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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Next Six Weeks Will Be Critical for this Rally

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Click this link to begin your quarterly subscription today.

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

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

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

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

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

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

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

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

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

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

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

Best,
Tom

Tom Essaye
Editor, The Sevens Report


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.

Make More Money, Save Time, Have More Knowledge

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!

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.

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.

If you want to make your business more successful, you have to possess unshakeable confidence in your knowledge, and helping you acquire that knowledge is what The Sevens Report is all about. Begin your subscription to The
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

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
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.

Make More Money, Save Time, Have More Knowledge

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.

If you want to make your business more successful, you have to possess unshakeable confidence in your knowledge, and helping you acquire that knowledge is what The Sevens Report is all about. Begin your subscription to The
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:

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

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Best,

Tom Essaye
Editor
The 7:00’s Report

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