising rates or the market finally realizes the Fed is out of bullets).

On Friday, following the jobs report, the “music” started again and investors piled back into stocks.

But, contrary to what you may have read in the financial media, Friday’s stock rally was not because of the strong jobs report. Yes, the headline was good, but the trend in job additions has been decidedly lower throughout 2016.

Instead, the reason for this huge rally in stocks is bonds – specifically that Treasuries went UP and yields went DOWN after the jobs report. Additionally, the Dollar was flat despite the strong jobs report.

That told investors that the market is now totally convinced that the Fed won’t raise rates this year, regardless of what happens in the economy, and as a result they piled into stocks.

So, it is the expectation of forever-low interest rates that is driving this stock rally – not any improvement in fundamentals.

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

No, we don’t.

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

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

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

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

We discussed the potential for that rotation in a recent edition of The 7:00’s Report and have included an excerpt for you below.

Are We Going to Witness a Great Rotation?

Most of the free excerpts you receive focus on macro topics, but in the paid edition of The 7:00’s Report
we include a general asset allocation model and list of tactical investment ideas we think can outperform over the medium term.

Throughout 2016, our general equity view has been “Cautious” where we advocate 2/3 allocation to defensive sectors (represented in the Report by SPLV) and 1/3 to higher-beta sectors (represented by SPHV).

Even with the S&P 500 hitting new highs, that allocation has handily outperformed the S&P 500 in 2016, as SPLV has risen 14% year to date, not including dividends, while SPHB has risen 1.4%, giving our “Cautious” allocation a weighed return of 9.6%, doubling the S&P 500’s 4.7% 2016 return.

But, right now, with stocks breaking out and people piling into equities, the question most advisors are asking is whether to rotate into more cyclical/higher-beta sectors.

That’s really important, because anyone who has been in defensive sectors has massively outperformed cyclical sectors year to date and knowing whether to stay in those sectors or rotate into cyclicals will be critical to outperforming for the remainder of 2016.

As we told subscribers earlier this week, we do not think this massive rotation is going to occur and currently we are advocating holding allocations to defensive sectors for anyone other than a short-term investor.

The reasoning behind that conclusion is fairly simple.

This rally is being driven by the idea that interest rates will stay low forever, regardless of the economy. And, as a result, that will continue to favor more income-oriented sectors (beyond the short term).

So, if the main justification for that breakout in stocks was that low interest rates have indeed made it “different this time” from a stock valuation standpoint, and because of record-low Treasury yields and the prospect of no rate hikes in the future, acceptable stock valuations are now higher than previous history.

So, if that is the reason that people are buying stocks, then it negates the “overvalued” argument towards defensive sectors (staples, utilities, REITs).

Yes, those sectors are overvalued compared to historical norms, but now so is the stock market, and if perma-low interest rates justify the valuation extension in the S&P 500, it must also justify the valuation extension in these defensive sectors.

And, so far, the price action has validated our thesis.

Despite the fact that consumer staples, utilities and REITs are basically at all-time highs, the relative underperformance since Friday is not nearly as big as it could have been given how “overbought” most people think utilities/staples and REITs currently are.

In fact, we were actually relatively impressed with the performance of consumer staples (XLP/FXG) on Friday, as given their recent outperformance we could have easily seen outright declines in both those sectors following that strong jobs report.

Getting this potential rotation “right” for subscribers will be very important, and it’s obviously going to be a fluid situation. So, to make sure we get this “right” for subscribers we are watching a single indicator to tell us whether this rotation is gaining steam.

Until we see a material break lower in the belly and long end of the Treasury curve, the income provided by staples, utilities, REITs and other defensive sectors will remain critical to outperforming in this market.

And, we will alert our subscribers to any break that occurs in Treasury yields and analyze the implications for the market in general and for equity asset allocations.

If you do not have one research document that provides macro analysis as well as tactical investment idea generation every day at 7 a.m., please consider a subscription to The Sevens Report.

We firmly believe we offer the best value in the paid research space.

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

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

Click this link to begin your quarterly subscription today.

 

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

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

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

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

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“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 7:00’s Report right now.

Begin your subscription to The 7:00’s Report right now by clicking this link and being redirected to our secure order form.

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

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

Best,
Tom

Tom Essaye,
Editor of The 7:00’s Report

Why the Yield Curve Matters to Your Clients

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When you started in this business, did anyone sit you down and explain that watching things like the “10’s minus 2’s Spread” could help predict economic slowdowns and potentially avoid stock markets declines?

Me either.

I learned it the hard way – through being an execution trader and later a buy side portfolio manager through the mid – 2000’s, when in hindsight an inverted 10’s minus 2’s Spread provided a massive warning that a calamity was looming (the financial crisis).

Perhaps it’s just because of the scars from that period, but if you’re like me your blood pressure still goes up every time you hear “best” or “worst” since ‘07/’08.

So, my blood pressure is up considering I’ve heard it twice in the last week:

  • Yesterday, the New Home Sales report posted the best number since January ’08.
  • Last week, as we and others pointed out, the 10’s minus 2’s Spread fell to its lowest level since last ’07.

Our primary mandate here at The Sevens Report is to make sure our subscribers never get blindsided by a macro-economic event, so that second statement concerns me a lot more than the first excites me, at least from a portfolio management standpoint.

We alerted subscribers to the 10’s – 2’s spread dropping to near 9 year lows last Monday (two full days ahead of the WSJ), and you, via these free excerpts Wednesday.

And, over the past week, I’ve had several discussions about the curve with colleagues, some of whom agreed with me about my concern, and some of whom tried to convince me that it is indeed different this time and the flattening curve is not a problem.

Yield curve dynamics are not in advisor trading programs, and the media doesn’t make it clear why the curve is important. So, I want to cover that quickly:

Myself and others watch the yield curve because it’s generally speaking a good, broad predictor of future economic activity. And, below I explain what the shifting yield curve says about future economic growth.

We watch all markets (including the bond market and the yield curve) so we can alert subscribers to the rising chance of a pullback before it happens.

That’s why we produce this Report at 7 AM every trading day, so that our paid subscribers are never blindsidedby a macro-economic surprise.

To that point, stocks are strong again today but there isn’t a real “reason” for this two-day rally, and it reeks of short covering and chasing, just like the previous failed rallies of the last three weeks.

Meanwhile, looking at fundamentals, the macro horizon is again filling with potential bearish influences:

  • Chinese economic data missed estimates in April and worries about the Chinese recovery are rising.
  • Complacency towards the Fed is as high as I’ve ever seen as markets simply do not believe anything the Fed says with regard to rate hikes, and that means another “Taper Tantrum” is possible between now and July (chances of a June rate hike are just 38%).
  • Politics will once again become a force on the markets as the Brexit vote nears and the US Presidential Election gets closer.
  • US economic growth needs to accelerate and while there’s not a risk of a recession, the first data points from May (Empire State Manufacturing, Philly Fed and Richmond Fed) started with a “thud.”

Bottom line, despite the S&P 500 again challenging 2100, I think the next two months will be more difficult than the last two months, and it will be harder for advisors to keep up on the shifting influences on this market.

That’s why we’re going to make sure we do that for our paid subscribers, because the most important thing for financial advisors to do for the rest of 2016 is show clients that they: 1) Know what is going on in markets, 2) Are in control of client portfolios, and 3) Know what to expect next.

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

We make sure our paid subscribers have an independent analyst team that communicates with them daily at 7 AM 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 paying subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets.

With a monthly cost of less than one client lunch, we firmly believe we offer the best value in the independent research space.

Understanding the signals the bond market is sending is very important for anyone managing money for the longer term, so we wanted to directly explain what shifts in the yield curve mean for the economy and stocks.

 

Why The Yield Curve Matters to Your Clients

There are three movements the yield curve can make: Steepening, Flattening, and Inverting. Each gives a different implication for future economic growth:

A Steepening Yield Curve (where long-term yields rise more quickly than short-term yields) is generally representative of an economy that’s seeing growth accelerate. The reason (broadly speaking) is because in a good economy, capital tends to leave bonds and flow into more cyclical assets that offer more upside like stocks. So, investors sell longer-dated bonds because they don’t want to be stuck in a long-term, low-yielding asset compared to other alternatives. Put simply, people don’t want to settle for getting a low-but-stable yield.

A Flattening Yield Curve occurs when the bond market fears an economic slowdown, investors flood into bonds as protection, sending long-term bonds sharply higher and yields lower, which then flattens the yield curve (it’s the inverse of the previous scenario, as investors flock to the safety of stable-but-low yields).

An Inverted Yield Curve occurs when investors are becoming so concerned about future economic growth that they are piling into longer term Treasuries to guarantee a return of capital, not a return on capital, and the yield on the 10-year Treasury Drops below the yield on the 2-year Treasury.

So, as a guide:

Steepening Yield Curve: 10-year Yields Rise Faster than 2-Year Yields = Expected Economic Acceleration.

Flattening Yield Curve (which we’ve had recently): 10-year Yields Drop faster than 2-Year Yields = Looming Economic Slowdown.

Inverted Yield Curve: The 10-year yield is less than a 2-year yield = Looming Recession or worse.

The yield curve inverted during the ’06 – ’07 period and forecasted the looming financial crisis.

The yield curve is flattening substantially right now, despite the broad expectation of higher economic growth, and it’s making me and other analysts nervous about coming months and quarters.

 

chart1 5-25

Bottom line, the flattening yield curve had our attention because historically it signals an economic slowdown, and if there is a slowdown looming, than that’s obviously a big problem for stocks going forward.

 chart2 5-25

Finally, with regards to timing, when the yield curve inverted in 2006, it took a while for the stock market to break (again these are slower moving indicators), but advisors who ignored that warning and remained in “Risk On” mode enjoyed modest short term gains, but suffered massive losses in ‘08/’09.

Meanwhile, advisors with longer time frames, who heeded that warning sign, didn’t miss much upside, and likely avoided 60% drop in the S&P 500 in ‘08/’09.

That’s why we watch these indicators for our subscribers!

 

It’s Different This Time (2007 Edition).

Finally, in reference to, “It’s different this time,” (the idea that this flattening yield curve isn’t signaling a looming slowdown) I had to dust off some of my old notebooks, but just as a reference, when the yield curve last flattened and inverted in ’06/’07, everyone said, “It’s different this time.”

Back then, the reason cited was the massive global yen carry trade, where hedge funds were selling Japanese government bonds (which had a 0% yield) and taking that capital and dumping it into Treasuries, on a massively leveraged basis. That, theoretically, pushed down longer-dated Treasury yields in the midst of a mild Fed tightening cycle and that caused the yield curve to invert, (although it’s important to remember back then the 2-year yield was over 4%).

That was the reason it was different that time, but we all know that in the end, it wasn’t different at all (in hindsight, the yield curve was screaming an alarm bell well before the financial crisis).

I’m in no way saying we’re going to see a repeat of that this time, but I don’t believe it’s different this time, and if this yield curve continues to flatten I’ll take that as a continued warning sign.

Our paid subscribers know that they can rest easy because we are watching all asset classes for them, and we will alert them when one of them (like the yield curve) flashes “Caution” like it is now, and when that “Caution” becomes a “Warning.”

If your brokerage or paid research isn’t providing you this type of analysis on a daily basis, please consider a quarterly subscription to The Sevens Report. The monthly cost is less than one client lunch, there is no penalty to cancel, and our retention rate is over 90%.

 

Value Add Research That Can Help You Grow Your Business in 2016 (Despite the Tough Start)

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

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

“Tom’s ability to summarize market action in minutes is invaluable in today’s environment of data overload. We spend over $100,000 a year on research, and The 7:00’s Report is the one piece of research I can’t do without.” – John S., Vice President of a multi-billion-dollar asset management firm.

“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.

 

Best,
TomTom Essaye,
Editor of The 7:00’s Report

Tom Essaye on Fox Business

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Now is the time to invest in cloud computing with ‘Box’

Jan. 23, 2015 – 3:04 – The Layfield Report John Layfield and The Sevens Report Tom Essaye on Box storage, cloud computing markets and their top stock picks.

 

Tom Essaye Featured in Forbes.com – Stocks Struggling To Break Free Of Oil’s Slide

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By Steve Schaefer at Forbes.com

It’s oil’s market, stocks are just living in it.

That’s the most common takeaway from the first few trading days of 2015, as the months-long punishing of oil prices and energy stocks keeps broader market averages mired in negative territory.

If oil, junk bonds and the ruble are rolling over, expect equities to fall in concert, according to Tom Essaye, author of the Sevens Report. When that trio is pushing toward fresh lows, “the stock market will go down in sympathy.”

Tuesday the trend continued, with a short-lived morning rally in stocks evarporating as oil prices slumped further below the $50 mark. West Texas crude dropped more than 4% to below $48 a barrel, while Brent slumped 4.5% to $50.71. The S&P 500 fell 1%, with energy its worst-performing sector by a wide margin.

FactSet senior earnings analyst John Butters points out that analysts still seem optimistic on the sector — energy is tied with healthcare for the highest percentage of buy ratings in any sector (57%) and companies like SchlumbergerSLB -0.04%, Kinder Morgan KMI -0.6%, Phillips 66 PSX -1.25%, EOG Resources EOG +1.16%and Williams Companies boast buy rankings from more than 80% of Street analysts who cover them — even though earnings are expected to fall more than 19% in 2015.

Citigroup’s Tobias Levkovich points to the chart below, which shows that while 2015 earnings expectations have plunged in the energy sector, 2016 have been little changed.

energy chart

Perhaps that’s because analysts think the selloff is overdone and has created some undervalued opportunities. More likely it’s because the damage in the energy sector has come so rapidly the analysts haven’t even had a chance yet to turn their attention to future years.

At some level, bargain-seekers will think oil and energy stocks are worth buying, but Essaye warns that the true oil shakeout some are waiting for may be a bit further off than they think.

A global supply glut barreling up against weakening economic growth is a well-understood factor in oil’s slide, but another element Essaye points to is the potential breathing room oil companies have thanks to hedging strategies.

Companies that hedged their 2015 production at prices around $90 or more per barrel can likely stay afloat longer than outsiders like OPEC anticipated, given that those hedges are now “in the money in a big way,” according to Essaye. Net short positions held by producers have leaped from 15 million contracts in August to 77 million last week.

“Bottom line, shale producers are not yet feeling the “full on” pain from the roughly 50% selloff thanks to their hedging strategies,” Essaye says. “Sso we can expect production to remain high and fundamentals to remain very bearish.” He expects oil to head toward $45 a barrel in the near term.

In a recent letter to clients, Forest Value Fund’s Thomas Forester notes that the sliding prices in oil have been considerably worse than the broader declines in other industrial commodities, which might be explained away in part by the end of the Federal Reserve’s monthly asset purchases – which provided cheap money that sloshed into emerging economies like China’s – and the strengthening dollar.

 

http://www.forbes.com/sites/steveschaefer/2015/01/06/stocks-struggling-to-break-free-of-oils-slide/

Don’t Get Fired By Your Clients: How to Become a Better Financial Advisor

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“Tom, I just fired my Financial Advisor!”

That’s what a subscriber to The 7:00’s Report recently told me. When I asked her why she felt the need to get rid of her advisor, she told me it was because he couldn’t intelligently discuss any of the things she’d been reading about each day, a read that took her just 7 minutes every morning.

This same subscriber also told me that her advisor rarely offered her any original trading ideas, and that when she asked him about something she read in The 7:00’s Report, he basically blew her off.

Now, if you’ve ever had a question from a client that stumps you, or if you just don’t want to be outfoxed by a client who’s actually up on what’s going on in the economy and the markets, then The 7:00’s Report is the solution.

To start a Free Two Week Trial of The 7:00’s Report simply sign up on the right hand side of this page.

I’m Tom Essaye, and I created The 7:00’s Report for one simple reason–to give Financial Advisors like you the analysis and insight you need to help you understand what’s really important, and to arm you with the latest intelligence you can use to keep your clients happy.

The 7:00’s Report brings you all of the critical information you need to know about the markets, by 7 AM each morning, and in only 7 minutes or less.

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About Tom

Tom Essaye is not your average newsletter writer. After cutting his teeth on the trading floor of the NYSE in 2002 with Merrill Lynch’s Institutional Equity trading division, Tom moved on to manage a natural resource and commodity focused hedge fund. He later joined a leading financial publisher as the head of its trading strategies. In January 2012, Tom created a new company with the express purpose of providing institutional quality market analysis direct to financial advisers and retail investors. Shortly thereafter, The 7:00’s Report was born.

Tom is a frequent guest on national television, and appears regularly on CNBC, CNBC Europe, CNBC Asia, Bloomberg TV, BNN and Marketwatch.com. He’s also been a guest commentator on national radio shows, and is frequently quoted in various national print publications.


A cum laude graduate of Vanderbilt University, Tom holds a bachelor’s degree in business To management, with minors in finance and philosophy. He also holds an MBA from the Hough Graduate School of Business at the University of Florida

                                        

Sevens Report 7.16.14

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Equities

Market Recap

Markets declined Tuesday as cautious comments from Fed Chair Yellen offset strong economic data, although stocks managed to close well off the worst levels of the day.  The S&P 500 fell -0.2%.

Tuesday initially started pretty well as futures were higher after several major companies beat earnings (GS, JNJ, CMA, JBHT, JPM) and economic data (June retail sales, July Empire State manufacturing) beat estimates.  The Dow Industrials hit a new all-time high, and the S&P 500 inched closer to its recent high, but markets reversed on the Yellen appearance before Congress.

I’ll cover it more in depth below, but Yellen’s comments caused the small caps and “momentum” sectors (biotechs and Internet stocks) to come for sale hard (you’ll see why in a minute), and that dragged down the entire market.

But, as has generally been the case since last Thursday, there was no real conviction or follow-through to the selling Tuesday. The S&P 500 bottomed down -0.5% shortly after midday, and then began a slow rally back toward flat before selling off slightly into the close.

Bottom Line

The market has been consolidating since the highs of July 7, and that continued yesterday.

The price action in small caps and momentum names is disconcerting, but most of the selling that’s going on in those sectors is by fast-money funds and algos, not real money materially reducing exposure (like we saw in April).  Europe has also been weak and likewise needs to be watched, but the fundamentals behind the market remain broadly positive.

All that said, I don’t think this period of consolidation is over just yet, and it wouldn’t shock me if we have another “scare” to the downside on some sort of negative news over the coming days.

Earnings are helping to support markets (although it’s still early), but I’d continue to like to see the SX7P (European banking index) bottom before buying back into Europe, and for the NBI and QNET (biotechs and Internet indices) hold the lows of last week before allocating anything further into SPHB and more-cyclical sectors.

Again, this looks like a normal consolidation to me (rather than a correction), but I don’t think it’s over just yet.

Yellen’s Testimony Wasn’t ‘Hawkish,’ But It Did Cause Stocks to Decline.

The general consensus of Fed Chair Yellen’s statement and Q&A in front of the Senate yesterday was that she was incrementally “hawkish.” But that wasn’t really the case.

The main sentence that was being spun as “hawkish” was her commentary that “if the labor market continues to improve more quickly than anticipated by the Committee … then increases in the Federal Funds rate target would occur sooner and be more rapid than currently envisioned.”

Translation: If the jobs market improves and inflation accelerates, we’ll pull forward when we raise rates and how quickly we raise them.

That’s not a hawkish statement – it’s common sense.

The reason the market traded down yesterday was thanks to a totally separate piece of information – the Fed’s semi-annual report to Congress.  It contained the statement that “valuation metrics in some sectors do appear substantially stretched – particularly those for smaller firms in the social media and biotechnology industries. … Moreover, implied volatility for the overall S&P 500 index, as calculated from option prices, has declined in recent months to low levels last recorded in the mid-1990s and mid-2000s, reflecting improved market sentiment and, perhaps, the influence of ‘reach for yield’ behavior by some investors.”

So, the Fed singled out bio-tech and social media as overvalued, and that statement echoes recent comments Yellen has made about pockets of “froth” in the equity markets. Importantly, though, she described the valuation of the broader stock market as “not far above historical averages,” so this was more about addressing the overvaluation in “momentum” sectors more than it was declaring the stock market “irrationally exuberant.”

The Fed signaling out “momentum sectors” is a unexpected headwind (the fear is a repeat of April where a sharp decline in those sectors drags the entire market lower).

But, and that’s not exactly new messaging, and more importantly, the bottom line is that the outlook for the Fed did not change in yesterday’s testimony (and likely won’t change today, either).

Economics

Both economic releases yesterday beat estimates and painted an encouraging picture for consumer spending and economic activity in July.  But, neither resulted in an equity-market rally, as comments by Fed Chair Yellen overshadowed the hard data.

Retail Sales

  • June Retail Sales rose 0.2% vs. (E) 0.6%.

Takeaway

June retail sales disappointed on the headline yesterday morning, but that was a bit misleading. The details of the report were good and there were positive revisions to April (0.5% from 0.2%) and May (0.2% from 0.0%). The “control” number — which is retail sales ex-autos, building materials, and gasoline stations — rose +0.6% in June, the 4th month in a row.

Bottom line, the disappointing headline of yesterday’s retail sales report for June was misleading and the report was actually pretty good. And, while not reflecting robust consumer spending, the strong June “control” figure and positive revisions will help ease some of the general concern regarding consumer spending.  This report was a positive for the economy.

Empire State Manufacturing Survey

  • General Business Conditions Index rose to 25.60 vs. (E) 17.80 in July.

Takeaway

Manufacturing activity accelerated to a 4-year high in the greater New York area in July. Both the headline and details of the report were good, as new orders (the leading indicator within the report) were little-changed but remain strong at 18.77.

Empire State manufacturing hasn’t been a very good predictor of the broader national manufacturing PMIs in 2014. Regardless, it’s encouraging for the market to see growth in the manufacturing sector continuing in July, especially in the context of constant worries about the strength of the manufacturing recovery.

Focus will now turn to the Philly Fed manufacturing index Thursday. But the bottom line is this first data point from July implies the recovery in the manufacturing sector is accelerating further and that’s anecdotally encouraging for the economy as a whole.

Commodities

Commodities were almost universally lower yesterday, in part thanks to a stronger dollar (+0.3%). The sole exception was copper, which was only slightly higher on better than expected Chinese economic data. The benchmark commodity tracking index ETF, DBC, fell to a 5-month low before bouncing slightly into the close.

Precious metals got hit again yesterday. Gold fell -0.8% while silver gave up a more-modest -0.4%. Nearly all of the session losses in gold came in the first 15 minutes of Yellen’s testimony (when her statement was released and then feverishly dissected by the news-reading algorithms). Gold smashed through support in that $1300—$1310 range in heavy selling before finding support in the $1290 region.

Gold futures were able to hold the 50-day moving average at $1,292.40. But the reason it was defended was more a result  of shorts taking profits rather than new longs initiating positions. Bottom line, it appears that the broken uptrend line was more important over the near term than initially expected. Despite the 3 other supporting factors in the market (the bullish cross in the moving averages, the rising number of net longs, and the underlying inflation bid), the bears still have the momentum and we could see a further dip or at the very least some further consolidation here below $1,300.

Elsewhere in metals, copper was the only commodity to finish higher yesterday, adding a very modest +0.05% thanks to some better than expected economic data. A Chinese report showed that lending increased at a higher than expected rate last month, which helped reverse losses ahead of the release.

Going forward, prices remain somewhat extended as the recent rally from $3.00 was a sharp one; therefore we’d like to see a further pullback to around $3.20 before the risk/reward would be favorable to initiate long positions in copper. But, looking ahead, the improvement in the global economy will continue to be a tailwind on copper prices as a result of higher demand.

Crude oil futures resumed their downtrend Tuesday after seeing a bounce on Monday. WTI fell -1.01% yesterday but importantly held support at the 200-day moving average ($99.81). But, WTI still has some significant downside momentum and until we see a break of the sharp downtrend that has been in place since the mid-June highs, we will remain sidelined. Such a break would require a close above $101.25.

Fundamentally, today is inventory day for crude oil and the products, and a bullish report may facilitate a short-covering rally and a close above the aforementioned technical level. Expectations are:  -2.6M bbls in WTI Crude, 700k bbls increase in RBOB Gasoline, and + 2M in distillates.

Natural gas traders retested trend support at the $4.10 level yesterday as futures fell -1.3%. Like crude oil, natural gas also remains a “falling knife” here. Even though the risk/reward setup for initiating a long here is favorable, like in WTI crude there is significant downside momentum in the very short term, and we would like to see a close above the steep downtrend line (above $4.15 or so) before initiating a long position.

Currencies & Bonds

The dollar was nearly universally stronger yesterday courtesy of the good economic data (retail sales and Empire State manufacturing survey) and a “hawkish” take on Yellen’s testimony.  The Dollar Index rose +0.27%.

The only major currency that ended the day higher vs. the dollar was the British pound, as it rose +0.39% to (just off a new 6 year high) after Great Britain June CPI rose to 1.9% year-over-year, much higher than the 1.6% consensus.

The headline jump in inflation year over year was a bit eye-popping, but it’ll probably prove temporary.  That’s because the spike higher was caused by price increases for footwear and apparel.  But, the increase will likely be temporary because of seasonal adjustments. Normally, retailers in Great Britain heavily discount summer clothing in June, so the seasonality anticipates this discount.  This year, though, the retailers appear to have not as aggressively discounted in June, and will likely spread out discounts over the summer months.  So, that should result in some seasonality “payback” in the form of price declines in July/August.

Regardless, clearly inflation is trending higher in the UK, as is economic growth. This is just reinforcing the point that the Bank of England will be the first major central bank to raise interest rates, perhaps as early as this year.  The pound remains the single-most-attractive currency vs. the dollar right now.

Staying in Europe, the euro was almost the worst performer vs. the dollar yesterday, falling -0.38%, on a combination of factors:  dollar strength, a German ZEW Business Expectations Index miss, and “dovish” comments by ECB President Mario Draghi (he said a strong euro is a threat to growth and that asset purchases (QE) are well within the scope of the ECB).  None of the comments were new, but Draghi wanted to try to talk the euro down and appears to have been moderately successful (the euro is down again this morning and through support at 1.355).

Keep in mind, a weakening euro is what the “Europe bulls” want right now, so a declining euro is a needed tailwind for European shares, if it continues.

Looking at the commodity currencies, the Loonie was the worst performer vs. the dollar yesterday, falling -0.4% ahead of a manufacturing report earlier today.  The Loonie is now sitting on key support at $0.9260, and if that’s broken, look for the declines to accelerate. The Aussie was also slightly lower vs. the dollar after the Reserve Bank of Australia’s June meeting minutes were taken as slightly “dovish” in tone. (Nothing shocking was said; just general mention of concern about the economy.)  But, the Aussie remains in the middle of the trading range ($0.92-$0.94).

Turning to bonds, the 30-year traded in a big range yesterday. It initially traded down nearly -0.3% on the strong economic data and Yellen comments, but then rebounded and rallied nearly +0.3% later on in the testimony, before giving back those gains to finish basically unchanged.  Meanwhile the yield on the 10-year was also unchanged.

Treasuries remain buoyant but seem a touch confused at the moment, as the market tries to “game” the Fed’s potential normalization strategy within the context of foreign demand for Treasuries, an accelerating economy and bottoming inflation.  And, in the near term, money flows from the two aforementioned sources are trumping the fundamentals of the two latter sources.  Bottom line is that Treasuries remain above the uptrend of 2014. Until they decisively break that downtrend, then the short-term benefit of the doubt remains with the bulls, despite growing fundamentals that suggest Treasuries should be declining.

Have a good day,

Tom

 

Sevens Report 7.14.14

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Equities

Market Recap

Stocks declined last week as soft global economic data led to a round of profit-taking in small caps and higher-beta sectors.  The S&P 500 fell -0.90% and is up +6.45% year-to-date.

Stocks traded lower last Monday mainly on European growth concerns after Erste Bank became the latest European bank to issue a profit warning. The selling continued Tuesday as European banks were again lower on news that BNP Paribas was hit with a $9 billion fine and Commerzbank may be next.

Also contributing to the selling early last week was news that a subsidiary of Banco Espirito Santo (Portugal’s largest bank by assets) would miss a debt payment and may be having funding troubles (which was extrapolated out to imply the larger company may also have funding troubles).

Stocks saw an oversold bounce Wednesday helped by better than expected AA earnings and positive margin guidance from AAR. But it was a weak bounce, and the selling pressure resumed Thursday as the S&P 500 was down over 20 points very early in trading, dragged down by Europe.

Stocks lifted off those early morning lows to finish down modestly Thursday as there wasn’t a lot of follow-through or conviction to the selling, and an earnings beat by WFC helped stocks bounce slightly Friday in quiet trading.

Trading Color

One of the bigger takeaways from last week’s selling was that it was much more about profit-taking than it was some broad “risk off” move by investors, although obviously defensive groups outperformed higher-beta names.  Utilities, consumer staples and REITs finished positive last week, and more broadly SPLV (which was flat on the week) handily outperformed SPHB (down -2%).

The reason I say the selling last week was much more about profit-taking than anything else was because sectors that have outperformed handily since May (momentum sectors like bio-techs and internet stocks) got hit hard, as did small caps (the Russell 2000 fell -4% last week as it was weighed down by financials, which were sold ahead of earnings, and the aforementioned biotech and Internet names).

The reason this distinction is important is because profit-taking-driven selling implies this is more of a consolidation in the markets rather than some sort of a bearish game-changer. Sellers weren’t aggressive last week despite the declines.

Two other observations from last week:  First, not all cyclical sectors got hit, as PICK hit a new 52-week high last Tuesday (helped by AA earnings), and metal & mining stocks bucked the broader market’s negative trend as gold traded higher (GDX was up over +3% last week).  We could see those sectors dip this week as they are short term overbought, but valuations in the global mining sectors aren’t extreme, and there’s plenty of upside from here as long as metals prices hang in there and we don’t get any materially negative data from China.

Second, energy was a standout underperformer last week, weighed down by WTI crude prices.  The XLE chart looks pretty bad at this point, as does FCG and XOP.  And, while I remain an energy bull, it looks like this selling has a bit further to go.

Looking at market technicals, the Russell badly violated support last week and traded out a weekly negative “outside reversal,” which will have people nervous.  The S&P 500 held support at the 1,964-ish level and that will be key again next week, while next support sits below at 1,950.

Bottom Line

Last week’s sell-off appears to be a normal correction in an upward-trending market more than it is the end of the rally.  Stocks have enjoyed a strong and uninterrupted rally since mid-May, and at this point need to consolidate and correct to restore some health.

The soft European economic data and European bank weakness appear to have just provided the catalyst for that normal correction to start, and it likely will last a bit longer depending on earnings season, which kicks into high gear this week.

More broadly, the “4 Pillars” of the rally remain largely intact:  globally accommodative central banks, an ongoing global economic recovery, a calm macro horizon, and still-reasonable valuations.

Risk remain to each of those pillars (Yellen speaks on monetary policy Tuesday, the global economic data have softened slightly lately, Israel is threatening to put ground troops in Gaza, and earnings need to confirm $130/share 2015 EPS).  But, at this point those are just risks to monitor.

Focus this week turns to earnings, but Europe will also remain the key.  I want to be a buyer of cyclicals and Europe on this dip, but I want to see the SX7P (European banking index) stabilize first—as I think that’s a leading indicator of when this correction will end.

Economics

Last Week

The biggest thing that happened last week, economically speaking, was that foreign data largely disappointed, and implied we’re seeing the global recovery lose a bit of momentum.  That, much more than concern about Portuguese banks, was the real reason global shares traded heavily last week.

Chinese trade balance (both exports and imports); German, French and Italian May industrial production; and Japanese machine orders in May all missed expectations. Specifically in Europe, the soft data added to a string of indicators that implied the recovery, while still ongoing, is losing some momentum.

Keep in mind that one of the “four pillars” of the rally is a broad global economic recovery.  And, while the data last week didn’t imply the recovery is stalling, numbers in Europe have been soft now for a few weeks. So, the global markets now need a bit of a confidence boost that the EU economy is indeed continuing to get incrementally better.

Domestically last week was very quiet, as FOMC minutes from the June meeting were in focus.  Going into the release of those minutes, it was expected they may be more “hawkish” than the FOMC statement because it was assumed the FOMC would have been extensively discussing exactly how they were going to start to unwind all this historic stimulus.

But, as seems to be the case lately, the market overestimated the Fed’s concern about both inflation (which the broad committee doesn’t see as a problem right now) and the economic strength (the Fed remains committed to being very accommodative into the future).

Some details of just how the Fed plans to eventually raise rates were discussed, but the Fed seems in the very preliminary stages of figuring out how they will eventually raise rates.

The one big headline out of the minutes was that the Fed will likely end QE in October, but that wasn’t a surprise to anyone who’s been paying attention.  Bottom line with the minutes last week was that they weren’t as hawkish as feared, and there were no changes to expected Fed policy.

This Week

The calendar gets busy again this week as we get several pieces of economic data and Fed Chair Yellen conducts her “Humphrey-Hawkins” testimony in front of the House Tuesday and Senate Wednesday.

Given the focus on the Fed and the expected transition in policy, the Yellen testimony Tuesday will be the highlight of the week. (Her prepared comments will be the same for the Senate testimony, so Wednesday all that matters is  the Q&A session.)

The highlight of the week from a data standpoint will be retail sales.  Consumer spending hasn’t been as strong lately as you would have expected, given the improvement in the labor market. Combined with recently dire commentary on the consumer from some companies (The Container Store last week was the latest to lament a poor retail environment), retail sales will be closely watched to see if the consumer is starting to increase spending.

Second in importance this week will be the first look at July data, via the Empire State Fed manufacturing survey (tomorrow) and Philly Fed manufacturing survey (Thursday).  As I’ve said before, these regional manufacturing surveys have lost some importance since the national flash PMIs started being produced, but the market will want to see that the pace of the economic recovery is continuing in July.

We also get our first look at the June housing data, as housing starts come Thursday.  Recent indicators implied the housing market is finally rebounding from the winter declines, and another good round of housing data will help further reduce concerns about the pace of the housing recovery.  Finally this week we get May industrial production and the Fed Beige Book.

International data will also be in focus this week given recent concerns about the strength of the recovery, especially in Europe.  There’s not a lot of data from the continent this week, but the German ZEW Survey will be in focus, especially given the recent weakness in German economic data.

In China we get the latest look at GDP, industrial production, fixed-asset investment and retail sales Tuesday night.  Obviously the key here is that the pace of Chinese economic growth remains stable.  As long as the numbers are mostly “in-line” with expectations, the market shouldn’t react too much.

Broadly this week, the market is looking for Yellen to not say anything surprising and to emphasize that any transition to policy “normalization” will be gradual.  From a data standpoint, markets need a bit of a confidence boost, mainly from the EU, but also from China and the U.S.

Commodities

Commodities finished last week mostly lower, led down by continued weakness in the energy sector as WTI crude oil futures fell a staggering 3.16%. DBC, the benchmark commodity tracking index ETF, had its worst week of the year, falling 2.5%. However, one bright spot despite the fairly broad weakness in the space was the continued outperformance of precious metals.

Beginning with energy, crude oil futures crashed through several support levels over the course of the week, starting with the 50 day moving average at $103.60, then the 100 day MA at $102.39, and lastly trend support at $101.25.

As for a reason for the substantial selling pressure, several things were citied including easing tensions in Iraq and increasing exports from Libya. However, these were more excuses to explain the overwhelming momentum that the bears have at the moment rather than actual market driving headlines. All eyes are now on support at the 200 day moving average at $99.96 and the sharp downtrend line that futures have been riding since they topped out in mid-June.

Elsewhere in energy, natural gas futures also continued to sell off last week, falling 5.1%. But, unlike WTI, the selling in natural gas futures lightened up on Friday, and actually closed higher by .5% and importantly, 4 cents above support at $4.10. Cooler weather forecasts and growing inventories are the main reasons for the short term weakness, and despite inventory levels remaining historically low, the outlook for weather remains the driving factor in the near term.  But, natural gas is nearing key medium/longer term support levels.

Moving to the outperformers, gold and silver both rallied 1.4% on the week. Both precious metals saw gains mid-week thanks to a “safe haven” during the Portuguese debt flare up. Both gold and silver are trading a bit lower this morning as equity markets bounce, but beyond the near term noise, gold and silver continue to benefit from general global unrest, rising inflation expectations and declining real interest rates.

Gold is now sitting on the uptrend in place since early June, so for those looking to trade it, buying this dip makes sense on the charts.  Use a tight stop though ($1316ish).

Currencies & Bonds

The Dollar Index was flat last week, as the greenback initially declined in response to the “dovish” FOMC minutes, but then caught a bid late in the week on a “risk off” bid.  The Dollar Index did manage to hold support above the 80 level, despite the choppy trading.

The euro also was surprisingly flat despite general risk reduction, disappointing data and Portuguese banking worries.  Oddly, though, euro strength is now a reflection of things not “working” in the EU.  The goal of the ECB (and the euro bulls) is to see the EU economy grow, bond yields rise gradually, and the euro fall.  But, when the market doesn’t think the ECB policies are working or the economy is growing, they will buy euro out of deflation fears.  So, trading in the euro is not all that dis-similar from the yen at this point—a weaker euro is a sign things are “working” in Europe.  Clearly, things weren’t working last week.

Turning to the yen, things aren’t working there, either.  The yen rallied to a 5-month closing high vs. the dollar despite weak economic data (again, the yen is pricing in potential low inflation/deflation concerns).  100.74 remains the key level to watch in the dollar/yen—if that is violated, then calls that “Abenomics” is failing will get louder, and we’ll have to significantly re-evaluate the “long Japan” thesis.  I can’t believe, though, that the BOJ won’t try to put pressure on the yen as there’s a BOJ rate meeting early this week.

The bond market surged higher last week and completed one enormous head-fake, as the 30-year is now just a few ticks from the highs for the year.  Lackluster economic data, a dovish Fed, and foreign buying helped push bonds higher. Astonishingly this uptrend isn’t over.  138’10 is the high for the year, and I’d be very surprised if that isn’t tested early this week.  At some point this bond rally will end, but I’m now becoming convinced that it won’t be until ECB policies in the euro zone start “working” and this enormous Treasury carry trade starts to reverse.  Until then, the short-term trend remains higher.

Have a good week,

Tom

 

7:00’s Report Editor Tom Essaye Discusses Gold Miners on Fox Business 6.23.14

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Tom Essaye discusses the outlook for the broad market and the potential for a continued rally in gold mining stocks on FBN’s Varney & Co. with Stuart Varney.

http://video.foxbusiness.com/v/3637800558001/time-to-buy-gold-miners/#sp=show-clips