Posts

What Will Move Bond Markets

/in /by

For the past two weeks, we’ve told you via these free excerpts that the markets were entering a critical six-week period that ultimately would decide whether the rally in stocks continues… or reverses.

Well, that six-week stretch of events started with a bang last Friday as Fed Vice Chair Fischer surprised markets by basically saying Friday’s jobs report would decide whether the Fed would hike rates in September.

As a result, bond yields spiked and stocks dropped.

And, if Friday was any indication, we’re in for a wild ride as the markets navigate the remaining 6 key critical central bank/macro events between now and September 26th (more on that below).

We never like to see the markets go down as all of us are generally “long” stocks, but Friday was a good day for us here at The Sevens Report, because it validated what we’ve been saying to our paid subscribers for the past several weeks:

Specifically, that whether stocks resume the July rally or break down from here will depend on the bond market, and as a rule, anything that sends bond yields up will be negative for stocks, and anything that sends bond yields down will be positive for stocks.

While other research publications were simply providing recaps of a dull market during the majority of August, we were consistently telling our subscribers that the bond market is the key and the coming several weeks were going to be critical—and on Friday afternoon (and continuing today), our advisor subscribers were able to demonstrate to their clients they were on top of markets and in control of their portfolios!

In fact, one subscriber wrote in and said it was the “Plain English” analysis of the bond market that’s helped him strengthen a relationship with a high net worth client, and he’s pretty sure that he’s going to get an additional allocation because, as the client said, his other advisors seemed to have “taken August off” given the quiet market.

That’s the kind of feedback that makes the early wake ups and long hours of work worth it, and the best part is that our subscriber only had to spend less than 10 minutes each morning reading our daily macro report. That’s how The Sevens Report
helps advisors grow their business.

Every trading day at 7 a.m. we provide plain English, concise analysis of:

  • Stocks
  • Bonds
  • Commodities
  • Currencies and
  • Economic Data

And, our daily report takes less than 10 minutes to read each day!

Finally, we do it at a cost that’s substantially less than our competition (and less than one client lunch per month), and that’s why we continue to believe we offer the best value in the paid research space!

Given last Friday’s “hawkish” surprise from Fed Vice Chair Fischer, it’s critically important for all advisors to understand what is really driving the bond market
(it’s not a Fed rate hike) because where bonds go from here will determine the next move in stocks.

We’ve included an excerpt of that research as a courtesy.

Understanding What Will Move the Bond Markets (It’s Not Rate Hikes)

The question of when the Fed hikes rates has come back to the forefront for investors, as expectations for a rate hike in September or December have increased following the hawkish comments from last Friday.

But it is very important to understand that while the media will focus on the Fed hike drama, easily the most important thing to understand about the bond market right now is that the Fed has little to no control over whether 10- and 30-year Treasury yields stay in a downtrend (good for stocks), or reverse and start to trend higher (bad for stocks).

Whether the Fed hikes in September, December or 2017 won’t resolve the major issue facing stocks right now, which is the near-term direction of global 10- and 30-year bond yields.

Instead, there are two other central banks that control the direction longer-dated Treasury yields:

  1. The European Central Bank (ECB) and
  2. The Bank of Japan (BOJ)

For US stock and bond investors, what those banks do in September is much, much more important than what the Fed does between now and December.

Now, I said that the Fed doesn’t control longer-term interest rates anymore to a friend this weekend, and he was incensed that I could utter anything so “stupid.”

But, I pointed out that over the past two years, we’ve seen the Fed:

  1. End the QE program and
  2. Hike Fed funds 25 basis points

Yet, during that two-year period, yields on the 30-year Treasury are down 80 basis points, from 3.1% in December 2014 to 2.1% post Brexit, and yields on the 10-year Treasury are also down 100 basis points (or 1%), from 2.3% to 1.33% post Brexit.

CHART

So my question to him was: If the Fed is still in control of longer-term Treasury yields, how can this be possible?

The answer is they aren’t in control any longer as the Treasury market has been overrun by foreign buyers due to the actions of the BOJ, ECB and now BOE.

The reason this is important for advisors and their clients is this:

Between now and year end, whether stocks resume their rally will depend on whether the ECB and BOJ are more hawkish than expectations, not the Fed.

If that happens, yields on Bunds and JGBs (Japanese Government Bonds) will rise and that will cause Treasury yields to rise too, regardless of whether Yellen trots out with a dove on her shoulder and promises to never hike rates again!

The critical bottom line is this: The financial media will be totally consumed with whether the Fed is going to hike rates in September, but from a stock standpoint (specifically whether stocks rally in Q4 or pullback) what the ECB does on September 8th and what the BOJ does on September 21st are much, much more important.

They are in control of longer-dated Treasury yields, and longer-dated Treasury yields will decide the next move in stocks and we will make sure you stay focused on what’s really important in the bond markets over the coming six weeks.

Make Sure You Have the Plain English and Actionable Analysis to Navigate the Next Six Weeks

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

And, we are going to provide that same level of analysis for the remaining 6 key events that are coming in September, events that will decide whether this rally extends into the fourth quarter

  • Friday’s Jobs Report: Will the number increase the odds of a September rate hike (and if so cause more short term declines in stocks).
  • 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 spoken, practical analysis that will help you navigate the coming six weeks, then please consider a quarterly subscription to
The Sevens Report. 

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

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

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

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

Click this link to begin your quarterly subscription today.

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

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

Why the Yield Curve Matters to Your Clients

/in /by

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

Important Shift in Yields

/in /by

While everyone was focused on equities yesterday, I think the most important market movements we saw yesterday came from the 10 and 30 year treasuries.

It looks at though 10 and 30 year yields have finally, after months, broken out to the upside.  As I’ve said repeatedly, getting long yields is going to be one of those “trades of a lifetime” but the trick is you’re got to be patient.

It looks to me like yields have finally broken out to the upside, and with the fundamentals of a less accommodative/more hawkish Fed, the technical and fundamentals are in line.

I’ve been faked out too many times on this trade so I’ll wait for another close or two before putting a position on, but it looks like the time is finally near to get long yields.

The above is an excerpt from the Sevens Report. To read the entire article and to receive daily commentary on all major markets and market moving economic and geo-political events, sign up today to request a free 2-week trial of the Sevens Report.