Posts

Earnings Season Preview (Market or Break for the Bull Market)

/in /by

What’s in Today’s Report:

  • Earnings Season Preview:  Two Important Factors

Futures are slightly lower despite generally good news overnight, as markets continue to digest the recent rally.

The U.S. & China announced the next round of trade talks will occur Jan 30/31 in Washington, which is a mild positive (although it was largely expected and mostly priced in).

Economically, data was mixed Japanese Household Spending rose 1.1% vs. (E) 0.2%, while UK Industrial Production dropped –0.3% vs. (E) 0.4%.

Today is all about the CPI  report (E: -0.1% m/m, 1.9% y/y).  Both the headline and core need to stay around 2.0% yoy for this “dovish” Fed narrative to continue to grow, as a hot CPI report could undo some of the rally markets have enjoyed since last Friday.

What to Expect in Tomorrow’s Jobs Report. March 9, 2017

/in /by

Jobs Report Preview: For notable releases like tomorrow’s jobs report, the Sevens Report offers a “Goldilocks” outlook to give a few different scenarios: too hot, too cold, and just right.

This gives our subscribers clear talking points to explain the importance of the report to clients and prospects clearly and without a lot of jargon. As always, the Sevens Report is designed to help you cut through the noise and understand what’s truly driving markets—all in seven minutes or less and in your inbox by 7am each morning. Sign up for your free 2-week trial today and see the difference this report can make for you.

Wednesday’s ADP Jobs Report clearly put upward pressure on expectations for tomorrow’s government report. And, there’s good reason for that. Over the past five months, the ADP report has been within 10k jobs of the official jobs report (the one outlier was November, when ADP was 50k over the actual jobs report). So, yesterday’s 298k jobs blowout implies a big number tomorrow.

Given that, the major issue for tomorrow’s jobs report is simple: Will it cause the Fed to consider more than three rate hikes in 2017? If the answer is “yes,” than that’s a headwind on stocks. If the answer is “no,” then it shouldn’t derail the rally.

Getting a bit more specific, the only reason the dollar is still generally stuck at resistance at 102 (and below the recent high at 103), and the 10-year yield is still below 2.60% is because the market assumes that the Fed will still only hike rates three times this year.

If that assumption gets called into doubt via a very strong jobs and wage number tomorrow, we will see the Dollar Index likely surge through 103 and the 10-year yield bust to new highs above 2.60%, and then they will begin to exert at least some headwind on stocks.

So, tomorrow’s jobs report is potentially the most important jobs number in years, as it has the ability to fundamentally alter the market’s perception of just how “gradual” the Fed will be in hiking rates.

“Too Hot” Scenario (Potential for More than Three Rate Hikes in 2017)

  • >250k Job Adds, < 4.9% Unemployment, > 2.9% YOY wage increase. A number this hot would likely ignite the debate about whether the Fed will hike more than three times this year (or more than 75 basis points if the Fed hikes 50 in one meeting). Likely Market Reaction: Restricted for subscribers: Access today by signing up for your free 2-week trial.

“Just Right” Scenario (A March Rate Hike Is A Guarantee, But Three Hikes for 2017 Remain the Expectation)

  • 125k–250k Job Adds, > 5.0% Unemployment Rate, 2.5%-2.8% YOY wage increase. This is the best-case scenario for stocks, as it would imply still-stable job growth, but not materially increase the chances for more than three rate hikes in 2017. This is the most positive outcome for stocks. Likely Market Reaction: Restricted for subscribers: Access today by signing up for your free 2-week trial.

“Too Cold” Scenario (A March Hike Becomes in Doubt)

  • < 125k Job Adds. This would be dovish, and while the fallout would be less than previous months given the market’s focus on future growth, the bottom line is bad economic data still isn’t good for stocks. Dovish isn’t bullish any-more. Likely Market Reaction: Restricted for subscribers: Access today by signing up for your free 2-week trial.

Join hundreds of advisors from huge brokerage firms like Morgan Stanley, Merrill Lynch, Wells Fargo Advisors, Raymond James and more… see if the Sevens Report is right for you.

Real Economics vs. Trump’s Washington Buzz

/in , /by

As has been the case since the election, the political noise in the market is deafening.

But cutting through that noise, the reality is this: The gap between market expectations from Washington and the current reality has grown significantly in the month since Trump’s inauguration, and it is not an understatement to say that political disappointment risk is now very high.

Is Trump News Affecting Markets?

Specifically, Trump noise aside, all signs point to massive fractures in the Republican Party over the repeal/replace of Obamacare, and over border adjustments (the key to any material corporate tax reform).

To boot, the constant drama and infighting is draining Trump’s political capital even before we get close to deals on Obamacare and taxes. Specifically, the immigration ban battle, the Gen. Flynn drama, and the Puzder (the Labor Secretary nominee) withdrawal (where a full 12 Republican Senators would have voted against him) all are combining to reduce the likelihood of anything substantial on taxes.

Bottom line, the only thing politically that really matters to markets is tax cuts. But given the fractures appearing on Obamacare and border adjustments, the likelihood of material, pro-growth policy is fading… and fast.

Last week, Trump again touted fantastic things coming up, and Ryan promised an Obamacare repeal/replace by the end of February. Yet neither actually mean any progress (for that we need Republican support for bills in the Senate, and that’s lacking).

Going forward, a key date emerging on the calendar is February 28, when Trump is due to give an address before Congress (first year Presidents give this address instead of a State of the Union).

If there is no material progress on a compromise on a Obamacare repeal/replace or border adjustments within corporate tax reform by this address, then the political reality could begin to weigh on markets as investors begin to lose hope of pro-growth reforms in 2017.

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves with the Sevens Report. Get a free two-week trial: www.7sReport.com.

Did One Fund Cause The Rally?

/in /by

Make sense of the rumors FAST. Below is an excerpt from today’s Sevens Report: www.7sReport.com.

Easily the biggest story that circulated trading desks Thursday morning was an article that a $4 billion options fund was blowing up. In doing so, the implication was that is what has caused the relentless really we’ve seen in stocks since last Thursday.

The fund in question is the Catalyst Hedged Futures Strategy, and in a broad sense this fund sells volatility using option strategies.

Did one fund cause this rally?

The story/rumor going around is that this fund sold a massive amount of call spreads, making them effectively short $17 billion worth of S&P 500 Index futures. Well, you can imagine how that’s worked out over the past week, and the takeaway is that this fund has been relentless buying S&P 500 futures over the past week to cover their shorts… and that’s why stocks have surged.

Normally, these stories about funds blowing up and causing a market disruption are little more than rumors created to explain a market that is defying fundamentals. But, markets defy fundamentals in the short term quite frequently without fund blowups.

This, however, is a bit of a unique case, because we can actually see the return data for this fund (it’s an open-ended futures fund). Over the past week, the fund has lost -14%. That has brought its year-to-date return to -13.5%, meaning prior to the last week, the fund was flat year to date. Taking a quick look at historical returns, a 14% weekly move in this fund is not normal, so it’s fair to say that something has gone very wrong there.

Looking more broadly, does the story of this fund explain why the market simply hasn’t been able to go down for a week (and why it suddenly exploded higher last Thursday despite the lack of anything good happening)? Yes, partially.

Even though I can’t directly validate the story, it reinforces my skepticism on this latest move higher from 2,300 in the S&P 500, and that is that this is a rally built on chasing and a squeeze.

 

Skip the jargon, arcane details and drab statistics from in-house research, and get the simple analysis that will improve your performance. Get a free two-week trial of the Sevens Report: www.7sReport.com.