Jeffrey Cohen, US Advanced Computing Infrastructure, Inc
Chicago Quantum (SM)
What happened today? We made a video to discuss the core economic data we see today. It is all negative and recessionary for the US Consumer and US Manufacturer. Lots of bad news, and a little good news. Tiny good news.
So, stocks are pretty strong today...flat...but US Treasury Bond Yields have crashed this afternoon.
GDP grew in Q3/2022 by 2.9% (real) as a revision up from 2.6% (real). Forecasts call for a positive growth rate in Q4/2022.
Chicago Business Barometer (TM) from ISM 37.2 (down significantly for 3 months in a row).
Lots of bad news in the data for the Midwestern US. Inventory up, orders down, etc. Supplier deliveries down, new orders down, but prices paid are higher (not a joke).
ADP Job Increase in November 127k jobs, except that the jobs were in the lowest rungs of the economy and job losses in manufacturing and professional / white collar jobs.
Credit Suisse stock hitting an all time low (at least according to Yahoo Finance) and is down 95% from $60 to $3.00. We discuss some potential reasons why. We tweeted on this. Potential BK risk. Saudis and Qataris step in to help rescue the bank.
US Treasury General Account down about $500B this year. This completely offsets quantitative easing by the Federal Reserve Bank. Ouch! The US government collects taxes and this means they likely had to spend it. So, those taxes were not disinflationary after all!
BEA: Personal Income and Outlays, October 2022 showed that the US consumer fell behind. It also shows that price inflation slowed slightly. Good news on prices, but bad news on the US consumer. Also, the US savings rate fell to 2.3%, which we believe is very, very low.
This couples with retail feedback from companies that are reporting earnings and forward guidance. Costco, Dollar General, Dollar Tree and weeks ago Target are all saying the same thing. More shopping value priced goods. Consumers shopping to their budget, and focusing on core essentials. Also, profits from retail are falling as costs rise. So, it costs more to sell cheaper stuff to consumers who are borrowing money to buy it. Ugh, this is bad news. $COST $DG $DLTR $TGT looks at the news for the details (all from today except TGT). Dollar Tree mentioned they might need to lower prices (what, to back to $1.00?). We slowed down our shopping at Dollar Tree since they raised prices 25% earlier this year. Anecdotally, they tried to sell $3, $4 and $5 frozen food and that seems to have failed at least in our local store (freezers are now empty in those sections).
Yesterday, Chair Powell of the Federal Reserve Bank gave a speech. Here is the transcript. We leave it to the actual words spoken, because we struggle to understand the intent behind the talk. It provides transparency, but may have been meant to guide the market and rates. Forward Guidance. Does not seem right that a speech should move markets. Maybe they should stop speaking to the press and public except during FOMC press releases?
So much news...
Earlier in November the Federal Reserve FOMC released its meeting minutes. We have been reading them and the data on the economy seems to show slowing and weakness. We found it to be very down and negative on economic growth in the USA, and led us to think a recession might be in store for us. This is the data the Fed FOMC had when they raised rates 0.75% last month.
So, what are we doing?
We have our managed accounts model portfolio in 100% cash right now as the market looks for direction.
We are looking into Credit Suisse $CS to see if this could be a bargain purchase (or a short to zero and BK). This could be a waste of time on due diligence, but probably good learning either way.
What about interest rates? We see significant interest rate / yield drops today across the yield curve. 10-year UST down 16.2 basis points. This is a significant move lower.
It appears we had another good day with our CQNS model.
Last night when it ran, the aggressive RISK-OFF stance of the weekend moderated. Number of stocks dropped to 20, and the stocks were more back to normal with some technology and higher BETA names.
The market did trade a bit erratic today, but it ended flat. The model picks were slightly red, but so was the S&P 500, so the hedge would have paid for some of the CQNS long declines.
Net-net, the model suggested a less aggressive stance, and the market was pretty subdued. Makes us feel good about the predictive power.
We are starting off 'on the wrong foot' tomorrow.
1. The 13-week US Treasury yield is up to 4.25%. This requires us to adjust a key parameter in our model, the risk-free rate. It is only 5 basis points, but we like to stay a little ahead so may raise it 10 basis points. This will reduce the edge of stocks, and create a new RISK-OFF cycle. The question will be whether other rates rise in the short term, and whether risk-free hits 4.5% (which will be material for our model).
2. Stocks we follow have lower volumes being traded. This can reinforce trends and allow for over-sized movements in stocks which do have volume. The lack of volume can also be a good thing, and dampen down volatility, if the market is not also seeing low liquidity. A lack of both liquidity and volume could mean trouble, like a small helicopter flying too high and running out of oxygen (which causes a lack of lift and power).
3. There is a speech by Chairman Powell on Wednesday. Those can be material to risk if he has a message to send.
4. We started to read the FED FOMC memo from early November. We read portions and they were dire. Lower market liquidity. Higher market volatility. Tightening Main Street Conditions.
5. Headline readings on US Real Estate were poor.
On the other hand, Santa may be coming to town. You know that old chestnut, the Santa Clause rally that lifts stocks in December as loss harvesting is completed and people reload positions.
By: Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure, Inc.
November 27, 2022
We ran our model last week, but kept a low profile on investments. We focused on family and did not make a single trade (our personal portfolio remains intact and our hedged managed accounts are 100% cash).
What we found today:
The expected return from 'risk' of the US Equity market is 4.8% over the next 12 months, including dividends. This compares to a risk-free rate of return of 4.2%. This is not a very large return as compared to the returns of 2021.
These conditions require larger portfolios (at least 20 to 35 stocks held equally) to provide significant alpha over buying the SPY, QQQ or IWM and holding. It may not provide a significant advantage over a simple portfolio of SPY and SHY, and maybe 1 or 2 more stocks, which we are finding to be simple to manage and reasonably good results from our model. We have those portfolios identified.
In short, this is why we are suggesting the market is RISK-OFF this week. A savvy investor looking to balance risk and return to find an edge has to work much harder, hold significantly more stocks, and take less risk.
CQNS Down Run:
The 809 stocks that passed data validation for our CQNS Down run (stocks to potentially avoid) have an all stock variance of 8.0 x 10-4, and this compares unfavorably to the S&P 500 Index ETF (SPY) variance of 2.3 x 10-4. Liquid stocks of unprofitable, US-listed companies (this group) have 3.5x the variance of the S&P 500 index ETF.
There are many biotechnology firms at the 'top' of our CQNS Down stock list, at least half of the top 50. The others are downtrodden names, MEME stocks, and a few fresh new faces that we have not seen in the list, and are potentials for shorting, or at least avoiding. They have variance that outweighs their market-following direction, or BETA.
The #1 stock to avoid is ALLK, and that stock can be put together with many other individual CQNS down stocks to provide a terrible risk-return trade-off portfolio of two stocks. These would be heavily biotech, but we see a few non-biotech MEME-like names to match up with ALLK.
This run is interesting for having 30 stocks with a BETA of 2.50 or higher, and the highest BETA found is AFRM. These stocks will move with the markets, and are unprofitable, so likely 3.5x more risky than the market. Fasten your seat belts.
There are three negative BETA stocks. These stock are moving in the opposite direction as the SPY.
BRK.B Berkshire Hathaway Inc. -0.12
SPRY ARS Pharmaceuticals Inc -0.04
VERU Veru Inc -0.86
CQNS Up Run:
The risk of this portfolio of 1,710 profitable stocks is 2.6 x 10-4, which compares favorably to the SPY with a variance of 2.3 x 10-4. The risk of holding a large, diversified portfolio is 1.13x the SPY, which is insignificant.
We see a few anecdotal things in the data, as follows:
1. The 50 stocks with the smallest volume on Friday compared to last year have very small volumes, all at or below 14.1% of last year's volume. However, the 50 stocks with the largest volume traded at or above 81.7% of last year's volume. Four stocks traded above 205% of last year's average volume.
2. There are stocks that have gone up in price, and stocks that have gone down, also at relatively extremely level (down 3/4 or up 2x as compared to the average over the past year). So, there is movement in prices.
3. There are high and low BETA stocks, at the extreme ends of the spectrum (0.1 or below, and 2.5 and above). So, there are stocks that are moving at extreme levels of correlation (or even leverage) to the market, while others are largely independent of market moves.
4. The best 15 CQNS UP portfolios found are all within one tick of each other, and vary from 18 to 23 stocks. To retain 37% of the edge, you can hold a 7 stock portfolio that includes QQQ, SPY, SHY, and four individual common stocks.
There are negative BETA stocks that were identified. These are not included in our run, and we present them to you for informational purposes.
CPK Chesapeake Utilities Corp -0.646
SQQQ ProShares UltraPro Short QQQ -3x Shares -3.800
TZA Direxion Daily Small Cap Bear 3X Shares -3.259
UUP Invesco DB US Dollar Index Bullish Fund -0.185
UVXY ProShares Ultra VIX Short-Term Futures ETF 2x Shares -3.604
VIXY ProShares VIX Short-Term Futures ETF -2.443
Our previous managed accounts had around 12 stocks, so these are larger portfolios. Again, we call this a risk-off portfolio as we are further spreading out investments to gain the best edge we can, and that edge tends to be smaller along with the return from market risk.
There is one more thing...
We run our model now against two baselines. One is the SPY and the alternative is the QQQ. We do this to get a 2nd look or alternative view of the best portfolios. The answers are always different, and we do learn a great deal.
What we learned today is that you can hold three stocks (ETFs actually) evenly, and hold 82% of the benefit of a fully-sized 34 stock portfolio. There are a few additional portfolios of four stocks that close to 80% of the alpha, and are surrounded by portfolios of ~100 stocks. This is important information if you want to beat the performance of the QQQ. The same results are not available to beat the SPY (our base case run is harder to beat this easily).
Good luck to all.
By Jeffrey Cohen
US Advanced Computing Infrastructure, Inc.
The consumer price index data came in this morning. It was lower by a tick, nothing more.
All of a sudden, bond yields are crashing (10-year UST yield down 21.3bps).
Stock index futures are up ~2%.
There is a lesson to be learned here, but we are not sure what it is.
Here are some thoughts:
1. Don't trade in a market like this, where liquidity is down and moves are aggressive. You will lose your 'alpha' or edge in transaction costs. The pre-market spread for two stocks we own is 7% and 30%. There are significant bets being made (likely by multiple trading desks and portfolio managers) in the same direction. Huge bets in pre-market on UST-10 year (long) and US equity indices (long). As a retail investor, you will likely pay more in transaction fees, and the moves are so great you may lose more than your money...but also your nerve. This is like riding a tsunami on a surfboard.
2.We are 'stuck' with our stock portfolio as-is, until markets settle down. We have 19 longs, 3 shorts, and have a short SPY position. One long and two hedges (to track performance). Our CQNS Long portfolio wanted us to go 'Risk On' this morning, but we are too late due to the pre-market moves already made. There are significant sells of low-beta stocks and significant buys of high-beta stocks.
The ideal portfolio for the SPY-based run is 11 stocks, and the QQQ-based run is 14 stocks as compared to our current 19-stock portfolio. We will ride out the storm until liquidity returns.
3. We will try to make a few position changes this morning to take advantage of the rising stock prices. However, if we only sell and don't buy, we will be in a > 1.0 hedged position.
We will report back our progress.
Ok, markets open 90 minutes. We sold > 50% of our CQNS long positions, the ones that were not in our CQNS Long portfolios as they read today. Those tended to be some of the in/out tech stocks, and the main street low BETA stocks. Those are now liquidated. We also reduced our hedges by around 20%. This means we are over-hedged for a few days while we wait for a chance to buy into our new longs (maybe Monday). This is a risk, but seemed a shame to miss a chance to sell into strength.
The markets are acting strange today.
US Treasury bonds yields are down 20 to 33 basis points, depending on the duration.
Stocks are up 3% to 6% depending on the index.
Crypto has made a recovery today
Copper is up significantly, and carrying forward a recovery rally (up to $3.77/oz).
Silver is up to almost $22, and even crude oil now is green.
The US Dollar is weaker.
It was like everyone saw a ghost.
Everyone turning bullish, globally.
Belief in a FED FOMC pivot.
Crazy, actually...and we don't buy into the narrative.
So, our CQNS Smart Volatility model portfolio is under-invested this morning after taking gains, and over-hedged by stonks and the SPY.
By Jeffrey Cohen
US Advanced Computing Infrastructure, Inc.
Today went from red to green in the US equity futures. The US Equity Futures are drifting back to a flat (to up) open. There is movement in our CQNS Long (or up) model portfolio this morning, as stocks prices (but not volume) look like they have done a day's trading...and all by 7:34am CT (or about an hour before market open).
Pre-market for a few select industry groups:
The Vix is red (which means lower cost of protection), and bonds are trading this morning mixed and higher. Energy is down, and the US Dollar is weaker. Seems like a great setup for US equities to rise.
However, while we were watching the Level 2 order book in Nasdaq (all exchanges) for $SPY, we saw a big trade go through. Nothing dramatic, but about 29,000 shares were sold in one order. This reminded me that there are forces moving the equity markets up, and there are opposite (but not quite equal) forces moving them down.
Crypto, especially Bitcoin, has been range bound for months. BTC/USD is trading now at $20.8, which is around the $20k mark.
Currencies are setting into a trading range as well, with the Euro at $0.9993, GBP at $1.1472. It takes 146.19 Japanese Yen to buy a US Dollar, and it takes 1.3468 Canadian Dollars to buy a US Dollar as well.
In terms of overall market breadth, on Friday there were 67% advancers and 28% decliners, and ~ 3:1 new low to new high ratio (437 lows to 155 highs).
For US Corporate Bonds, the the A/D ratio was similar, but there were many more new lows than highs. There were 5,024 advancers to 3,584 decliners, and there were 631 new lows and 38 new highs, for a ratio of (17:1).
Good luck today.
We are watching the markets whipsaw today.
Interest rates are rising across part of the yield curve.
Stocks are up, down, up, down all day.
Made a video sharing transparency:
Good morning. 11:06am ET. Markets are open.
Not sure what I am witnessing.
Interest rates are up, including mortgage rates.
Will go through the list of industries we track (equities):
US Banks are decidedly mixed, with an almost equal number up as down.
Quantum companies are mixed to lower
Enterprise IT is a little lower, and most companies are lower.
Logistics and Transport is higher
Chips and Semiconductors are lower
Cannabis and Tobacco are higher (the small caps) and the large caps which pay high dividends are lower. Dividends are 'out of fashion' today in tobacco companies.
Crypto and miners. A few commodity miners and assorted stocks are up slightly, but the rest are down significantly. Dogecoin is up almost 5%.
Coal is mixed.
Retail is mixed. The largest, discount retailers are down.
Money managers are down, except for a few investment banks and money managers. Robinhood is up today $hood.
Oil, Gas and Pipelines are up today (mostly).
Overall, the market is mixed and no single industry or narrative is holding.
The FOMC meets on Tuesday and Wednesday, with a press release on day 2 indicating the new policy stance. Most banks are expecting a 75bps rise in the policy (or overnight and prime lending rates) this week.
Good morning and happy Halloween.
It looks like a different market today than Friday.
1. Interest rates are higher (13 weeks through 30 years: US Treasuries)
2. Russia ended the Grain Deal, and wheat prices (which means food prices) are up. In fact, food (grains) futures are up significantly, including oats, soybean, corn, rice, canola and especially wheat (up 5.5%).
3. The US Dollar is up slightly this morning, by about 0.5%.
4. Crude oil, precious and industrial metals, and US gasoline (wholesale) are lower today.
5. US equity futures are down into the open, suggesting a ~0.5% lower open today. This would claw back a little of the gains from last week, but not much.
6. The news globally is generally local. There were deadly accidents in South Korea and India. Russia is escalating their 'war on infrastructure' in Ukraine. Brazil had a successful, peaceful election of their Left party candidate Lula da Silva as President of Brazil. As a reminder, da Silva was arrested and imprisoned on allegations of corruption and served 580 days in jail. He is now back in power for a third term, and suggests that Brazil's 215 million people come together, unify, and move forward.
At the open, our CQNS Short picks are either flat or down slightly. Our UP long picks are down (12 of 14 are down).
After two minutes, all three of our CQNS short picks are up, suggesting a continuation of the push into 'stonks' we saw on Friday. The CQNS longs are still decidedly RED or down three minutes into the trading day.
By Jeffrey Cohen, President & Investment Advisor Representative
US Advanced Computing Infrastructure, Inc.
Good morning. Notice a few things in the market this morning (pre-market at 8am ET):
1. The US Dollar has fallen significantly over the past week, and the EUR/USD went back over parity (currently 1.0081). However, this morning the US Dollar is stronger. Up by 0.35%
2. Copper is back to $3.50 / oz and other industrially sensitive commodities are also higher. Crude oil WTI at $88.12 / bbl is up there, along with silver at 19.35 / oz. This is not the sign of a global economy in trouble now. This demonstrates either market 'restraint' or 'strength' as companies acquire future supplies (which is possible pre-war with Russia), or that companies may be cutting costs, but not production in Q4 and into Q1 2023.
3. US Riskfree interest rates have risen, and bonds have fallen. Bonds are down this morning, and are generally very weak compared to where they were even just a few months ago. Interest rates across the yield curve are at or above 4%. This is great for savers, who can earn 4% interest with just a little effort. However, this is not great for companies or organizations (like regional banks) that hold bonds to boost current income through bond interest payments. They are holding bonds that have been weakening for the past few months. There was even a crisis in the United Kingdom about this when pension funds used borrowings, or leverage, to hold more bonds than they could afford as they fell in value.
So, what does that mean for equities this morning? Europe is down a full percentage point, and Asia was down. The exception in Asia is the Hang Seng, which ended up almost 1%. The Hang Seng fell dramatically earlier this week, so a technical reversal or 'bounce' can be expected. It was up almost 4% at one point last night.
US Equity futures are mixed. The Nasdaq Composite 100 ^IXIC is set to open lower by 0.6%. This is NOT surprising as tech stocks reported earnings yesterday and after hours and had issues. The Metaverse company $META, formerly known as Facebook $FB, traded significantly lower last night after hours (down 20% at one point as we watched) on top of a 6% drop during the trading day.
Other stocks may be falling in sympathy, but it is hard to tell. The moves are too slight this morning.
What are we watching today?
We have two personal holdings that hopefully will be profitable positions. There isn't much to do on those but to watch and either buy or sell. No need to discuss them.
We ran our model last night, and will save that update for another BLOG post.
Good luck to all.