By Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure, Inc.
​June 30, 2022

We noticed a few things this morning:
1. New lows are outweighing new highs again, both in US Equities and US Fixed Income. This is a key indicator for us on the breadth of the decline in stocks. Don't catch falling knives. 

2.  Interest rates are falling today, into the end of the quarter. We think this may be window dressing, and may not last. The FED is raising rates, right?

3. We discuss, again, our logic for betting against Lakeland Financial $LKFN and Bank of Hawaii $BOH. We go to the 10-Qs. What we didn't realize is how poorly they treat their depositors! These companies are not very kind to their depositors financially. You will see it in the videos. We also show how much money they lost in Q1 and likely the same thing happens in Q2, but you won't see it in the income statement or net income.  However, those losses show up in the balance sheet and banks trade at a multiple of common stock equity.

4. Not surprising is that the US equity futures are red today. What is surprising is how badly the European markets did, and the Japanese Nikkei. They surpassed the US Equities market performance yesterday. The tail is wagging much harder than the dog today.

Good luck to all.
​Jeff

By: Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure, Inc.

We made our morning video which pointed to US equities being weaker, despite US equity futures indicating an UP or Green open.

As we checked our key industry sector indices, they were pointing to a declining market. However, the indices themselves (S&P 500, Nasdaq 100 and Russell 2000) were higher. This is a disconnect. We checked $TNA and $TZA, which allow traders to bet 3x on the direction of the market in the short-term. TZA (bear) was up, while TNA (bull) was down, despite the $SPY being up.

So, we move to our stocks. Just the four we have a position in, and a few others on our buy list.

Broken market, broken arrow, red dawn, Wolverine, OMG, Honey who shrunk the kids, operation RED SQUARE, and Great Scott!

We see fewer shares offered for purchase and sale at the top of the book (thin markets). We see larger spreads in price between best bid and ask. We see signs of liquidity weakness in downtrodden stocks. We see low volumes being traded. 



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By: Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure, Inc.
​

By Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure, Inc.

Today will be quick:

1. Expected returns in stocks and bonds are going up due to the fundamental weakness in the economy, fear of a recession (and the game theory answer which is to sell first), and increasing risk-free rates of interest.  When expected returns go up (or need to), then prices fall.

2.  Currency markets are boiling. US Dollar is strengthening (but not against the Canadian Dollar today, which is already down), and this will hurt the US Economy at the expense of our major trading partners. They are all (except for Europe) weakening their currency which lowers inflation in the US, and makes us prefer imports to our own domestically manufactured goods and services.

3.  Long term interest rates are up (even over the 5-days) and mortgage backed securities are down (also over the past 5-days) of the bear market rally. They fell, which fed the rally, and now they rise, which will starve the rally of fuel.

We shared our investments. 
CRBP and AMS are long term holdings where we are under-water. We are long, diamond hands, and could either gain a big pay-day or lose it all. 

BOH and LKFN are short or long-put positions where we are out of the money and betting on a decline based on their losses on investments. These show up as AOCI, which is reflected in their weakening balance sheets, but not in their net income. Larger depositors may flee these banks, while the FDIC bails out (and back stops) smaller retail depositors.  These banks are trading at high multiples of common equity, which continues to fall with rising rates.  This is a very bad situation for their stock prices.

Good luck out there. If you like the video on youtube, please hit the subscribe button and leave a comment. It helps us spread the word without advertising. Also, we are not paid to write these blogs or make our videos.
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Update:
Bank of Hawaii is a Hawaii-based bank holding company.
Lakeland Financial Corp is an Indiana-based bank holding company.

Since banks lend primarily on housing (both residential and commercial), let's see what the Federal Housing Finance Agency has to say on this topic (here):
Hawaii housing prices are up 4.3% this quarter, 22.75% this year, and 59.15% over the past 5 years.
Indiana housing prices are up 3.52% this past quarter, 15.65% this year, and 60.98% over the past 5 years.

Mortgage rates also vary by state. According to Consumer Finance .gov (here), a well qualified buyer (800-820 credit score) buying a $500k house and putting 20% down for a fixed 30-year conventional loan has access to a spread of rates.

• State (low, median, high):
• Alabama (5.25,6.125,6.5)
• Hawaii (5.25,6.125,6.5)
• Indiana (5.25,6.125,6.5)

We spot checked this with NextAdvisor (time.com) in Warsaw, IN (46581) and see the best zero point, zero fee 30-year fixed rate is from Blue Spot Home Loans, with an APR of 6.12%.

Lake City Bank offers mortgages on their website. 30-year fixed rate, with zero points, has an APR of 6.105%. We went deeper and entered information for Fishers Indiana, $500k house, $400k mortgage, without impounds or escrows. 30-year Fixed Rate: 6.033%, with no points. Excellent Credit History required for this rate.

In Aiea, Hawaii (96701, 96740), there is only one mortgage available and it is from LoanDepot, with an APR of 5.22%, 1.946 points, and fees of $7,219 and the loan is only a 15 year fixed loan.  BankRate does not have any lenders giving quotes on 'the big island' at 96740.

Bank of Hawaii offers a 5.305% APR with 2 points, 20% down payment for a 30-year fixed loan. Maximum loan amount is $970,800 and these are not fixed rates, just a calculator used today (here). To drill down deeper, you have to create an account with SimpliFi, and that seems intrusive to us. 

A $400k house would then have a payment (before taxes and insurance) of $2,406/month, unless the borrower chose to pay $8,000 in up-front points and then the monthly payment would be $2,224, or $182/month cheaper, with a 44 month break-even point on the points, excluding interest you forego, which would likely take it out to 45 - 48 months.

It seems that Bank of Hawaii charges more for mortgages Lake City Bank.

The question is whether people buying a home can still afford the $2,400 mortgage payment, property tax of ~ $1,000 to $2,000, property insurance and the cost of operating the home. Conservatively, this makes the home cost ~$5,000 / month. If not, we will see homes declining in price, or people losing their homes in a recession.

Again, we are betting against the prices of $BOH and $LKFN as we think a recession is possible, and we estimate both banks will have negative (net income - AOCI), which will reduce their shareholder equity and make their stock market valuation more 'rich' all things being equal.

Everyone knows this who watches social media, but just in case, mortgage rates are above 5% for the first time since February 2011, or 11 years ago. At some point, this will slow down house purchases for 2nd and 3rd time home buyers. If the 10-year and 30-year US Treasury rates continue to rise as the FRB raises interest rates, then mortgage rates will continue to rise too. Look at the performance in the 1970 - 1983. Mortgage rates are historically sticky.

Update Two: The market did rise initially (first 15 minutes) then fell and flatlined after lunch. Even if they go up into the close, it is just more volatility that isn't helpful to stock market investing. Look at NASDAQ 100 down 2.48% on an initially up day. This is a very large swing from a historical perspective.

Thank you Finviz for the visualizations.
​

By Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure, Inc.

Good morning. We see these key facts in the market today:

1. Multiple bank stocks had significantly higher volume on Friday. Banks made up most of the top 10 volume increases in our CQNS UP run. 

2. Futures are up this morning on US Equities. Most of the economically sensitive sectors we track are also up pre-market, but not 100% of the stocks are up in each. This is a broad-based pre-market rally.

3. US Treasury Bond Yields are up this morning as bond futures fall. Bonds are still above their support levels having recovered over the past week, but are not making new highs either. Long-duration bond yields are higher this morning.

4. California wants to drop $1050 on every family with three or more members that own a car.  This is to help pay for gasoline price increases, or other price increases that California families are facing. In our opinion, this is not a good idea. If you want to drop money on people, then leave quarters for people to pick up. This way, everybody gets some if they work at it and those that need the money can pick up more quarters.

5. Our CQNS UP run model has finally given up on individual stocks, and has selected the three US Equity Index ETFs as the three individually best performing (risk - return) tradeoff stocks. SPY, QQQ and IWM score better than any other individual stock. The market is 'rational' again and does not favor stock pickers. This is good to see, but also terrifying to see as it eliminates the edge that some traders have from running quantitative models like ours. Net-Net: if you have $100 to put into the market, the model suggests to invest it into one of the three ETFs above and not to pick an individual stock.

Bitcoin, currencies, commodities all look ok. No big changes.
GLTA!

By Jeffrey Cohen, Investment Advisor Representative
​US Advanced Computing Infrastructure, Inc.

Today we are wondering why there is so much movement in the market around the committed downturn in stock prices. We see economics-driven stocks (business cycle stocks) like Citibank, Freeport McMoran, Cleveland Cliffs crashing, but then we looked today and they always go up and down 2-4x, or 1/2 to 1/4. This is what they do as the economy goes from boom to bust.

We see whole industry subsectors of stocks go up in after hours trading, just to fall in pre-market trading. In certain industry sectors, the stocks that go up in after hours go down pre-market, and vice versa. This is movement to scalp pennies, or dimes, on share prices, or to fine tune positions.

The overall trend is negative and down.

Two stocks are dropping that give us pause, and we will do some due diligence. DB and CS are down, and I am concerned there may be a banking problem in Europe.

There is no real economic news today in the headlines. Just commentary. 

Interest rates look to fall today based on the futures, which brings US Treasury Bond and Note prices lower. Could be a small flight from US investments in fixed income.

New lows to new highs maintained a 29:1 ratio today in both corporate equities and corporate fixed income. For every one company stock or bond that hit a new high, twenty nine hit a new low.

Be careful out there. Don't lose sight that we are in a downturn and whatever stock you hold that is exposed to the economy will most likely be lower in a few weeks. Hold if you can / must, and sell if you are unsure.  The first person who sells into a recession wins.  The first one who buys at the bottom also wins.

Best regards and good luck today. GLTA

Jeff

By Jeffrey Cohen, Investment Advisor Representative
​US Advanced Computing Infrastructure, Inc.

Hope you enjoy this morning's video. We enjoyed making it. We reflect on recessionary fear bets, the overall market direction, and our take on what is happening out there.

Net-Net: almost all the 'bell-weather' stock industries we track are trading near 52-week lows. We are taken by surprise by this, and think most investors are unaware of this fact too.

By Jeffrey Cohen, Investment Advisor Representative
​US Advanced Computing Infrastructure, Inc.

We noticed a few important things yesterday. 

1. The market move happened before the market opened. The market opened gap up. Retail investors could not participate. Once the market opened, the moves up and down were slight ripples. This means, to be precise, that stocks you might want to buy were already up in pre-market so you would be buying them at the open, or in the first hour, at their already 'runner' prices.

We see this today with the lower open expected. Pre-market stocks like $COIN Coinbase are already down more than 8% pre-market. If you wanted to ride Coinbase lower, you already missed that move. It is the same across our 'indicator' or 'canary in a coalmine' industry sectors. They have already moved in pre-market.

2. We also see a significant number of new lows in yesterday's 'UP' market. This is very surprising to us. We also see the average stock is lower than it was over the past 2.5 months, and over the past 10 months. There is still a weakness in individual stocks and bonds.

Corporate bonds (91:1) new lows to new highs
(not a typo, ninety-one to one)
Agency bonds (16:1) new lows to new highs (largely residential mortgage holdings)
US Equities (10:1) new lows to new highs.

What this says to us is that the market is not 'throwing good money after bad' and is leaving many companies behind. This does present a buying opportunity in certain companies with strong valuations that are down-trodden. However, those stocks likely will be less expensive in a week or two. Probably better to wait.

3. We see commodities like Copper showing weakness, approaching $3.90 from ~$4.50 when we first starting tracking it. However, big picture, copper has traded for a long time around $2.00, and rose (similar chart as the Russell 2000) from the Covid-19 pandemic lows to more than double. This is a return to a normal, historical level of pricing. We would also expect copper miners like Freeport McMoran $FCX) to fall with it.

4. We see weakness in the mortgage backed securities MBS market, both in Freddie Mac, Fannie Mae, Ginnie Mae and FHLB. This is likely due to the rise in long term interest rates. Yes, short-term and long-term interest rates are rising. This makes everything in our economy more expensive. Companies that borrow short and lend long, or that take in deposits and make investments in long-term fixed income, will not have a good Q2/2022 according to the data we are tracking. 

When we looked, the banks have dropped from 20% to 30% over the past quarter with the adjustment in market rates.

Good luck in the markets today. It looks like a RED or down open for US equities, and the move is already well underway in pre-market. I hope that if you have a trading idea, it is still there when the markets are open and not 'already played.'
​

Thank you to the websites we are using for our data and analysis.
https://finra-markets.morningstar.com
https://app.koyfin.com
https://finviz.com
https://www.marketwatch.com
https://www.mortgagenewsdaily.com
https://finance.yahoo.com
https://www.chicagoquantum.com
https://www.cmegroup.com

Stocks quickly rose this morning (they gained most of their advance pre-market). I noticed that 1-month US Treasury Bills yields fell dramatically to 1.02% today. Not sure why, but this would explain why financial stocks are doing very well today, and overall the market is higher. This is a riskfree rate, and a rate that you peg to for interest-bearing savings accounts. When the riskfree rate drops, stocks are actually worth more, and banks are expected to earn more.

The longer term UST did not rise (yields did not fall). This is only on the short-end of the stick (or yield curve).

VIX fell 5% today. I guess people are no longer worried about stock market volatility, or at least are not willing to pay to protect against it.

Russell up 2.0%, S&P up 2.6%, and NASDAQ Composite 100 up 3.0% today as we write this at 1442 ET.

​

There are a few ways to gamble on a market recovery or a market decline that are efficient, lower cost and relatively easy. There are some ETFs that deliver multiples of the underlying index on a daily basis. You can buy and sell them like stocks (they are exchange traded funds), and they tend to behave well on a one-day basis.

$TNA - for up days
$TZA - for down days

Are we in a recession? We don't know. There is no confirmation. However, credit quality will give clues:

• Watch for changes in credit quality. It needs to impact US banks, US commercial lenders (e.g., energy and construction), and US consumers (credit cards, mortgages and auto loans).
• Chinese credit quality declines are not as relevant here unless they threaten the stability of the US or European banking system.

Game theory suggests you should sell stocks before a recession is confirmed (tweet below).