By Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc.

What we know:
What we see in our model analysis is that twenty-two stocks paid an actual dividend yield of 18% or more last year. This is calculated simply as the sum(dividends) / average (adjusted closing price) for each stock over the past 253 trading days. There are normally five to ten of these stocks, and now there are twenty-two.

These 18% or higher dividend yielding stocks are almost too good to be true. Our model corrects for the adjustment of closing prices based on dividends paid (most data providers adjust down for dividends paid, and that understates BETA).

The companies represented by these common stocks (not preferred, nor bonds) are typically capital managers, holding companies, business development corporations (BDC) real estate investment trusts (REIT), and the occasional operating company (e.g., they make and sell things, or provide services to customers).

As Hans Gruber said in Die Hard, "by the time the figure out what went wrong, we'll be sitting on a beach earning 20%." This is a lifetime goal of mine (not the Nakatomi Plaza part, but the beach part). This is the dream of most investors. Passive income of 20%, especially when inflation is 2% to 4%.

A dream come true? Time to buy 20 of those stocks with 5% each of our investable capital and head to Puerto Rico? Yes...BLOG post over. Wrap it up. Why am I telling you about this when you can buy those shares before me and drive up the stock prices?

Not so fast...

What we think happened (our hypothesis):
Our hypothesis is their share prices fell hard and fast. The market has lost focus on high-dividend stocks either due to macro-economics, interest rates, or a fundamental belief that those dividends will not repeat.

Clue 1: Past dividends are not a guarantee of equivalent future dividends. It is possible that some of these dividends were one-time events (like the shipping companies during the COVID-19 pandemic that earned above-market profits, or companies paying out excess capital or earnings back to investors). One stock is an investor in energy companies that fought off a short attack by paying an exorbitant one-time dividend that the short seller had to cover.

Investors will sell the stock, and lower the share price, if they don't believe dividends are repeatable or sustainable. Investors need to evaluate whether dividends can continue based on the fundamental performance and assets of the company underlying the stock.

Clue 2: Stock prices may have fallen on high-dividend stocks reflecting macro-economics, such as rising interest rates or slowing economic activity.

We once made money betting against bonds (savings and loans) when interest rates were rising (during the Federal Reserve Board (FRB) Federal Open Market Committee (FOMC) tightening cycle. We knew interest rates were rising and bond prices would fall. They did. 

This same logic holds for stocks with high dividends that look and act like bonds. For example, a REIT pays out 90% or more of its income in dividends, by SEC regulation. If they are a stable performer with stable assets, maybe increasing rents with inflation, then they look like a bond and their stock price will be reduced as interest rates rise.

So, it is possible that rising interest rates (e.g., US Treasury bills (short-term money) has been yielding ~5.4% for months now, and the long bond kissed 5% recently, and is around 4.4% currently. These rates were significantly lower.

The reduction in stock prices due to rising interest rates (an alternative, risk-free, place for money) could be temporary if interest rates fall, or we could see the continuation of this effect if interest rates continue to rise. This is truly an external event.

We made a related mistake a few years back. We bought a high-dividend, utility-type company that had massive debt to fund the purchase of their assets. They were no longer growing their business, but they were profitable, had a good reputation, and in the past paid down their debt when times were good. We lost money because the company's stock dropped as interest rates rose. Why? The company just stood still. Their revenue growth was anemic despite a significant capital investment (5G build-out), they did not buy back their debt at a huge discount (they could have), and they seemed to tread water. The rise in interest rates and their 'bond-like' behavior caused their stock price to fall about 40%.

Clue 3: Capital arbitrage opportunities may have dried up as the prices of capital assets have increased. We read that real estate prices have risen to reflect rising rents, which rose due to inflation (an external event). We have also heard that the prices are 'so high' that new home building has fallen, aging the asset base. I cannot remember the last time I saw a new skyscraper go up in Chicago (where we live), but I do see the occasional warehouse shell being built to accommodate the shift from brick-and-mortar retail to online shopping and multi-channel logistics.

We also notice more stocks being traded on the public exchanges (NASDAQ, NYSE and BATS), and some capital opportunities are being taken straight to the capital markets, which may limit the opportunities for business development corporations. We hear about fewer M&A deals and private equity investments, and we hear whispers of worry about war and economic slow-downs, which could create a short-term ice age for investors.

If you would like to learn more, or contact us to discuss becoming an investment advisory client, please call me at 312.515.7333 or email at [email protected]. Thank you.
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We are going to run our Chicago Quantum Net Score today, on Saturday, after having a relaxing morning. Before the run, we have a few parameters we can tweak, and do so.

One thing we can do is look for erroneous ticker symbols that somehow enter our model despite the existing data validation steps. Today, we are scrolling through tickers and notice about twenty duplicate stock tickers (different tickers symbols, but same company), which we are coding in to remove until we determine a way to find and remove them systematically.

• I notice many pharmaceutical firms...hundreds of them with obscure names.
• I notice a firm my wife used to work for. It was a well-run company, but I didn't know they were public.
• I notice companies with silly sounding names such as:

1. Bullfrog AI Holdings Inc. $BFRG
2. Magic Empire Global Ltd $MEGL

Maintaining the set of tickers that our model runs and analyzes is a 'sometimes' interesting exercise.

We did just add back about two dozen ETFs that track commodities, interest rates, volatility, and foreign stock indices. We used to talk about them, their BETA, and what they tell us about U.S. common stocks. We removed them to speed up the model, and now we add them back, and added in bitcoin and others as well. They have to have traded continuously for a year, so some may not make the cut.

Please contact us if you have questions, or want to learn more about our investment advisory services.

Jeffrey Cohen
President
312.515.7333 - cell
[email protected]
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The Federal Reserve FOMC Statement holds both parts of their policy are held steady: "In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent...In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities."

What we see is the range of 19 central bankers have narrowed their range of where the economy is heading, in individual, independent forecasts. ​

• The economy will grow, after inflation, by 2%
• The unemployment rate will stay at 4%
• PCE and Core PCE inflation will be between 2.5% and 3% this year, falling to 2.0% to 2.5% in 2025, and falling to 2.0% to 2.5% in 2026.

PCE inflation and Core PCE inflation is the price change of goods and services that people actually buy, as opposed to a more holistic passive index (CPI).
​

The next thing we see is that the Federal Funds Rate, or the policy rate, will end the year at 5.1%, then fall one percent in both 2025 and 2026. However, there are central bankers who think the Federal Funds Rate could rise in 2024 and 2025, and only slightly fall in 2026, while others see them falling more quickly in 2025 and 2026.

What is interesting for us is that there are bankers (or at least one banker) who forecasts policy rates needing to stay higher for longer, even though few if any bankers forecast elevated inflation or elevated unemployment. There is a disconnect here.

Our best explanation of this is that central bankers have a glide path for inflation where it hits 2%, and it takes a very long time to squeeze out that last 1% of inflation, even though inflation came down significantly and quickly in 2022 and 2023. We believe higher inflation earlier this year could have caused this hesitation. 

The market has taken an optimistic look at risk-free, longer term interest rates that are used to set U.S. mortgage rates. The market brought down the interest rate on the 10-year U.S. Treasury Note to 4.3%. This year it ranged from 3.4 to 5.0%. Today's decline of 0.11% was significant.

What does this mean for U.S. retail investors?
We think that investors in fixed income (bonds) should try to lock in short-term and long-term interest rates in bonds, notes and bills that they buy as close to 5% as they can. We don't see short-term rates rising above 5.5% in the coming weeks.
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We think that investors in U.S. equities can look at the message of interest rates being held higher for longer as meaning headwinds, and not tailwinds for the rest of 2024.

This is a risk-off message where people take a few percentage points of their portfolio out of equities and move them into fixed income, at least until we see inflation come down further. There is no real catalyst for an immediate change in housing prices and mortgage rates, but we may see interest rates drop by 0.5% for borrowers due to market preferences for more recent inflation readings (which came out today and were good, showing lower inflation).

For more information about becoming a client, please call/text/whatsapp us at 1.312.515.7333 or email us at [email protected]. Thank you for reading.

By Jeffrey Cohen, President of US Advanced Computing Infrastructure, Inc.

What is the CBOE Volatility Index, or VIX?

The VIX is a traded index that is based on a forward-looking volatility estimate for the S&P 500 Index (options:SPX) in the near-term. It is based on the prices of options on the SPX. It is called a fear index or considered a price of downward insurance on U.S. stock prices.

This is different than a historical volatility metric which we use in the Chicago Quantum Net Score (CQNS) which looks at variance over the past year.

For those who appreciate a traded stock or exchange traded fund (ETF) instead of a theoretical index value, we follow the ProShares VIX Short-Term Futures ETF (VIXY). 

We used to measure the BETA of the VIXY when we loaded our model with cross-commodity ETFs, and it was always significant and negative. This means the VIXY, and the VIX, typically moves in an inverse direction to the S&P 500 Index.

The charts we see are from April 1, 2024 through today, daily chart with candles. The blue line is the S&P 500 Equity Index.

What we see is a significant increase in the VIX from April 1 - April 19, which corresponds to a fall in the S&P 500. As the VIX fell through May 21st, the S&P rose, and continued to rise as the VIX rose briefly, then fell again to where we are today.

The question we ask: Will the VIX remain at low levels for the foreseeable future, which is bullish for the S&P 500 and foreshadows a calm, rising, Summer U.S. equity market from the current level of 5,438, or will it rise again and and bring the S&P 500 back below 5,200?

We suggest that the VIX is an important equity valuation metric and we are not sure it stays low, at or below 12.25 for even the next 2-3 weeks. This suggests a correction could be ahead.

If you would like to contact us to become an investment advisory client, please call/text/whatsapp us at 1.312.515.7333 or email us at [email protected].

This could be big enough to matter w.r.t. borrowing costs and a shift in sentiment.

This is good for real estate stocks and mortgage backed securities today. We see home improvement, home buy/sell software, and home builders stocks up today in a significant way.

We have seen 14 basis point intraday moves before, just not very often.

Good morning, this is Jeffrey Cohen from US Advanced Computing Infrastructure Inc.

Inflation came in lower than the trend, and this is lowering U.S. Treasury Yields. This is also supporting small capitalization stocks, with the Russell 2000 futures in pre-market up significantly.

The European Union is taking an action similar to the United States and adding very large and significant tariffs on the importation of electric vehicles (EVs) that were manufactured in China. This is targeting Chinese companies that purchased European car brands and are now importing those cars under those European name plates, domestic brands that manufacture offshore, and other Chinese brands. We believe this is bad for consumers of electric vehicles (raises prices) and signals a coordinated NATO trade action against China. This runs counter to global economic and military stability.

Our Chicago Quantum Net Score (CQNS) model is flashing some interesting signals.

1. We see the typical names of smaller capitalization growth companies, real-estate related stocks, financing companies, and specialty retailers at the top of the list of LONG stocks.

2. We see the typical volatile names that we have been seeing for the past few months in the SHORT list, and new 'contestants' are focused in the biotechnology space. 

3. The issue is the relative strength of the signals. The long stocks are responding to a higher risk-free rate of 5.4% and a lower expected market return to risk of 5.5% (you add the two for a stock with a beta of one). The LONG stocks have a weaker signal than the SHORT stocks. This is troublesome, and suggests adding short exposure to your portfolio in the short term, preferably with the worst, garbage stocks that do most poorly during a correction. We have the list of names, and many we have researched already and watched them dilute, lose money, or just flounder near zero.

On the longer-term, if market interest rates (e.g., on the 2, 5, 10, 20 and 30 year U.S. Treasuries) fall due to lower price inflation, and the Federal Reserve lowers policy rates, this will be good for stocks and real estate valuations, and companies working in the real estate space like Opendoor Technologies Inc., $OPEN and Hovnanian Enterprises Inc., $HOV, which are both highlighted in our LONG CQNS list.

In conclusion, the short list of stocks today is more compelling than the long list, and the model suggests that except for a few hot names, investors take some risk off the table and hold more stocks, and smaller positions in each. Our third best portfolio has 15 equally weighted stocks, versus when the market was rising we would see much smaller portfolios.

For more information about becoming our investment advisory client, please contact Jeffrey Cohen at 312.515.7333 (call, text or whatsapp), or email at [email protected]. Thank you and good luck to all.