By Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure Inc.
May 27, 2022 1024 ET

Both US equities and US Corporate fixed income performed well yesterday.

Our Chicago Quantum Net Score UP (or long) picks also did well.

Today's video is a deep dive walk-through of last night's Chicago Quantum Net Score run and deliverables received by a client.  Hope you enjoy it. Please ask questions and make comments.

GLTA

Initial thoughts after a few days is to compare equity capitalization to common equity. Should be around 1.0. We can look at things like AOCI, Dividends, Investments, their ability to generate NI and CFFO, and the quality of their loan portfolio.

​Each day we get a little smarter on this industry sub-segment. Stay tuned.

These are the FOMC minutes published on May 26, 2022 for the meeting on May 4.  They can be found here.

​These are worth a read if you want to see the big picture.

The FOMC in May missed this development and only referred to some earnings reports being negative. I think this will hit the news and financial information by Q2 earnings reporting in July and August 2022.

That is...if the weakness in earnings continues. It is possible that companies sell more products and services, serve more digital customers, and keep things rolling in the USA.

A look at today's stock markets makes me think the 'gravy train' has pulled into the station.

• S&P 500 up 2.2%
• CQNS UP Portfolio up magnificently today
• Nasdaq Composite up 3.1%
• Russell 2000 up 2.5%

By Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure, Inc.
May 26, 2022 0926 ET

Markets look healthy, green and up in pre-market trading.

Discount retail looking strong, especially $DLTR Dollar Tree.

Fixed Income Corporate was up across the board yesterday. Fewer new lows, and more new highs.

Stocks were up yesterday globally (overnight and this morning), and the US equity market looked strong and up yesterday as well.

US Treasury yields were down yesterday. This is the opposite of the recent FOMC rate hikes and quantitative tightening we were told to expect. The market says no, long rates are coming down both for sovereign debt and corporates too.

Not much news today, except Broadcom is spending $61B to buy VMWare, and Nvidia had a somewhat poor quarterly report. Their sales and gross margins were up, but operating expenses rose faster and they hurt their quarterly earnings. The press release did not say why, so we need to read the 10-Q.

We did fundamental analysis 'on the fly' for $CONN or Conns furniture stores. Here is the quick bull and bear case we developed. It came up because we are providing significant amounts of fundamental data with our results now to clients. One should not trade blindly on data, but to understand the bull and bear case of every stock they hold, or consider to buy or sell.
Fundamental valuation
Bull and Bear case


CONNS: Bull case: stock is down, cash and NI generation is strong.
If they keep it up, they can pay down the debt…equity value will rise.
Return cash to shareholders, and they manage a hefty 1.5B revolver




Bear case:
Heading into a recession
Housing sales (new homes) down 3%
Inflation is up, especially transportation and energy.
Furniture is heavy, a lot of trucks.


Inflation zaps their earnings
Recession reduces sales
$500M of debt becomes a noose around their neck
BK


Spent $55.4M buying back shares (now down 40%)


We also looked at dividend stocks. Here are some strong dividend stocks.  We say strong because they pass two requirements. They are towards the top of our risk-reward curve for individual stocks (but not as good as $SPY), and they paid dividends higher than the $SPY did last year. Here is that list of stocks. Most are in financial services and are exposed to market risk.  Buyer beware, of course. Future dividends are not assured.

CG
AMP
BLK
TROW
BX
AVGO
PNM
PAYX
RJF
MMC
ADI
MCD
ATLO
TXN
QCOM
ADP

Oh, before we forget. The vix fell to 28.31 this morning. Risk is slightly lower today of large market swings. Also Oil is up to $112 / barrel and gasoline was doen 10 cents to $3.73 per gallon.

​GLTA!

Good morning. We are doing due diligence on some companies we have heard of. These are the downtrodden stocks we often speak of.

I am reflecting on a few stocks that I did homework on. They fall into two patterns:

1. Companies reacted to the supply shocks and expected future price increases by increasing inventories. They 'had to' increase operating expenses through wages, cost of energy, product costs, etc., and in come cases threw in some discretionary expenses as well. Regardless, they have levered up their current assets and current liabilities by 'investing' in inventory. This was a seemingly prudent move as COVID 19 subsided, the masks came off, and we were 'full steam ahead' in our economy.

However, now those companies have suffered weakness in sales and consumer demand. Their sales are not consuming the inventory, and now somebody has to pay for those inventories, and increased operating expenses. It looks like it will not be the consumer. So, they borrow more money, issue preferred stock, and the lucky ones can issue more common shares to pay for the losses.

However, once the common stock is down (say 80% or 90%) the dilution feels punitive. Once bonds are trading in the 70s, this means yields are in the 20s, and new debt is priced extremely expensively. The only thing to do is to cut expenses dramatically, or look for strategic options. This market feels full of companies looking at downsizing, strategic options, or BK.  With each earnings release, expect more of these to go public so long as inflation and energy prices remain elevated.

2. Companies continued to operate as normal. Good, solid performance year on year. Long-term contracts supplemented by spot sales. B2B and B2C can fall into this pattern. Solid business plans with little to change or improve. Steady Eddies. Some R&D, maybe a few new products. Selective hiring but nothing crazy. Most office workers work 'from home' and things remain status quo.

The inflationary cycle hits them. Costs increase, as they must. Labor costs rise, the occasional rent or capital expense increase, and of course raw materials cost more. Maybe costs only rise 6% vs. 8.3% for CPI and management seems satisfied that it is tightening its controls.

Now another factor hits them. Capital costs more. Debt for high yield companies keeps hitting new lows, which means yields rise. We track some debt yielding from 20% to 30%. Equity costs more too. Investors expect lower returns (Our model suggests 4.5% to 6%) so investors pay less for new shares, and require more of a share of the equity for every dollar invested. Where does a company turn to when it needs a hand up?

There are a few sources of funding (outside the pawn shops and payday loan businesses). Firms can turn to private equity, venture capital, specialized lenders / turnaround shops, and banks. Regular banks that hold trillions of US retail deposits. They may charge higher interest rates, but hopefully it will be lower than our default credit card rates of 29.999%. This hurts in another way too. We notice that firms that were healthy took on additional debt. That debt in many cases is variable rate, which usually means some index plus a mark-up, plus a percentage of unused borrowing capacity. As interest rates increase, their cost of debt rises immediately, from quarter to quarter. One company we looked at has no economic profit and interest costs of $200M/year. As rates rise, and their interest hits, say $300M, they likely will need to borrow to pay higher rates, or dig a deeper financial hole.

Finally, the impact of inflation and fears of recession play out in their consumer's minds and spending habits. Maybe spending only falls 5% or 10%, but that, with increased costs, means that profits evaporate and now the company has to cut further or dip into those expensive capital and debt markets.

Now, we turn to the consumer. The consumer is hit by layoffs from companies feeling the squeeze of inflation, and they have to pay more for items they absolutely need to live, such as food and energy. This is how economic downturns happen, and why inflation is so dangerous.

What does this mean in the stock market for investors? It means that you should not buy shares of stock in companies that are sliding towards bankruptcy. That is a slippery slope that only gets harder to leave over time.

Good luck in the markets. Sorry for the gloom and doom.
It comes with the territory of being a financial advisor and researching companies.

GLTA!

By Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure, Inc.
​May 25 0930 ET 

The market is set to open lower today.  We cover a somewhat random walk through the markets this morning and look for insight, indicators, anomalies, and clues on how the market will do today. If we were a day trader, we would be doing just this homework. However, we would probably be doing it at 0500 to 0700 ET instead of 0845 ET.  

VIX is interesting. It is trading above 30 this morning (up from 29.x).  This is converted to daily price moves that 'break even' the cost of the insurance in our video. The way to think about it is you take the VIX number, say 30, then divide it by 19.1 (assumes continuous trading), and that is the percentage change for the S&P 500 within 2 standard deviations (68% of the days).

Put another way, if you buy the VIX at 30, you are betting that the market will stay within a 1.57% daily change in price 68% of the days for which you bought that insurance.  Earlier this year, the VIX was much lower, and that change was ~ 0.6% for a daily change, mostly because in a steadily rising market you pay less for downside insurance protection.

Next thing we noticed is that our fundamental screener (which only gives you stocks to research - not a sure thing), is yielding stocks with total capitalization (debt + equity) that is not that much more than either Cash Flow From Operations (CFFO), or Net Income (NI), or both of them. This yields stocks to look into, to see if their future earnings will be just as good as their historic earnings. One such stock $FNF or Fidelity National Financial, which trades at multiples of 4 and 7, and paid a 3.52% dividend, looks like one to dig into. Hopefully rising oil and gas prices and a potential recession won't stop their cash generation. Let's learn more and find out.

We covered oil and gas this morning. Prices are not just rising, but have been higher for a while. We discuss how short-term fluctuations in the price of crude oil are buffered by the refining industry, finished product storage, and hedging activities. We then discuss how when these prices are higher for 3 months or so, like now, those buffers get worked through and now prices will likely remain higher, and be buffered in. For examples, E&P may hedge their production at recent prices to ensure they make a profit. However, when oil is $110/barrel, hedging at that price may be cost prohibitive and so they sell at the spot market, which is $110/barrel. If costs of hedging fall, because traders get used to $110/barrel, then that price will be locked in for months up to a year.

For gasoline, cheap crude works through the refineries, and into finished gasoline storage. Once the inputs cost $110/barrel, then the new product, which may take 3 months to be sold, is more expensive. Together, these effects will work to keep the price of gasoline higher for consumers.

On the consumer side, if gasoline stays at $5/gallon retail, eventually economic activity will slow down. This will cost other retailers business, both from less driving and transportation, and in substitution of goods, services and meals at restaurants for the money poured into gas tanks. For most people, money supply is not elastic, but is fixed on a monthly basis. For example, we spent $48 to fill our tiny Toyota Corolla gas tank yesterday. At some point, it just won't be worth the drive...and we will stay home. Imagine if we still had the Chevy Trailblazer XT!

As you can see, the price of oil and gasoline has been higher since the beginning of March. Those higher prices will start to change consumer habits as they 'sink in' and become permanent changes to expectations. We will say, "remember when gas was only $3/gallon?" like it was years ago.

We also did some homework on our "stocks to buy" and "stocks to sell" lists. We confirmed bankruptcy risk on $RGS Regis, $AUTO Autoweb, $ATIP ATI Physical Therapy, and will be checking out $PRTY Party City next. If these companies recover, these stocks are a screaming buy. If not, they will not likely hit these high prices again.

We still like $CLF Cleveland Cliffs $NVDA NVIDIA Corporation, and recently discovered $INTC Intel Corporation, but are still waiting for lower stock prices as the market crash / correction continues.

We continue to watch $BA Boeing, $AVYA Avaya, and in the medical research field we like $RWLK Rewalk, but in all cases are sitting on cash to let the market find its new equilibrium. We expect to see markets calm down, for daily swings to get smaller (not larger), for liquidity levels to rebuild before we re-invest in the market. We may miss the bottom, but that is ok.

We did not discuss this in the video, but we see US Covid cases rising again. This is bearish for Main Street, retail and service industry stocks.

Our mantra still stands: FOMO is a cost effective strategy today. Downtrodden stocks will likely be lower in the next week or two, so it pays to wait a bit before investing fresh capital.

GLTA!  

We have a saying here at Chicago Quantum. FOMO is a cost effective strategy. It means that stocks that have been falling will continue to fall during this market, at least for the next week or two.

We do this because we are seeing extensions of trends of falling stocks. If you like a stock and the price has been falling, it is likely you will get to buy it still cheaper.

We tested this hypothesis on $SNAP because we have never looked at this stock. Not our wheelhouse. When we look at this chart, the stock fell from $80 to $40, then paused, then fell to $30, and is now below $13.00 per share.  The news from the CEO may have been a shock to the after hours market, but it is aligned with the overall direction of the stock over the past eight months.
​

We stand by our strategy to hold onto your cash, and wait for a clear sign that the market has bottomed before investing downtrodden stocks. This does not mean you should not invest your cash in assets, but do so into index funds like the S&P 500, Nasdaq Composite or Russell 2000. Wait to pick individual stocks for now.

We continue to build our buy list for when the rain stops and Noah can step out of the arc.

Today we further cleaned our model inputs. We removed stocks of companies that are not US companies. We find anecdotally that non-US company stocks are more volatile and possibly could lose significant amounts of value due to non-company specific factors. Better to remove them and have a more consistent risk profile.

We also are refining our filters and due diligence approach for stocks. Most valuation metrics are trailing indicators, or feel like driving backwards while looking in the rear-view mirror up to 3-months ago. However, if we can get comfortable with a company's direction and future prospects, and their discipline in handling (protecting) cash and assets, then past performance gives us reason to research these stocks for the future.

We can see industry sectors that tend to be valued with lower metrics and valuation ratios. These may be the industry sectors that make our buy list as the market bottoms. The key is to create due diligence processes that work well in each industry.

We also found a few stocks that are susceptible to weakness in equity prices. They hold assets that will need to be marked to market, and impact their earnings and potentially, even if they are unrealized losses.

Contact us for more information.

Here is what we saw:

Interest rates looked ok, the US Treasury yield curve is upwardly sloping and rates were coming down. Long Bonds yielding 3.08%. 10-year yields dropped further today during the trading day, now down to below 2.75%.

Fixed income: Corporate bonds fell, with more declines than advances.  About 25:1 new lows to new highs, so the down issues kept falling lower. Investment grade bonds were the worst performing.

Crypto (specifically Bitcoin) was down this morning, and the EUR/USD hit a high we had not seen in a while, up to 1.075 (or thereabouts). The US Dollar is breaking down this week.

Pre-market equity movers (all lower that we saw) pointed to a decline in economic activity, including digital advertising. $SNAP Snapchat, indicated that April 2022 saw a significant decline in economic activity which impacted their revenues, and profits. That CEO letter of warning cost this stock 41.41% of its value, and the stock is trading at $13.20 as we write this. I wonder if the CEO saw that coming, or consulted with shareholders before making this disclosure in such an abrupt way.

We saw $ANF Abercrombie & Fitch fall in pre market as well. 

$BBAI Big Bear AI fell, but that is a MEME stock so this could be an unrelated 'trading' situation. 

Retail, including specialty retail, was almost universally down in pre-market and in early trading. Some of the retail names that have liquidity and solvency risk are significantly lower, potentially due to the recession risk. We think that shuttered stores and massive retail layoffs will just add to the recessionary dialog if this continues. In retail, companies that are a credit risk are a self-fulfilling prophesy. This is because stores need credit to stock inventory for holidays (think Thanksgiving and Christmas). Otherwise they have to pay for all merchandise in advance, which limits how full their stores will be. An empty store is an unprofitable store in most cases.

Companies that rely on digital advertising are also down today.

$AUTO Autoweb is an example of what happens to companies that seize the initiative, work to grow their business in a new area, but ultimately are chocked when capital becomes more expensive (as it did in 2021). Don't be surprised, high-yield debt became much more expensive in the 2nd half of 2021, and we are seeing the effects in 2022, almost a year later. Autoweb does not have the capital resources to maintain a used car business that bought (wait for it) either 100 or 1,000 cars in April.

There are many other capital constrained businesses that in hindsight squandered the money they earned or raised over the last 2 years of economic recovery. Companies like $TUP Tupperware, $FL Footlocker, $VRM Vroom and many more spent their cash, and now are facing creditworthiness risk. There are many more like this...we also see ~1,000 new lows in the corporate bond market. Debt is becoming much more expensive for companies without a liquidity cushion. This can quickly turn into massive high yield default and liquidation / BK. $AVYA Avaya Holdings Corp. had a tough quarter in their core business and has fallen significantly to $3.4250. This is an enterprise IT firm that sells innovative voice technology B2B. Back in the day this equipment and software was indispensable.

That said, we advise our clients to wait before buying stocks in companies where the stocks have already fallen significantly. We call them 'the downtrodden' and our tagline is FOMO is a cost effective strategy in this market. Stocks that are lower now will likely be lower in a week or two. We have been saying this for 8 weeks, and it is still true.

Global equity markets were lower overnight and into this morning.

The VIX was up, but not significantly. It is elevated, but not at 'panic' levels above 30.

Other stocks we discussed were $URBN, $AVYA, $COIN, $RWLK $CLF (now at $22.05), and $FLXS (now at $17.69). In all cases, we are looking for price targets to make a purchase.

Retail sales data came in from Census.gov (an advance reading for April 2022), found here. It showed rising prices, and actually house sales falling back to historically normal levels for April of 600k units. For us, the news is that prices have increased. "Sales Price The median sales price of new houses sold in April 2022 was $450,600.  The average sales price was $570,300."

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Here are the three stocks that were very active on Friday, have high historical volatility, and lost money.
Three stocks that move fast, and had high volume on Friday


GENI - down
ZYME Zymeworks - down, but loaded recently.
LWLG - Lightwave Logic - moves every day…trader’s paradise.

Here are the multiple stocks that had a strong fundamental valuation based on last year's performance, and are significantly down in price. These are your falling knives with good metrics.

Up Stocks:


$100M equity market cap or above.
Traded every day for a year
Positive BETA
Positive net income
Positive CFFO
Stock prices that pass validation.


Down in price, but good earnings, better than 10:1 ratio on total capitalization / CFFO, and total capitalization / NI (both conditions are met):




COIN Coinbase Global
TUP Tupperware Brands
RVP Retractable Technologies
CONN Conns Furniture store
BGFV Big 5 Sporting Goods
PLCE The Children’s Place
BIG Big Lots
LEU Centrus Energy Corp
RKT The Rocket Companies
URBN Urban Outfitters
PVH PVH Corp
WGO Winnebago Industries
GPRO Go Pro
BBY Best Buy
NATR Nature’s summer harvest
CASH
GHLD
FL - Foot Locker
SIG Signet Jewelers LTD (foreign)
AAN Aarons
DKS Dicks Sporting Goods
JHG - Janus Henderson (money manager UK)




Sporting goods and sporting apparel is down. UA is down massively last week.


9 Up pre-market, 4 down
8 Up vs. 5 down
Even in a down market, cash flow from operations and net income matter. They are valued by investors.


In a recession, however, earnings and cash flow evaporate and you end up holding stocks with worse valuations.

And these final two stocks are just a little different. Worth looking at:
CLF Cleveland-Cliffs Inc (down 5%)
AUTO Autoweb (down much more than 5% - going concern risk)

Good luck in the markets today.
​GLTA!