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Bonds and Currencies Report (BOE Surprise?)

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It was a generally quiet day in the currency and bond markets as the various cross currents (election, M&A, economic data, etc.) all largely cancelled each other out.  The Dollar Index closed little changed after spending most of the day modestly stronger.

The euro was modestly weak for most of trading Monday (down 0.30% at the low) thanks to a slightly soft October core HICP (their CPI). Year over year, core HICP rose just 0.7% vs. (E) 0.8%, and with inflation still sluggish the idea that the ECB will materially reduce its QE program remains an outlier. The risk to markets is that they underwhelm with their extension (i.e. taper and extend, as opposed to extending the current 80 billion monthly purchases).

It is just one indicator, and growth has appeared better in October, so it wasn’t a materially dovish influence and the euro rallied yesterday afternoon to finish with mild losses. Going forward, The Sevens Report continues to expect the euro to chop largely sideways near 1.10 vs. the dollar until we have more color on the ECB’s plans for its QE program.

Looking elsewhere in the currency markets it was quiet. The yen, Aussie and loonie were all little changed (the loonie held up well despite the plunge in oil, down just 0.20%).

It was equally quiet in bonds as Treasuries rallied small (the 10-year yield rose 1 basis point while the 30-year Treasury rose 0.33%). Part of that was buying following the soft EMU HICP (remember, deflation in Europe sends money into higher-yielding US Treasuries) and some of that rally was just general election angst given the October email surprise.

Going forward, the FOMC, BOE and jobs report are the next significant catalysts for the bond market, so I’d expect generally quiet trade into those events starting Wednesday.

Bottom line, if those events are hawkish and the 10-year yield moves up through 1.90% and towards 2% (remember the 10-year yield rose 11 basis points last week, so it could theoretically get close to 2%) that will be a headwind on stocks.

The Bank of England meeting is the most important Central Bank meeting this week.

Much of the media focus is on the Fed meeting this week, but actually the central bank meeting with the greatest potential market impact is the Bank of England meeting on Thursday.

The reason is well known. US Treasury yields continue to follow global yields (remember, Bund and GILT yields rose more than Treasury yields last week), and if BOE Governor Carney disappoints markets on Thursday we’ll see GILT yields move higher, and that will drag Treasury yields higher and become a headwind on stocks.

The risk into Thursday’s meeting is that Carney backs away from his promise for more stimulus this year because of the near-20%, post-Brexit collapse in the British pound, which is causing an uptick in inflation pressures across Britain.

Now, to be clear, he’s not expected to dial back his support for more stimulus, but it is possible, and that’s a risk to stocks as markets have priced in another move by the BOE (in December).

So, while the media likely won’t cover it nearly as much as a likely anti-climatic Fed or jobs report, this BOE announcement actually has the biggest potential to surprise markets this week. Stay tuned.

What the Election Means to Markets (Updated)

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Election Day is just two weeks from this Tuesday, so you’re probably getting the question:

“What does the election mean for the markets?”

Specifically, we want to address, in plain English, what a Clinton or Trump win would mean for:

  • The major asset classes: Stocks, Treasuries, Gold, Oil, the US Dollar and
  • Which stock sectors will be winners or losers

We’re producing this research now because if you’re like advisors who subscribe to The Sevens Report, you’re already getting asked questions about the election, and we want to make sure our paid subscribers have a clear, confident answer if a client or prospect asks about the potential market consequences of a Clinton or Trump victory.   

We’re addressing this for two specific reasons.

  • I haven’t found a good, comprehensive, Plain-English analysis of the election that focuses on the specific implications for all asset classes (not just stocks) and that singles out which stocks or sectors will rise or fall depending on the outcome.
  • The election is obviously a popular topic, and advisors will be talking about it with current clients and prospects. We want to make sure our paid subscribers have the talking points they need to turn those conversations into more assets and more clients
    – because the opportunity will be there for the informed advisor!

That’s why we made sure our election analysis covered all asset classes (not just stocks), because who wins will affect bond prices, oil prices, gold prices and the US dollar.

The election will also produce opportunities in specific stock sectors to outperform into year end, and we want our subscribers well versed in those potential opportunities, so when a prospect or clients asks – they have a specific answer!

As we enter what we believe will be a volatile fourth quarter, we will be dedicated to making sure our subscribers know what’s really driving markets, because we firmly believe volatility is an opportunity to strengthen your relationships with current clients and impress
prospects who are currently with other firms.

We all know that successful advisors grow their books by connecting with high net worth clients, and to build trust with those clients you can’t just repeat company “perma-bull” strategies.

That is why we created The Sevens Report, so that advisors can make sure they have an independent analyst that communicates with them daily, by 7 a.m., and quickly identifies the risks and opportunities for:

  • Stocks
  • Bonds
  • Currencies
  • Commodities, and
  • Interprets what economic data means for the market

The Sevens Report is the daily market cheat sheet our paid subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets.

With a monthly subscription cost less than a single client lunch, we are confident that we offer
the best value in the independent research space.

As a courtesy, we’ve included an excerpt from a recent edition of The Sevens Report that provides a roadmap for the markets given a Trump or Clinton victory.

What the Election Means for Markets

Three Market Winners (Regardless of Who Is Elected)

Infrastructure Stocks: Both candidates will likely expand infrastructure spending. Some names to watch (there isn’t a pure play infrastructure ETF): Restricted for subscribers. IGF is a global infrastructure ETF, but the US makes up less than 1/3 of the ETF, so it’s not a pure play (although still not a bad idea as increased government spending is likely across the globe).

Defense Stocks: Both candidates will likely increase defense spending, at least initially as the push to eradicate ISIS. Obviously given their stated policies it’s more positive for defense names if Trump gets elected, but either way this is a sector that should have a tailwind regardless of the outcome. Our preferred Defense ETF is:  Restricted for subscribers.

Gold: Regardless of who wins the outlook from a political and macro standpoint isn’t exactly rosy, so gold will likely catch a mild bid in either case even if it’s nothing more than as a protest vote by investors (neither candidate is exactly wanted by the markets).

Clinton Victory

Macro View:
The market “prefers” a Clinton win solely because it’s more of the same. So, a Clinton victory should be viewed more as “not bad” for stocks rather than “good” (in the short term) compared to the uncertainty of a Trump victory.

Market Reaction: Stocks: A mild relief rally (relief there were no surprises) but nothing particularly bullish. Bonds: Also a mild relief rally. Oil/Gold: Oil little changed, gold likely modestly higher. US dollar: Little changed.

Winners: Hospitals (Thesis: No Obamacare repeal or replacement, ETF: Restricted for subscribers), gun manufacturers (Thesis: Potential restriction on certain firearm sales. No ETF, best stock,
Restricted for subscribers). Alternative energy (Thesis: Continuation of investment in alternative energy programs. ETFs:
Restricted for subscribers.

Losers: Biotech/Pharma (fears of regulation/price ceilings), energy & coal (Thesis: Increased environmental regulation reducing coal and fossil fuel production, ETFs:  Restricted for subscribers. Private prison stocks (Thesis: Clinton said she wants them basically out of business at the debate.  Stocks:
Restricted for subscribers). Notable: Natural gas may be the exception here and worth a look on a dip as natural gas is the favorite fossil fuel of the alternative energy crowd.

Trump Victory

Macro View: The level of uncertainty regarding his policies will be very high, and that will elicit a “sell first, ask questions later” immediate reaction from stocks. But given the period between Election Day and Inauguration is usually a quiet one for the President Elect, I don’t think a Trump victory will, by itself, cause a material selloff into year end.

Market Reaction:
Stocks: Likely a mild-to-modest selloff, but not a bearish game changer. Bonds:  Treasuries lower near term but not a bearish game changer. Dollar: Lower as markets price in potentially contentious trade deals. Gold/Oil:  Both up (potentially materially) on uncertainty (the former more so than the latter).

Winners: Coal (Thesis: Reduced regulation on coal production and sales. ETF: Restricted for subscribers), energy (Thesis: Relaxed regulatory environment. ETF: Restricted for subscribers), pharma/biotech (Thesis: No risk of price controls or ceilings. ETF:
Restricted for subscribers), banks (Thesis: Potentially higher rates, rollback of certain Dodd-Frank regulations. ETF: Restricted for subscribers).

Losers: Hospitals (Thesis: Potential healthcare law changes. ETF: Restricted for subscribers). Alternative energy (Thesis: less funding for programs. ETFs:  Restricted for subscribers).

The Worst Election Outcome for Stocks

Given the large shift in the polling towards Clinton over the past few weeks, there are two new threats to the market from the election that I want to cover.

First, the Democrats sweep and win the presidency, Senate and House.

Second, and more likely, the Democrats win the presidency, Senate and shrink the Republican majority in the House.

Now, to be very clear, calling this a threat to markets has nothing to do with politics. These events aren’t a threat to markets because of the Democrats. Instead it’s because the market generally prefers a divided government that can’t really do anything. One party in full control is the opposite of that desire.

So, turning back to the first scenario where the Democrats sweep, that could be at least a temporary market negative because the government wouldn’t be divided and would likely be very active over the next two years.

The second scenario, where the Democrats win the presidency and Senate would still leave us with a divided government.

But, it would also vastly increase the chances of multiple budget/government shutdown dramas over the next two years. I say that because the Republicans would only be able to use the withdrawal of funding to influence policy (similar to what we saw in ’08 to ’12). And, to that point, current government funding is due to expire December 9th, so if this is the outcome of the election, that date will all of a sudden become more important.

Bottom line, Elections can move markets.

In 2012 the S&P 500 dropped 7%
ahead of and after the election, and if we get a negative surprise this year, a similar decline could easily turn the S&P 500 negative year to date.

If you don’t have a morning report that tells you, in plain English, what the election means for all asset classes, and doesn’t specifically identify sectors and stocks that will rally or decline based on the outcome, then please consider a quarterly subscription to The Sevens Report.

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

If all we do is help you avoid any election related pullback in stocks, or give you a tactical idea that can outperform into year end, it will be well worth the quarterly subscription cost!

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

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

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

Click this link to begin your quarterly subscription today and learn the 10 ETFs and 6 stocks we think will outperform or underperform depending on the election results.

Value Add Research That Can Help You Finish 2016 Strong!

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

Buy, Sell or Hold? (What’s Next for the Markets)

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People on Wall Street have a great sense of humor.

I remember thinking that years ago when I started my career at Merrill Lynch, and despite the fact that we’ve witnessed a lot of changes in this business over the years (most of them not good, in my opinion) I’m happy to say there are still a lot of funny people in this industry.

One of them is this guy “IvantheK” who I think is a trader (you never can tell on Twitter).

After the Fed meeting last week, he tweeted this image:

That’s a pretty accurate description of most people’s opinion of Fed policy!

Unfortunately, a dysfunctional Fed isn’t an excuse for advisors (or analysts) to underperform, and blaming a confused Fed for not having a good year won’t keep a client.

So, to keep growing both our businesses (yours and mine), we’ve got to get this market “right’ regardless of how difficult it is.

Given that, I’m happy that we again cut through the noise last week and gave our subscribers the need-to-know information about the Fed and BOJ.

Last week, we said the risk going into these central bank decisions wasn’t that they’d cause a pullback.

Instead, it was that they’d inadvertently put a “cap” on future stock gains.

And, we think that fear was realized because neither central bank was dovish enough to make us think global bond yields will drop towards post-Brexit lows.

And, without that tailwind, our fear is that the S&P 500 is now “stuck” at 2200.

Without the US 10-year Treasury yield heading towards 1%, there isn’t any justification to buy the S&P 500 above 17X earnings (I say the S&P 500 is stuck at 2200 because 17 * $130 (the 2016 S&P 500 EPS) = 2210).

So, in last Thursday’s Report, we said that while the post-FOMC rally was enjoyable, it was just a “relief” rally (relief that the BOJ and Fed weren’t outright “hawkish”) and not indicative of a new bull market.

And, over the past two trading days, the market has validated that analysis as the S&P 500 has retraced the entire post-FOMC rally.

Over the last week, we gave paid subscribers:

  • Central bank previews that they used for talking points when discussing interest rates and the Fed with clients and prospects.
  • Analysis they could send to clients immediately following the central bank decisions that showed they understood markets and were in control of portfolios.
  • Marketing material they can use with clients and prospects that shows their analysis of those decisions was right!

And all it took was a 7 minute read each trading day at 7 a.m.!

That’s how we turn our daily macro report into a tool advisors use to grow AUM.

Now that the key events of September are (mostly) behind us, focus is shifting towards the fourth quarter, and while the general consensus on Wall Street is that it could be a quiet few months, there are still several key events looming between now and December 31
that will decide whether the S&P 500 finishes 2016 positive or negative, and we’ve offered an excerpt of that list as a courtesy.

What’s Next for Markets: 5 Key Questions

Nearly six weeks ago in mid-August, when almost every analyst on Wall Street was trying to cram in a little extra vacation time, we told our paid subscribers (and you via these free excerpts) that the period of low volatility was about to end, because starting with the Fed’s Jackson Hole Conference (in late August) we were entering a critical stretch of key events that would largely decide whether stocks resume the July rally or not.

Since then stock volatility has risen sharply and the upward momentum in stocks has been broken.

Now, we’re saying it again:

The rest of the year will likely not be smooth sailing, and there is a lot of potential for volatility.
And with the S&P 500 up just over 4% year to date, there’s not a lot of room for error from a performance standpoint.

We have identified five key questions that, depending on their outcome, will ultimately decide whether the S&P 500 ends 2016 positive or negative:

Question 1: Will the ECB Extend QE? It’s widely assumed the ECB will extend its current QE program in December, but that’s not a given, and if they disappoint markets, we could see a sharp pullback at the worst time – three weeks until year end.

Question 2: Will the BOJ Taper QE This Year? The Bank of Japan basically admitted it’s “out of bullets” last week, so now it’s just a matter of time until they actually reduce their QE program (it’s not working and risks doing more harm than good). If/when the BOJ does taper QE, that will hit stocks.

Question 3: Does the Italian Referendum Pass? This is easily the most important issue for markets you likely haven’t heard about. This vote isn’t the Italian version of Brexit, but it isn’t very far from it, either. Later this year Italy will vote on a series of constitutional reforms, and if the vote fails, that will set up a “Brexit” type vote in 2017.

Question 4: Does the US Election Cause a Surprise? Even after last night’s debate this election will be closer than anyone thought possible, and it has the potential to cause a surprise and rattle markets.

Question 5: Does OPEC Cut Production: Falling oil is still a weight on stocks, so if OPEC does not cut or cap production at tomorrow’s meeting, the last date to do so in 2016 will be in late November. Plunging oil caused a drop in stocks last December, and the potential is there for a repeat.

In tomorrow’s paid subscriber edition of The Sevens Report, we will tell our subscribers the “Need to Know” on each of these looming events including:

  • Key Dates to Watch
  • What Will Make Each Event Bullish or Bearish
  • What Assets and Sectors Could Benefit or Get Hurt?

It is our hope that subscribers print this section of the report out and tape it to their desks, as it literally will be a road map to help advisors and investors navigate the remainder of the year.

Finally, our paid subscribers know we will monitor these looming events, but more importantly we’ll be watching for macro surprises that aren’t on the calendar – including:

  • European bank concerns (DB is in trouble)
  • US economic slowdown (notice economic data has been soft lately?)
  • Unexpected Chinese economic slowdown

That’s how we are going to help subscribers successfully navigate a volatile fourth quarter, so they can continue to focus on growing their business and strengthening client relationships.

The fourth quarter helps you lay the foundation for more allocations in the New Year, and we’re determined to help advisors “win” in Q4!

What Does This Mean for Markets (Stocks, Bonds, Commodities, Currencies)?

The S&P 500 being capped at 2200 does leave the markets vulnerable to macro shocks.

In fact, this market environment is starting to look at a lot like last year.

From May 2015 to July 2016 the S&P 500 was “capped” at (basically) 2100, and because it was capped, it was susceptible to sharp macro-economic inspired pullbacks:

  • August 2015: The S&P 500 dropped 10.5%
    in a month peak to trough on worries about the Chinese economy.
  • December 2015: The S&P 500 dropped 4.3%
    in two weeks on plunging oil and junk bond concerns.
  • January 2016: The S&P 500 plunged 13%
    in a month on falling oil, negative interest rates and a volatile Chinese yuan.

Obviously the market has recovered from these dips, but if an advisor had been able to tactically reduce exposure during just part of these declines, the cumulative effect on performance would be huge, and that means happy clients and more assets!

That is what we are very focused on doing for our paid subscribers over the next three months.

We are going to make sure they:

  1. Have someone carefully watching the macro horizon to alert them to any potential risks (more on that below) and
  2. Provide tactical idea generation that can help protect portfolios in a falling market, or outperform in a stable-to-rising tape.

If you don’t have a morning report that is going to give you the plain-spoken, practical analysis that will help you navigate the fourth quarter and help you get positioned properly to outperform into year end, then please consider a quarterly subscription to The Sevens Report.

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

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

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

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

Click this link to begin your quarterly subscription today.

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 Essaye
Editor, The Sevens Report

Is the Bond Bull Market Over? (Central Bank Preview)

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SL: Is the Bond Bull Market Over? (Central Bank Preview)

In the next 24 hours we’re going to get the answer to two very important questions:

  1. Is the Bond Bull Market Over?
  2. Have We Seen the Highs in Stocks for 2016?

And, it’s the Bank of Japan that likely will decide the answers to those questions, which will decide whether we see a potentially sharp decline in both stocks and bonds.

I’m not one for patting myself on the back, but I don’t know of many other research firms that were pounding the table back in August (when the market was quiet) saying:

  1. The July rally in stocks was in trouble because global bond yields were moving higher (they did, and the S&P 500 is down 2% from the August highs), and
  2. That the Bank of Japan and ECB were more important to US stocks than the Fed (the ECB caused a pullback two weeks ago and the Bank of Japan may do so tomorrow).

So, now I’m reiterating that tomorrow is a potentially very important day for clients’ stock and bond holdings, because even if we don’t see a lot of volatility immediately following the meetings, the Bank of Japan decision may mean the continuation of this rally in global bond yields, and the decline in stocks.


And, that could have significant consequences on clients returns as we enter the fourth quarter.

We are committed to making sure our paid subscribers know, before their competition, whether the Bank of Japan will cause global bond yields to move higher or lower, because that will be the key to getting clients properly positioned to outperform in Q4.

We’ve already delivered our Plain-English BOJ Preview to paid subscribers and they already know:

  1. What The Market Expects from the BOJ
  2. What will Make the Meeting “Dovish” and the likely market response
  3. What will Make the Meeting “Hawkish” and the likely market response

So, tomorrow, while other advisors and investors are searching WSJ.com, MarketWatch or CNBC to try and determine whether the meetings were bullish or bearish for stocks and bonds, our subscribers will already know.

But, more importantly, our subscribers know that at 7 a.m. Thursday morning we will deliver clear, Plain-English analysis of what the meetings mean for all asset classes (Stocks, Bonds, Commodities, Currencies) in the short and long term, and what tactical ETFs or general allocations we think will outperform in Q4 and beyond (and if that means raising cash, we’ll say it!).

Our paid subscribers won’t have to wait for a delayed, compliance-approved recap from their brokerage firm that just explains what the BOJ or Fed did, and ignores how to either protect gains or profit from the decisions.

We are going to tell our subscribers (at 7 a.m., and in plain English): 1) What Happened, 2) What it Means for Client Holdings (Stocks, Bonds, OI, Gold, the Dollar) and 3) How We Think We Can Make Money from It.

And, because this is such an important time for markets, we will be hosting a special webinar this Thursday at 1 P.M. EDT titled: “Breakout or Breakdown? 4th Quarter Market Preview.”

We will discuss the outlook for both stocks and bonds (and how we think investors should be positioned) heading into the 4th quarter.

There are a lot of moving pieces to tomorrow’s BOJ meeting and there aren’t a lot of clear, easy-to-read previews out there, so I’ve included an excerpt of our BOJ Preview as a courtesy:

 

BOJ Preview: What’s Expected

The fear going into tomorrow’s meeting will be that the BOJ will tacitly admit that it is indeed out of bullets, and is no longer able to provide meaningful stimulus to the Japanese economy. And while Japan is a unique case, this matters to all developed stock markets for two reasons.

  • First, and most directly, if the BOJ raises a symbolic white flag tomorrow, Japanese Government Bond yields will keep rising, which will make US Treasury yields rise, and that will keep a headwind on stocks.

  • Second, global stock markets have been supported (or propped up, depending on your definition) by the idea of ever more accommodative central banks. If the most aggressive central bank just declared itself impotent to spur further growth or inflation, what does that say about the ability of other central banks to support stocks prices/the economy if we see a slowdown? I often say at its heart, the market is little more than a confidence indicator, and a BOJ that disappoints markets again will strike a big blow to market confidence.

Bottom line, for global stock and bond markets that have been driven higher by the expectation of forever-low rates and ever-increasing central bank stimulus, having the most active player tacitly admit defeat is not good.

Now that we have the context, let’s look at what’s expected (there are a lot of moving pieces here, so bear with me):

  • QE: The first thing I will look at when I get up Wednesday will be to see if the BOJ increased the amount of QE. What’s Expected: No change to QE. If there is no change to QE, this BOJ decision will be at best neutral for stocks.
    • Dovish If (and Likely Market Reaction): Restricted for Subscribers
    • Hawkish If (and Likely Market Reaction): Restricted for Subscribers

     

  • Interest Rates:
    What’s Expected: Deposit Rate Cut from -.1% to -.3%.

     

    • Dovish If (and Likely Market Reaction): Restricted for Subscribers
    • Hawkish If (and Likely Market Reaction): Restricted for Subscribers

Wildcard to Watch: If the BOJ increases the inflation target from 2% to 3% (or close to 3%) that will be a surprise dovish move, and be taken as an unexpected positive (positive for stocks, negative for global bond yields).

 

Have a Plan In Place If Yields Keep Rising (and Stocks Keep Falling)

If you’re like me, and most advisors and investors, the biggest risk for tomorrow’s meetings is that global bond yields keep rising and stocks keep falling, creating an extension of the past 10 days where both stocks and bond holdings are falling together.

Given that risk, we spent last week providing subscribers with our “Higher Rate Playbook” they can refer to if we see that negative outcome, because in that scenario protecting profits and finding sectors that can outperform will be critically important! Paid subscribers already have this tactical playbook they can refer to, because we all know thinking clearly gets much more difficult when markets are falling!  

Play #1: Get Short the Long End of the Yield Curve, and/or Reduce the Overall Duration in any Bond Ladders

If we see a sustained decline in bonds/rally in yields, the belly and long end of the yield curve will get hit much harder than the short end of the yield curve.

There are two reasons for this:

First, the long end (say beyond 10 years) is over inflated because of foreign money, and as such has a lot further to fall before we get to compelling values.

Second, the short end of the curve (really 2 years or less) trades off Fed expectations, and the Fed simply isn’t going to raise rates quickly regardless of what happens in the markets (and especially if we see a selloff in stocks). So, the Fed will anchor the short end of the yield curve while the longer end rises, meaning the declines in short-term bonds will be less than in longer-term bonds.

ETFs to Get “Short” the Long Bond (there are many ETFs to do this but this is a list of the most liquid and targeted): Restricted for Subscribers

What to Buy in the Bond Markets: Restricted for Subscribers.
We don’t think everything in the bond market is toxic and we continue to have a top pick in the fixed income market for incremental capital that is less than five-year duration and the best alternative in a bond market that may be broadly declining.


Play #2: Focus on Good (but not Great) Credit Quality in Corporates

First, I think there may be opportunities for additional yield in the tier right below the top end of investment grade.
Point being, I would take the extra yield in that space between AAAs and junk, because barring a broad economic slowdown, corporate balance sheets are as strong as they’ve been in years.

Second, if I had a large allocation to junk bonds, I would rotate into higher-quality corporates because junk will get hit, and hit hard, in a declining bond market (think of junk bonds as the “subprime” of the bond market). Yes, junk pays a good yield, but in a rising rate environment it’s not worth the incremental risk.

How to Get Short Junk Bonds: Restricted for Subscribers.

How to Put on a Long Investment Grade/Short Junk Spread:
Restricted for Subscribers.


Play 3: Shift Exposure in US Stocks Out of “Yield Proxy Sectors.” (Know the difference between high-yielding sectors and truly defensive sectors).

If bonds and stocks keep falling, sector selection is going to become very important, and knowing the difference between truly “defensive” sectors vs. sectors that pay big dividends will matter for performance.

We provided the specific defensive sectors we like to paid subscribers in a report last week.

Play 4: Get a General Hedge Against “Risk Off.”

For over a year now we’ve used a specific inverse ETF as a broad hedge against a “risk-off” move in stocks, as this ETF has direct, specific exposure to some of the weakest sectors of the market, and as such can cushion any broad declines in the markets (like we saw in August/December 2015 and in January/February 2016).

We provided this specific ETF to subscribers once again in a report last week.


To be clear, I’m not advocating taking any of these steps right now, as it’s simply not clear that the bond market has indeed turned. So, we have to be wary of (another) head fake in this multi-year bull market.

But, if the bond market does turn and 10-year Treasury yield moves towards 2%, it is important that advisors have a plan before the declines start, because things could get ugly quickly.

If you don’t have a morning report that is going to give you the plain-spoken, practical analysis that will help you navigate the BOJ and Fed decisions tomorrow, and help you get positioned properly to outperform into year end, then please consider a quarterly subscription to The Sevens Report.

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

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

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

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

Click this link to begin your quarterly subscription today.

Value Add Research That Can Help You Finish 2016 Strong!

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

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

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

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– Independent FA.

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“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

 

 

 

Market Update: Buy, Sell or Hold

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Last night my wife and I went out to dinner with friends. Shortly after we sat down, the conversation shifted to work, and eventually to what I do each day at The Sevens Report.

When describing the value that The Sevens Report
provides to our paid subscribers, my wife’s friend said, “so you’re basically a navigator of markets” for financial professionals.

It’s really a great analogy, as 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 tools like 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 ECB QE, Chinese economic policies, implication of rising interest rates, GDP, FOMC Statements, 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 day 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.

Stocks saw their first decent pullback in weeks Tuesday as an initial spike higher in Treasury yields following disappointment over underwhelming Japanese fiscal stimulus weighed on stocks.

And, with the Bank of England decision looming tomorrow and an important jobs report beyond that, the chances of rates moving higher are rising, and that’s a potential risk to stocks.

As a courtesy we have included analysis on yesterday’s selloff for you today:

Bottom Line—The Danger of Expectations

Yesterday’s surprise dip in stocks isn’t changing the outlook for markets, and including yesterday’s dip we can chalk this recent price action up to consolidation of the recent rally. In fact, part of the reason yesterday’s selloff caught people by surprise was because the market’s gone straight up for some five consecutive weeks.

Beyond the short term, though, I do believe yesterday’s reaction validates what we’ve been saying about this rally since it started after Brexit—namely that it is founded on extreme dovish expectations for central banks, and extremely low expectations for interest rates well into the future (like years in to the future). Given that extreme expectation, markets are at a constant risk of a reset.

To that point, it’s important to understand that over the past few days Japanese authorities have eased policy further.

  • First, the BOJ increased its purchases of ETFs.
  • Second, the Abe administration added 7 trillion yen of new government spending to stimulate the economy.

And, tomorrow the Bank of England will almost certainly cut rates (more stimulus).

But, the actions by the BOJ and only a rate cut by the BOE (meaning no more QE) will underwhelm markets because of the absurdity of expectations with regards to policy.

Literally the only thing that would have pleased markets recently is if The Bank of Japan and Abe administration would have instituted “helicopter money” by:

1) Floating a 50-year bond Japanese government bond,

2) Having the Bank of Japan buy those bonds with printed money and

3) The Japanese government spend the BOJ’s money in the economy!

Ten years ago, even proposing the idea of doing something like that would have made you a candidate for an economist insane asylum!

Now, it’s expected, and the culprit is the central banks themselves who have trained markets that if currencies rise too much and stocks go down enough, they will do whatever it takes to placate the investor class.

That remains one of my biggest issues with this rally. It’s built on the idea of forever-low rates, but central banks have consistently disappointed since Brexit, and the BOE may do it again tomorrow.

This is a theoretical rant, but at some point this system will break.

Maybe we’ll be at S&P 500 2500 before it does, but this relentless appetite by markets for more and more stimulus isn’t healthy longer term, and this week’s price action has made me all the more concerned that unless we get back to some state of normalcy in monetary policy sometime soon, the fallout for all this will be extreme.

Making this rant practical, central banks have consistently underwhelmed markets since Brexit and it’s starting to take its toll as the rally has stalled.

If the Bank of England disappoints markets tomorrow, and Friday’s Jobs Report runs “Too Hot” that will cause a move higher in bond yields, and that could well signal an impending pullback.

Tomorrow’s edition of The Sevens Report will be sent to paid subscribers shortly after 7 a.m. so we can tell them the market implications of the Bank of England decision. And, it’ll include our “Jobs Report Preview” that will directly tell subscribers what specific levels of a jobs report will cause Treasury yields to rise, and stocks to drop.

Click this link to begin your quarterly subscription and make sure you have an analyst team committed to helping you navigate this still challenging market.

Use Market Volatility to Your Advantage

The Sevens Report isn’t just another research tip sheet that’s designed to tell you whether stocks are going to go up or down. Rather, it’s a tool we have created for the purpose of helping advisors:

  1.  Attract more clients
  2.  Increase assets under management
  3.  Improve retention

In fact, The Sevens Report helped thousands of your colleagues and competitors at wirehouse firms and smaller RIAs be more efficient and more effective in finding and closing new clients since we launched in 2012, and we are doing it again in 2016.

We know this because last year, an advisor from Florida called to personally tell us that sharing The Sevens Report with one of his larger prospects helped him land the $25 million account!!!  

He said the independent analysis provided talking points for him to discuss in the meeting, and it helped show his prospect that he wasn’t all about “touting the company line.”

Another FA at an independent firm told us that our analysis of the recent stock market sell-off saved his clients a substantial amount of money.

He wrote, “Thanks for your continued insight; it has saved my clients over $2M USD this year… Keep up the great work!”

These are the results our subscribers are achieving with The Sevens Report.

And, we know our product delivers because we have a nearly unprecedented retention rate of over 90%.

2016 has already been a volatile year, and with divergent central bank policies emerging around the globe, still-volatile oil prices, and important political events (Italian and US elections) looming, markets are going to stay volatile, so consider making a small investment in your business that can:

1) Save You An Hour Each Day

2) Help You Make Better Investment Returns

3) Increase Your Market Knowledge and Confidence When Talking with Prospects

Affluent clients want communication on the markets that is not “boiler plate” strategy updates from your broker dealer.  They are expecting you to know what is happening in the markets and how it is affecting their portfolios, especially in this difficult environment. 

We created The Sevens Report, so that advisors can make sure they have an independent analyst that communicates with them every day and quickly identifies for them the risks and opportunities for:

  • Stocks
  • Bonds
  • Currencies
  • Commodities, and
  • Interprets what economic data means for the market. 

Most of our subscribers are not actively trading clients’ accounts.  However, they can demonstrate to their clients that they weren’t blindsided by the recent volatility
thanks to The Sevens Report.

That’s the kind of analysis that leads to More Clients and ultimately More AUM.

So, why not make an investment in yourself and your business in 2016? We are confident it will produce returns many times greater than the cost (which is less per month than one client lunch).

Because of the great response we have seen, 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.

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

Weekly Economic Cheat Sheet 10/26/15

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Last Week

Global markets got a badly needed boost of confidence last week from economic data, as reports gave further proof that the Chinese economy is stabilizing and that turmoil from the emerging markets is not dragging European and US economies downward. That, combined with more global central bank easing (the PBOC cut rates Friday and the ECB plans on doing more QE in December), pushed stocks to two-month highs.

The most important data and activity last week came from China. Early last week Q3 Chinese GDP slightly beat estimates at 6.9% vs. (E ) 6.8% while September Retail Sales also beat expectations. The data wasn’t universally positive, as September Fixed Asset Investment and industrial Production slightly missed estimates, but those numbers, combined with August data and September manufacturing PMIs, does imply the Chinese economy is stabilizing.

That helped markets broadly to start last week, and a very active PBOC helped support markets throughout the week. Last Wednesday, the PBOC made targeted liquidity injections into 11 financial institutions to promote lending, and on Friday the PBOC did a (somewhat) surprise 25-basis-point interest rate cut and 50-basis-point reserve requirement cut.

Bottom line on China last week was economic data continued to get better, and while data is still far from “good” on an absolute basis, it is stabilizing, and Chinese authorities continue to actively support the economy.

Looking more globally, the October flash PMIs were better than expected in Japan, Europe and the US (54.0 vs. (E) 53.0 in the USA). This is important because these PMIs refute the growing idea that the emerging market turmoil and global market volatility in August/September was pulling developed market economies back toward recession.

The event that effected the markets the most was a very dovish ECB meeting and rate announcement. ECB President Draghi basically told markets that the ECB would be doing more QE in December in reaction to declining economic growth and inflation. Much like the PBOC, the fact that the ECB is going to more QE isn’t a shock, but the fact that Draghi was so explicit about it was a surprise. That dovish ECB meeting was the major positive stock market catalyst last Thursday.

Finally, looking at some hard domestic economic data, September housing continues to come in “fine” with both Existing Home Sales and Housing Starts both beating expectations, and implying a still-healthy housing market while jobless claims continue to refute the soft August and September monthly data. Jobless claims beat estimates at 259k vs. (E ) 265k, and remain near 42-year lows, implying the jobs market remains strong.

Bottom line, last week was a good week from a macro standpoint as we were 1) Reminded that the biggest global central banks remain active and committed to propping up stock prices and being ultra-accommodative, and 2) That actual economic data (especially in China) is stable, and so far the fear that China would drag down the developed economies is not coming true.

This Week

The FOMC decision this Wednesday is obviously the highlight of this week. There is virtually zero chance the FOMC hikes this week (for multiple reasons). We will do our typical FOMC Preview in tomorrow’s Report, but the focus of this meeting will be on how much the FOMC acknowledges the improvement in Chinese economic data and the stabilization in US stocks (if both those developments are highlighted that will be “hawkish,” and increase chances of a December rate hike).

Away from the Fed there are several important domestic economic releases to watch. From an inflation standpoint, Friday we get the September Personal Income and Outlays Report (which includes the Fed’s preferred measure of inflation, the core PCE Price Index) and the quarterly Employment Cost Index, which is a closely followed measure of wage inflation (wage inflation is typically a precursor to broad inflation). Remember, core CPI was a touch more “firm” than expectations two weeks ago, so these inflation numbers will be watched closely.

After the inflation data most of the focus is on growth, with the highlight being the first look at Q3 GDP out Thursday. Durable Goods (tomorrow) will also be closely watched to see if business investment remains resilient.

 

TEST – TEST

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Sevens Report

Sevens Report 1.26.14

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Sevens Report 1.26.15SWG

Closing Bell Exchange: Oil, Jobs & Wages

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Tom Essaye’s recent interview on “Closing Bell” at CNBC.

5 Macro Risks Keeping Stocks Down

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Markets by their very nature are risky, but sometimes the macro risks are bigger and more dangerous than the bulls can handle. As we kickoff 2015, I see five big macro headwinds facing stocks—headwinds that are likely to limit upside at least in the near term.

In order of near-term importance, they are: 1) What will ECB QE look like? 2) Can oil stabilize? 3) Will we have another “Grexit” scare? 4) Is there really a global deflation threat or is it just oil? and 5) When will the Fed start to tighten and how will markets react?

Of the five, the first four are almost equal in importance with regards to what stocks do over the coming weeks. And, it’s important to note that European QE concerns now have trumped (or equaled) oil contagion worries as the near-term leading indicator for stocks. This was made evident Friday when articles in Bloomberg and Reuters were largely responsible for the drop in stocks (it wasn’t the jobs report).

Keep an eye on the WisdomTree Europe Hedged Equity ETF (HEDJ), a proxy for European stocks, as this fund’s direction will betray how the market assesses those concerns.

It’s key to realize, though, that beyond the very short term, none of the above should be materially negative influences on stocks.

The ECB may disappoint with initial QE, but the bottom line is the ECB knows it has to expand its balance sheet and provide more stimulus, which is bullish for European stocks over the coming months and quarters.

While we haven’t likely seen the low tick yet, oil appears to be trying to stabilize, as prices at these low levels will likely start to have an impact on marginal producers (so the pace of declines should slow), which is what is important from an “oil contagion” standpoint. The global “deflation” scare is mostly linked to oil prices so when they stabilize, so will inflation statistics. Third, the “Grexit” story is likely overdone (the chances of Greece leaving the EU remain very slim, and we know that from the bond markets).

Finally, the concern about the FOMC raising interest rates is a problem for the April time frame (as we approach the potential June “lift off” in the cost of capital).

The point here is that we are likely to see more near-term volatility until the events above get resolved, but I would view any material dip below 2000 in the S&P 500 as a buying opportunity in domestic cyclicals (banks, retailers and tech specifically) and continue to view European market weakness as offering fantastic longer term entry points.

Bottom line: The near term may be bumpy, but we see no reason to materially alter equity allocations.