What China Means For Your Clients’ Portfolios

 

Chinese macro-economic analysis was not in any of our respective broker training programs when we all started in the business, but the bottom line is that China is the main reason that client portfolios are negative year to date.

With the market still at a key tipping point, understanding China is still very important for all advisors and investors.

In the excerpt below we provide some analysis that explains, in plain English,

1) What is happening now in the Chinese economy,

2) Why China is Still the #1 Threat to Client Portfolios

3) What indicators will tell us whether China will help or hurt markets into year end, and

4) How to Outperform Depending on What Happens in China

Before getting into specifics, though, understand that at the heart of this China angst is the worry that Chinese authorities aren’t in control of the economy.

Growth has been slowing in China for a while, but over the summer we saw huge stock market declines (more than 30%) and Chinese regulators flailing to stop the selling by 1) Prohibiting the short sale of stocks, 2) Banning government entities from selling shares, and 3) Accusing certain market participants of engineering drops in specific stocks.

Then, in mid-August, Chinese authorities made things worse when they surprised the market again by depreciating the yuan 2%, the biggest single drop in years.

All of this implied they aren’t in control of the economic situation, and that’s really why US stocks broke down in August, and that fear remains a headwind on markets today.

It’s the same thing with your clients – they get nervous when they think that you aren’t in control of their portfolios, so while we all know that following macro-economic trends in China doesn’t get new clients or increase AUM, right now you need to be a China “expert,” so you can show your clients that you are in control of the situation and have a plan to protect portfolios, and in doing so solidify that client relationship for years to come.

Since August, we have been that China “expert” for our paid subscribers, and given them the talking points they need to 1) Understand what’s happening, and 2) Be able to communicate the facts including their plan for client portfolios.

Our job at The Sevens Report is to do that every trading day, regardless of the latest macro scare, and make sure our clients have the information they need across asset classes:

  • Stocks
  • Bonds
  • Currencies
  • Commodities, and
  • Market Sensitive Economic Data

That’s what we do for paid subscribers every trading day at 7 AM, and it’s why we believe we’re the best value in the independent research space.

As a courtesy, we’ve included an excerpt from today’s Report that details what’s going on in China, and what will make it a bullish or bearish game changer.

What Makes China the #1 Influence on US Stocks Right Now

Whether the Chinese economy continues to stabilize or rolls back over will decide whether US stocks finish 2015 positive or negative.

Anyone who says otherwise simply doesn’t know what’s really driving this market.

And, although you wouldn’t know it if you were just listening to the financial media, over the past month economic data in China has shown signs of stabilization:

  • August Fixed Asset Investment, Retail Sales and Industrial Production all declined, but they weren’t as bad as expectations (so not as bad as feared).
  • September Manufacturing PMI rose to 49.8 vs. 49.7, which is the first increase in months.
  • Last week, Chinese foreign currency reserves declined -34.3 billion dollars, significantly less than the -93.9 billion in August, and that implies that the sense of panic towards China is receding.
  • Yesterday, Chinese September exports declined less than expected (-3.7% vs. (E) -6.0%).

The recent data has clearly shown that the Chinese economy is showing signs of stabilization, and that is important because if it continues, then US stocks can rally into year end and we would want to put money to work to try and take advantage of that macro shift.

Why This Matters to Your Clients (Three Reasons)

Reason 1 – Worries about the Chinese economy caused the stock market correction in August and September. If the Chinese economy stabilizes further, that will remove a headwind on US stocks.

Reason 2 – The US stock market correction and rising risk of emerging market turmoil led the Fed to NOT hike rates in September. If the Chinese economy stabilizes further, the Fed will hike rates in December, which will remove a headwind on US stocks.

Reason 3 – The stock market volatility and Fed uncertainty is starting to weigh on the US economy, as we’ve seen in the manufacturing reports and in the most recent jobs report. If the Chinese economy stabilizes further, that will remove a headwind on the US economy (and US stocks).

So, Stable China = Less Turmoil = Fed Hike Becomes Imminent.

That equals a US stock market rally. And that’s why this is important for your clients.

But, before you think we’re getting bullish, I want to be very clear in stating that while there has been progress in China, it is still not clear that the economy has actually stabilized, and by no means is China out of the woods.

There are two critical events that need to be watched going forward:

The Chinese September Economic data (out this Monday morning) and Potential Yuan Devaluation (this will likely occur before year end). Both of these events will have a significant impact on US stocks, and having quick, accurate, clear analysis of them will help you allocate client assets more appropriately.

If you don’t have an analyst on your staff who understands the macro implications of China and who is following the data each day and telling you the “Need to Know” then subscribe to The Sevens Report today for just $65/month ($195 per quarter).

Click this link to start your quarterly subscription.

How We Can Make Money off This Analysis

Strategy One: China Stabilizes and We Buy Resource Stocks:

If the Chinese economy has truly stabilized, then there is a tremendous opportunity in commodity related stocks including: Miners, MLPs, Energy Companies, and Global Industrials.

Most resource stocks are trading at multi-year lows, and at very, very compelling valuations (assuming commodities have bottomed).

This is the type of trade that could outperform for years to come, as these stocks are historically cheap – but before risking capital it has to be crystal clear that the Chinese economy has indeed stabilized and that has not happened yet.

Over the next few days we will be providing paid subscribers with a “shopping list” of MLPs, energy stocks, miners and industrials that we think can significantly outperform the S&P 500 if the Chinese economy stabilizes and the bottom is “in” for commodities.

Strategy Two: China Does Not Stabilize and We Add to Our ETF Hedge

Starting in late July we began including a specific inverse ETF that we believed would protect clients against a China/emerging market led decline in stocks, because we recognized that risks were building and wanted to provide a solution for subscribers that wanted to reduce exposure.

In August, that ETF rose 15.0% compared to a -6.20% decline in the S&P 500. That’s 21.20% outperformance.

In September, that ETF rose 2.10% compared to an -2.60% decline in the S&P 500. That’s 4.70% outperformance.

If the Chinese economy does not stabilize over the coming weeks and we get another surprise yuan devaluation in the next month or two, stocks will fall sharply, and this ETF will protect client portfolios. We are consistently reminding paid subscribers of this ETF in our analysis.

Regardless of which outcome occurs, our clients know that they will have plain English, actionable, succinct coverage of these events each trading day at 7 AM. While their competition will be scrambling trying to figure out what happened, our subscribers will be communicating with their clients and making asset allocation decisions.

If all we do is help you get “China” right for the rest of 2015 and know whether to add long exposure or get more defensive, we’ll have more than covered the subscription price.

Click this link to begin your quarterly subscription for just $65/month with no long term obligation.

Let Us Help You Navigate the Market for the Rest of 2015

We have often referred to ourselves as “navigators of the market” for our subscriber base, and so far in 2015, we have been able to help our subscribers get this market Right.

  • Back in March when markets were relentlessly grinding to new highs and volatility was essentially non-existent, we continued to tell our subscriber base that the market was “capped” at 2100 based on valuations, and that investors should not be recklessly increasing long exposure despite the new highs.
  • In April we gave 4 reasons we were “cautious” on the market. They were: 1) Valuations 2) The “low quality” of the rally 3) Continued “lackluster” global economic data and 4) More Fed uncertainty.
  • In early June, we notified our subscribers that our favorite leading indicator, a high yield debt ETF, was beginning to show signs of failure and potentially rolling over, which was a bad signal for stocks
  • Then in late July, we alerted our subscribers that two of the most historically accurate technical indicators had turned bearish: 1) Dow Theory and 2) a “death cross” in the Dow Industrials
  • Most recently, we have been guiding subscribers through the volatility, offering key technical levels (such as support at 1880 last week and resistance at 1990 yesterday and today) as well as fundamental support levels based on valuations so that subscribers could demonstrate to their clients that they are on top of the volatility and ahead of the markets which ultimately builds confidence and solidifies relationships.

In three years of doing this the absolute best feedback I’ve ever received was when a client (an FA from a bulge bracket firm based in Florida) called me late last year and said our Report helped him land a 25 Million dollar client!

But, while obviously not as monetarily impressive, we continue to get strong feedback that our report is: Providing value, Helping our clients outperform markets, and Helping them build their business:

Thanks for your continued insight; it has saved my clients over $2M USD this year… Keep up the great work!” – FA from a Bulge Bracket 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 RIA.

Great service from a great company!!” – FA from a Bulge Bracket Firm.

“Great report. You’ve become invaluable to me, thanks for everything…! – FA from a Bulge Bracket Firm”

Subscriptions start at just $65 per month, billed quarterly, and with the option to cancel any time prior to the beginning of the next quarter, there’s simply no reason why you shouldn’t subscribe to The 7:00’s Report right now.

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

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

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

Best,
Tom

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

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