We see it in labor-only businesses like ATI Physical Therapy. $ATIP
Also true in the coal mines of Indiana: Hallador Energy Corporation. $HNRG
Get used to it. Labor already costs more and produces less in the US. Will the trend continue?
Data found here.
By Jeffrey Cohen, Investment Advisor Representative & Management Consultant
US Advanced Computing Infrastructure, Inc.
So much to discuss this morning in US financial markets.
Inflation news was very positive. Not only was consumer inflation down (CPI-U) but so was producer price inflation (PPI). This gives the government a little breathing room. We noticed quantitative tightening is having the first $100B in impacts, and the interest rate hikes are of course positive in helping fight inflation. On the other side, we see the dollar weakening, which helps raise inflation in USD. Finally, where is inflation in China and Japan? More like 2% to 3%, nothing like NATO is suffering.
Markets are not up this year. Despite reports to the contrary, all three major US equity exchanges are lower this year, even accounting for dividends. We are merely rising within the fall.
Our model picked two dividend stocks. These stocks scored better than the SPY (S&P 500 Index ETF), and paid higher dividends last year than the SPY. This is not usual, the model was bearish in the extreme until recently.
The variance of the S&P 500 remains elevated while the variance of individual stocks seems to have peaked and is down slightly. This reinforces our notion or hypothesis that the S&P 500 is a point of leverage and manipulation of the market. Big bets are made in the SPY or ES_F, and these cascade through the market. The market for individual stocks is moving more slowly, and could be indicating an end to some of the destructive volatility we have seen. It is still very early, but call this an early warning. Volatility in the stocks of money making and money losing companies may have peaked this week.
With a reduced and modest 8% expected return on stocks, our model is quite bullish. Eleven (11) stocks scored better than the SPY for risk-return trade-off. For the longest time (weeks) there were none. The CQNS UP run model likes stocks in the following sub-sectors (not the sub-sectors, but a few stocks in them):
Large-cap tech stocks
Software & eCommerce
Our CQNS Down Run sees many of the same faces, but also a few new names. Some of these are old MEME stocks. Some just act like it. High volatility and no sense of direction. I guess these are good to sell options on. All hat and no cowboy. All smoke and no fire. Big, dramatic moves that don't seem to go anywhere, or circle the drain of a price of zero.
There are more stocks to invest in. I remember when we started running and publishing results in our model there were 3,100 stocks that passed data validation. That number is up around 20%, and that discounts foreign HQ/located companies that we pull out of our CQNS UP run.
VIX is down, below 20 this morning in pre-market trading. This suggests downside insurance against stock price declines is less costly than before. Insurance against stock price declines in the US is cheaper than before. What's funny is that stock prices are higher...but insurance against falls is lower. You would think intuitively that it would go the other way. Try this one on for size. As the variance of SPY stock price moves increases (showing larger, more asymptotic moves), the VIX or price of insurance against those moves decreases. This is an anomalous relationship and could indicate poor prices before, or a disturbance in the force currently.
Both stocks and bonds are up over the past few days, although corporate fixed income is lower for those companies that already have lower-price bonds. It looks like the market is punishing high-risk companies (companies at risk of repaying their debts). We would need more hard evidence, but we can see this anecdotally in FINRA-Morningstar data and in the WSJ Bond Benchmarks. According to the WSJ, corporate bonds in junk status (rated CCC) yields rose from 7% earlier this year to 13.1% currently. They were even higher, with an average of 15.2%. More to come on how to quantify this, but it looks like some corporate debt is firming, while others weaken.
The US Dollar is down HARD since the news on consumer inflation, which likely reflects the lower expectation of future short-term or policy interest rate hikes.
Energy prices are rising, and economic metals are up today (and over the past few days/weeks). This may suggest the recession is ending.
We found some really bad news in the Inflation Reduction Act that the Senate passed on a 100% Democrat vote (51-50) with VP Kamala Harris casting the deciding vote. Read Section 10101. Corporate Alternative Minimum Tax and shoot me a note. I spoke about this in the video as I found the appropriate and relevant tax in the bill. Boom, this could knock a few percentage points off the S&P 500 if it passes in its current form. This is one reason to be bearish into the Fall.
We did due diligence on Hallador Energy Corporation $HNRG. They have liquidity issues and recently raised money from company insiders (convertible unsecured debt paying 8%) where most of it was converted into equity almost immediately. That money, around $20M, is needed for capital projects for the rest of $2022. Good luck to this company. Their mines are showing safety violation allegations in their latest 10-Q filing with the SEC, and they recently had a mine fatality. His name was Brian Rodriguez and he was a US Marine who served two combat tours in Iraq. Let's hope they use the money to keep their mines safe and prevent future accidents. Document here.
We notice that moves higher in this market are happening in the morning, and very quickly. If you blink, sometimes you can miss the move higher. Pre-market moves without follow-through during the day. Interesting, as we saw this in previous markets.
By: Jeffrey Cohen, Investment Advisor Representative & President
US Advanced Computing Infrastructure, Inc.
Many tried to politicize the news and say it wasn't good, and maybe the market reflects that narrative. I say, if prices were flat, and I mean there is a zero in the column for July CPI-U index growth, then the US Federal Government (less spending), the US Federal Reserve Bank (QT and rates) along with the people of the United States (change behavior), did their job and brought prices back under control. Good job, round of drinks for everyone!
So, the market did not buy the same narrative. The stock market went up for the first two candle sticks, or about 40 minutes, then rode flat all day.
Just say it again to let it sink in. After inflation rose 8.5% for the year (and it rose for 11 months), it stopped in its tracks in July and did not rise.
The lead lining in the news is that while energy prices fell (gasoline wholesale back to $3.00 from $4.00 for example), the price of food that you buy in the grocery store and prepare at home rose very quickly. It rose over 1% in July. People, real people, are still suffering.
Also, US non-farm labor productivity fell 4.6%. This reflects more hours worked and less product and service produced. Also, wages rose ~10% for the same period. So, we worked longer, made more money, but produced less. This is not very good news for the economy, and might be a result of over-hiring for some, and under-performing for others. As a funny example, I am on Twitter during the day because that is how we promote our points of view. We share our video link and make comments about stocks, bonds and markets. We do it as part of our work. However, there are many on Twitter during the work day that I think might have full time jobs, and are not paid to tweet personal views. Just saying...and the work at home model is great until you want to go for a bike ride (we did yesterday), or your wife 'wants to talk' (she did), or you have to go to the store and fix an electrical fixture someone broke last night (I do). Productivity is down (in part) because employers have less control over their workers' productive time that they are paying for.
The other thing that I reflect on this morning is the whip-saw in interest rates. We were going along great, with mortgages and loan rates low and accommodative. We were building, fixing, buying and selling homes across the nation. Prices were rising, money was being made, but it only lasts while people can afford to invest, risk, buy, and pay on real estate. The rise in interest rates and prices have given people pause, and that is enough to slow things down.
Let's see what today brings. I expect that the new corporate income taxes (15% on stated income), declining labor productivity, declining corporate fixed income (forgot to talk about that - bonds are falling while UST risk free bonds are rising, reflecting greater corporate risk), reduced consumer spending and enthusiasm, and the possibility of two global wars for the US might drive down corporate profits. That would be the end of this bear market rally, and bring back the bear. Only time will tell.
Please be careful out there and always do your due diligence before investing.
By Jeffrey Cohen, US Advanced Computing Infrastructure, Inc.
President and Investment Advisor Representative
We look at a few data points and overall, cannot say that the bear market rally is over. It could be, and it may end shortly, but not feeling it today.
Here is what we see:
1. New Quantum Computing firm hit the market. $QBTS
2. Stock market breadth (US Equities) is more positive and bullish than we have seen in a long time. 3:1 New Highs to New Lows. Also, more than 6,400 stocks are trading above their 50 day simple moving average (SMA) and only 2,400 are trading below. This has been significantly reversed for a long time.
3. Fixed income is still negative, more new lows than new highs. In fact, Fixed Income declined yesterday despite lower US Treasury long-term rates. This means the fixed income market sees more risk in corporate borrower ability to pay.
4. Semiconductors are 100% lower in early pre-market trading. I wonder if people are worried about an economic blockade of Taiwan by PRC's military? Could be, or this is just a bet against high BETA and economically sensitive stocks. The PRC military escalation against the US, and China letting their currency weaken further against the USD could be a sign of supply chain risk.
5. Yesterday's market action resembled a Lazy Boy TM Recliner. (Lazy Boy is a registered trademark). It pumped in pre-market, rose for 90 minutes, then fell for 135 minutes to the opening level, then was up and down for the rest of the day, closing at the opening price.
6. We also continued to tweak our Chicago Quantum Net Score (CQNS) model parameters to see how bullish or bearish the market could be. We took the expected return for new money, inclusive of dividends (1.39% paid on the S&P 500 last year), down to 8%. This implies a 6.61% capital gain on new money invested in either the QQQ, SPY or IWM. The analysis continues to be very bullish and risk on.
Notes from our discussion:
We adjusted the expected return of stocks by investors (new money) inclusive of dividends, down to 8% (from 10%). Dividends were 1.39% Stocks deliver a capital gain of 6.61%, not unreasonable.
High BETA stocks chosen, and those large-caps that consolidated recently.
If you like dividends, you want to hold the money managers.
Finally, we took a look at indices, and the S&P 500 looks the weakest. The big red candle is about 100% overshadowed by the big green candle (Monthly chart) and so the question is whether the support level at 4,120 will hold. It may or may not, only time will tell. However, the NASDAQ Composite 100, or QQQ, looks stronger and better. Not sure this will drop given the trend.
This week, and in fact the period starting June 16, has been an aggressive, RISK-ON time for stocks and bonds. Bond yields at the long end have fallen, which increases the prices of bonds. Stocks have risen ~15%, which is a large and aggressive rise and 'earned back' about half the loss in the first part of the bear rally. Commodities in economically sensitive areas are down, foreshadowing a recession. We even have a recession-calling 'yield curve inversion' that we can talk about. This is another foreshadowing of recession. What's funny is that stocks seem to have temporarily moved beyond that. We also have geo-political tensions, and those seem to be of minimal impact on market action. Finally, this is the Summer, and most 'big money' traders are desks are on holiday. That all changes in early September.
Saddle up and let's ride.
Good luck to all in the markets (and in life) today!
By Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure, Inc.
We noticed a few things today and last night while thinking about the markets.
1. Mornings on social media are mornings wasted. I just spent 30 minutes on financial twitter trying to get a handle on things...and now I cannot get the phrase 'vibe-recession' out of my head.
2. Inflation is now a global phenomenon. When did that happen? I thought inflation was based on currency growth (broadly speaking, including velocity of money) minus economic growth. Now, everyone has inflation, including Indonesia, Europe, Latin America. What makes sense is the US Dollar becoming the world's global currency, along with just a few others. When we interlink the Euro, Great British Pound, Chinese Renminbi (Yuan) and other dollar-tied currencies together, then the US Dollar impacts those countries. We have seen many countries deflate or weaken their currency so they can sell into the US less expensively, but that means their prices of globally priced goods rise (like oil, gold, and most likely foodstuffs).
This does not apply to Japan, which has pursued an independent monetary and fiscal policy from the US. Japan has inflation, but it is 'high' at 2.5%. The Japanese Central Bank spent a significant amount of yen recently defending low Japanese Government bond yields, and Japan's inflation is high at 2.5%. Link here, thank you Trading Economics.
3. The market is trading in just a few, active stocks with volume. This may not 'really' be true but it sure seems like it. Most stocks we track are trading well below their normal volumes. However, a few stocks are 'hot' and seem to be getting most of the attention. Our model called them out, and we were too 'chicken shit' to put our capital into them on Tuesday morning when first called. Their options were expensive to us (4% per month ATM calls), and the spreads were high pre-market (up to 10% spread between bid and ask). However, during the day these stocks moved quickly and decisively. Interestingly enough, the moves in pre-market were most of the moves by market close. You had to be in pre-market, or in the first few minutes of trading, or you missed the rally.
4. Cannabis industry is in trouble. Declining prices for weed, along with reductions in discretionary spending (income and savings) means significant declines in business for major 'axe and shovels' providers like Hydrofarm $HYFM and GrowGeneration $GRWG. Their footprints have increased, but their sales decreased. A good provider of pricing information is the Cannabis Business Times, link here.
5. The S&P 500 and other stock market indices are recovering significant territory on low volume. The S&P 500 is trading at 4,151.94 as we write this. The market was 'over-priced' in our opinion at 4452, or 8% higher (300 points). The market corrected from ~4,600 to ~3,600, or 22% (1,000 points).
I keep thinking 'when did this happen' but I realize it happened starting at the recent bottom at June 16, 2022. US Treasury long-term yields peaked on that day, along with the VIX, and most US equity indices hit a bottom. Remember that date, June 16, 2022. That was right around when we sold out of our bearish bet on regional banks. Thank goodness we eeked out a profit on that large-ish position. Since then, the regional banks have recovered nicely, and continue to move sideways / higher.
The core, macro-economic and monetary news is worse now. Political tensions are rising between NATO, China and Russia, and the world is slipping into a global recession / depression with widespread inflationary pressures. Globally, we see short-term interest rates rising (if only to defend against the USD strengthening too much), and a world battle to end zero-interest rates.
There is more to discuss, much more. We don't know what the markets will do today, Friday, but we plan to have an insightful and entertaining livestream this morning.
Good luck out there. GLTA.
By Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure, Inc.
The highlights from yesterday was the reversal in US Treasury fixed income securities that are longer-duration. 10-year and 30-year notes/bonds were falling the day before, fell in the morning yesterday, then boom, recovered after lunch. This changes the dynamic because as bonds are worth more...this removes a big stressor in the markets.
This morning we see futures flat on US equities, however our model, our CQNS UP run model, is still bullish and suggesting a few very risky sectors to invest in to beat the S&P 500. Bitcoin-related, semiconductors, software and eCommerce. Internet related growth stocks. The model was right yesterday, and today it picks similar stocks. The model suggests jumping into risky stocks if you believe the overall market is expected to rise 10% over the next year (inclusive of dividends).
Remember though, this could be a bear market rally and be short lived while most of us are on vacation in August. There are fewer participants and liquidity is lower. This is the time when market players can make significant profits. It is like trading pre-market.
The new high - new low indicator is still negative (more new lows than highs), but is moderating and close to 1:1.
In the stocks we looked at today, the core economy of discretionary expenses is lower, and companies that benefit from when we have modest means (inflation, fewer jobs, stagflation), were higher.
In mid-June, the US Equities and Fixed Income market changed. It started going up again.
This has been a healthy rally, rising ~15% depending on the index. US Treasury interest rates have fallen in light of a diligent and hawkish Federal Reserve Bank. Volatility of most stocks has stabilized, albeit at a higher level than before. Volatility of the S&P 500 continues to rise.
The VIX started to fall in Mid-June, and has not looked back. The cost of insuring against a market fall is lower, even though the market has gone higher. It is a matter of perception in the market...stocks are rising and risk is back on.
In a recent video I had said "you can be right, or you can be wrong and rich in this market.' What I meant is that most people think the market should be falling further. They reflect on economic, political, fiscal and monetary conditions and say Rome is Burning. Sell stocks, go short, bet against the market.
However, while this is happening the riskiest sections of the market have been rising, and stocks suggested by our model are already up 25% to 50% already since mid-June. Our model has done a 180 degree turn with the change of one key assumption. That model run was amazingly correct yesterday, and we made our optimistic video, and even wore a Chicago Bulls hoodie to support it (in pre-market before we saw the results).
All we did was suggest that investors in the market expect to make money. They expect to make 10% over the next year, inclusive of dividends. That is all we need to push the market higher. 10% expected returns.
By comparison, when we had 5% returns to risk assets (as the market was in free-fall), the model had us picking the more conservative sectors of the market, including consumer discretionary stocks, insurance companies, insurance brokers, B2B industrial firms and the like. In other words, low BETA and high profit companies that can weather the storm.
We ran the model again last night with the 10% 'override' assumption on expected returns. The model again picked a risky basket of stocks to invest in.
Good luck to all.
Check out our video this morning.
By: Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure Inc.
Chicago Quantum (SM)
August 1, 2022 06:22 ET
Today, as of 11:30 ET, the us Stock Markets reversed course and moved higher. Not all sectors are up, but the overall indices are green.
US Equity Futures falling faster pre-market. It is 09:06, and pre-market futures are down more.
Whack-a-mole is a game where the user holds a large hammer (usually very light). There are nine squares or holes where a possible mole (furry little creature) pokes its head up. We presume the moles rise in a random, independent distribution. The goal of the game is to hit as many moles with the hammer as possible.
The US equities market seems to us to be like this.
A few weeks ago, before our July vacation, the model was picking the largest tech stocks. Now, those stocks have risen and are out of the top 50 stocks. The model has a rotation of consolidating stocks that are low risk, high return (all relative to the overall market), and stocks rise to the top in groups.
Today's group now begins to reflect MLPs in the energy sector. These dividend payers are falling out of favor. Also, we see some utilities, hard-core industrial B2B companies, insurance and insurance brokerages, and consumer favorites like McDonalds and the beverage companies. The model likes these individual stocks best. It is likely that these stocks have either risen and fallen in roughly equal measures, and with less volatility than other sectors, or fallen and risen repeatedly in a wave-like pattern. The model likes them because you can buy a stock with lower variance (in the past year) but still get some return on your investment (including dividends).
The #1 pick by the CQNS up run is Berkshire Hathaway Inc. B-class shares $BRK.B. Why is this not surprising to us given where we are?
We also see higher BETAs in commodities that move with the stock market. Money is flowing into commodities like copper $CPER, oil $USO, and Silver $SIV. Makes sense if someone wants to invest in a 'Fed Pivot' or the end of the current recession. That could also explain the recent rise in the markets. People say the stock market predicts 'real life' 6-9 months ahead of time, and this would suggest that our economic troubles, both inflation and recession, will be behind us in January 2023. This does not seem to be an unreasonable belief, although it is not one that we hold ourselves. We are not ready to see beyond the current troubles, and think they may last for a year or more. Then again, our coffee cup appears to be half empty, not half full this morning. It is all about perspective.
BTW, our offices are in Highland Park, Illinois (map below).
The S&P 500 E-Mini Futures show a steep decline in May and early June, followed by a steady and aggressive recovery from Mid-June through July.
US Equity Futures are down slightly this morning, along with the US Dollar. The US Dollar has declined significantly against the Euro and Japanese Yen.
The VIX (or fear index) is up slightly. Energy prices are down, and while short-term bonds are stronger, US Treasury Bonds (30-years) are weaker.
Good luck to all.
Our Chicago Quantum Net Score UP run stocks are as follows today:
[deleted, hope you caught it this morning]
This is an equally weighted portfolio that you would buy today, at the open. It is expected to outperform the S&P 500 for 20 trading days, especially if the market rises. Note the mix of companies, from sleepy telcos to old and new tech, MLPs, retailers, and a whole mix of industries. Pharma, consumer products, chips, software, fast food and software. Diversification is the key to an uncertain market with higher interest rates and negative historical returns in the past year.
This is as of August 1, 2022. We will track the performance of this Chicago Quantum Net Score UP run through August and report on our results. This is the type of deliverable you gain when you buy an UP run, along with all the data you see in our Invest Information sub-tabs, and a spreadsheet of stocks with supporting information.