By Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc.
Illinois Registered Investment Advisor, and friend to all in the markets

Story is a work in process. 

This has been an unusually bad week for high beta stocks that have low volatility (relative to their high beta). As the market has corrected, so too have these stocks.

A few examples:
TNA - The 3x small cap ETF, Direxion Daily Small Cap Bull 3X Shares, is down 25%, and looks very much like a hill, up fast and down fast.
OPEN - Open Door Technologies down about a third this week on a lower earnings forecast for Q3
BETR - Better Homes and Financing down sharply today on news of a 50:1 reverse split
SMCI - Super Micro Computer, Inc. is down 25% this week, along with Intel $INTC, potentially on earnings.
QBTS - D-Wave Systems down 25% on quantum computing concerns
RGTI - Rigetti Computing also down 25% on quantum computing concerns

This is all happening at the same time that the S&P 500 ETF is down around 5%, but mostly in a downward direction. Today the market is higher, taking back about a third of the loss, but the damage to high BETA stocks is already done.

In conclusion, the benefit of holding high beta and low volatility stocks is that they do very well when the market is rising steadily. They move higher, often in lock-step with the overall market, and rarely have negative surprises. However, when the markets correct, these stocks also move quickly downward. The news driving the declines seems independent (reverse split, earnings surprise, etc.) but the declines happen. If you invest in high beta stocks, hedge against the downside risk.

The other thing about these stocks is that the market has a short memory, and it is likely that if they can find their footing and rise again on good market news, they can keep their position and market focus, and rise again.

Was this just a Fed FOMC-induced fixed income temper tantrum?

• Who knows, but highly unlikely. This would be an emotional response to waiting until September 2024 to begin raising policy rates by a quarter or a half of a percent.

Was this a great 'unwinding' trade from Japan?

• Japan's central bank raised rates, and indicated a tightening of rates (from 0% to 0.25%) to fight their nascent inflation, which is expected to continue. This 'I have read' caused a great unwinding of Japanese cash in U.S. markets, as it all ran back home to earn an extra quarter percent (soon to be half a percent if you believe the Bank of Japan Governor Kazuo Ueda).
• Highly unlikely in our opinion, although Japanese fixed income policy rates have been near zero for the past seventeen years, and this must feel a shock to some market participants. I suppose many assets can make the trek from Japan to the U.S. in seventeen years of near-zero interest rates. Who knows how much of the fifty trillion to 55 trillion USD invested in the U.S. equities markets is funded by Japanese savings?

This could be end of irrational exuberance, helped along by Summer trading desks and market technical instability.

• Maybe the market just needed a pause to convert profits into cash, to allow a few big trading desks take a Summer vacation in early August. The hypothesis is that trading desks would have lowered their risk control levels, and junior traders could not handle the volatility. Combine that with a market shut-down of retail traders (Monday, August 5, 2024 saw retail traders unable to log in or trade on major platforms), and it could have been a march of the market losers doing all the wrong things for two days in response to the Bank of Japan raising rates. We think this is part of the problem...the market became disorderly.

We did have market uncertainty from the introduction of VP Harris and Tim Walz into the 2024 U.S. presidential race. We do not under-estimate the impact of a diverse and progressive word-salad, San Franciscan challenge to a felonious, conservative, loud and abrasive New Yorker. I feel a race like William Jennings Bryan against Barry Goldwater, and the only thing we are missing is the mushroom-cloud advertisement.

Thank you to the U.S. Library of Congress for preserving this ad.

The thing we noticed the most in this latest market correction, the thing that really surprised us and made us tweet furiously and sit confused in front of blaring, red screens of doom, was the response of U.S. interest rate futures.

What? Who cares about fixed income? Isn't that the boring area where grandma puts her nest-egg, and clips coupons every six months to make those sweet apple pies?

No, fixed income is a significantly larger market than U.S. equities. Here is a perspective I shared with my daughter yesterday taking her to music lessons:

• "The U.S. equity market that we study each day is worth around $50T, maybe $55T on a very good day."
• "The U.S. Federal Government has debt of $35T, and that does not include states, municipalities, or all the corporations? I would guess they owe $100T, so the fixed income market is around 2x the stock market in size."

Net-net, the 13-week UST rate and the 10-year UST rate both crashed. The value of fixed income rose quickly and decisively. We think this was the play on Monday.

Gotta go...markets open in 4 minutes. Have a great trading day, and good luck to all #GLTA.

New Clients Welcome
+1.312.515.7333
Non-discretionary investment advice.

Run for the hills. The VIX is inversely correlated to the US stocks, especially the NASDAQ 100 but also the S&P 500. At the same time, the 10-year US Treasury Note is showing yielding 3.7%, which is also down from around 3.9%, 4%, and 4.25% we have seen recently. There is a flight to cover the 10-year, or to lock in that yield to ride out a potential U.S.-led global macro-economic storm.

At least, that is the narrative.

The other narrative is that a large trade came in to buy long-duration US Treasuries last week after the Fed FOMC held rates steady, taking one last ride on falling rates. That trade crowded out other equity trades, and is causing volatility in the Japanese Yen. The result is a rout in US Equities, and Japanese Equities. We read last night of a trade called a volatility control trade that has sold off $64B in U.S. equities since Thursday. Could be a thing...we run a volatility controlled, high beta model and it was down significantly on Friday.

So, what do we see:
US Equity Futures are down almost 5% this morning
- S&P 500 down 3.44%
- NASDAQ 100 down 4.7%
- Russell 2000 down 4.25%

VIX up
US Treasuries up
Gold down
Oil down
Bitcoin down significantly
Japanese Yen up (against the US Dollar)
Grains are down, mostly.
Metals are down, livestock is down, and energy is down.

I would guess that the 'buy the dip' forces are gathering to pick up the pieces after today's storm.

Good luck to all. Our Chicago Quantum Net Score top pick is down again in pre-market. This is an aggressive sell-off of risk in the markets. 

The VIX rose twice recently, and reached its peak as the NASDAQ Composite 100 fell.

Thank you Koyfin for the visualization.

The VIX is the sense in the market of the future volatility. It drives the price of insurance (calls and puts) on major indices like the QQQ and SPY.

I look at this like a cause and effect, but I might have gotten it backwards. I usually think that the VIX reflects nervousness in the market, fear of future volatility, and therefore it goes up, and then stocks react. It could be that way for some investors. 

Alternative Hypothesis:

What if the cost of calls and puts goes up, because investors are buying more of them to hedge the market, or even to profit from a change in the market? What better way to profit from a sell-off than to buy calls and short the market (upside protection), or to buy into the market and buy puts to protect against a fall (downside protection).

When we look at the attached chart, it looks like the market purchased more calls and puts, and drove up the price of insurance, then the market fell, the options blew out, and the price dropped again. As the price drops, and less insurance is purchased, the market rises again and the cycle continues.

Not sure this makes sense in the real world, but the chart is a little too perfectly aligned to be a coincidence.

VIX is low, market rises. VIX rises, market falls. This is only true in NASDAQ 100 and to some extent the S&P 500, but not the RUSSELL 2000. That market moves independently of the VIX, or if anything this last time it went up with the VIX. That could be a coincidence, or just market participants making two bets at once (sell the large caps while buying the small caps).

Hope you liked this post.
Comments and replies welcome.

Good morning to my faithful and interesting readers. I appreciate you. Please comment if you would like something different, more info, a follow-up, or just to say hello. 

The largest stocks, typically growth stocks with high expectations, fell yesterday. The largest market capitalization stocks, the ones where the money flows into when people buy passive index funds (like the S&P Index 500 or NASDAQ Composite 100) were lower, and significantly so.

As seen above (thank you Finviz for the three visualizations), the largest rectangles tended to be red, with a few notable exceptions in "main street stocks" like Home Depot, Cat, Exxon Mobil and Chevron, Berkshire Hathaway, Coke and Pepsi, Merck, J&J and Abbvie.

The homework we did last night showed 16 of the top 26 US listed stocks, by market capitalization of equity, fell yesterday and some of the declines were material, significant and meaningful. NVIDIA and TESLA falling more than 5% in a day. Most stocks being down 2% or more. This has the impact of reducing the total value of the stock market, without most people noticing.

Technical analysts would call this day a distribution day, because people sold the most valuable stocks (maybe closing out long bets), and also bought smaller stocks (maybe closing out short bets). This is our hypothesis of what happened, investors moved to the sidelines on Thursday.

You can see the largest rectangles, by far, were red. The losses were focused on the most valuable stocks.

This chart, also from Thursday, July 11, 2024, also shows the impact on stocks. This view is by industry, and only shows S&P 500 Equity Index stocks that fell on that day (1-day change).

The silver lining is that small caps screamed higher yesterday. This is an ETF that we like that moves with small capitalization stocks in a magnified way. It rose almost 11% yesterday.

In conclusion, what we saw was an exit of the equities market (maybe exiting long positions), and a rotation of buying into small cap stocks (maybe to close out shorts).

We sell analysis of individual stocks, and we sell access (on a daily basis) to our full market analysis, which we call the Chicago Quantum Net Score analysis. If you would like to learn more, give me a call at 312.515.7333 or check out the website at www.chicagoquantum.com.

New Update: The June 28, 2024 short data came out from NASDAQ and short interest has more than doubled to just over 300,000 shares. With the move to OTC on June 18, 2024 (market open), 1.4 million shares outstanding, and another 1.05 million warrants in the money, this could be a wild ride as shorts cover, or don't cover, and wait for resolution.

$TBLT: Where did all the new shorts go?

Short volume lower than I have seen in many months!

ToughBuilt Industries: Confidently going into OTC!
In the chart below, we plotted the last four trading days against short volume (Source FINRA), excluding 'excluded short volume.' This is calculated as total shorts (all exchanges) divided by total volume.

We have seen this percentage fluctuate around 50% for all the months we are in this stock, with likely as many days above 50% as below. 

​Thank you FINRA for the data.

We do see very few shares available to short. Thank you shortables dot com for the data. Also, the cost to short stocks is far higher than it has been in the past, running around 100% of the price over the year. So, you pay for the stock anyway, so why short it?

What is our hypothesis?

1. The stock is seeing lower volume, after a period of very high volume. It is possible that the 'short squeeze' crowd has accumulated the stock and is ready for a huge burst of price before the stock moves to OTC. This gives the 'pumpers and dumpers' a chance to exit their stock position with a gain while the stock is still on NASDAQ. Confidence: 10%

2. The stock has doubled the float since the offering, from 770 thousand shares to 1.4 million. There are an additional 1.05 million warrants that are near the money at current prices. Those warrants gave investors the chance to short the stock already, including naked shorts that will be covered with warrants. Maybe the shorts are already 'all in' and covered by warrants? Confidence: 50%

3. The uncertainty over the company's latest news on July 3, 2024 could have been priced into the stock via the shorting. The company's stock, in our opinion, is undervalued against fundamentals, assuming they are a going concern and continue to trade on NASDAQ. It is possible that the stock would have run much higher had the uncertainty around their board of directors and financial statements been absent. Confidence: 20%

4. The stock has been fully shorted already, and since June 20, 2024, based on the recent doubling of the stock price. Confidence: 20%

Where do we go from here?

We love the company and the company's stock. We think this stock undervalues the company and is  trading at a significant discount given the history of dilution (which we think is behind us based on improving fundamentals), and the uncertainty over their financial reporting. The 'big date' of July 18, 2024 when the stock gets suspended from trading and delisted at market open puts a huge risk factor on this stock.

We will be buying more, adding to our long position, after the uncertainty is behind us.

We are an investment advisor, registered in Illinois. We sell investment advisory services for a fee, and offer an analysis of ToughBuilt, delivered by way of a two-hour conversation, for $250. We are non-discretionary investment advisors, so you pay us for our time, efforts and expertise, not based on how much money you invest.

Good morning to my faithful readers. There is a significant update on ToughBuilt Industries Inc., NASDAQ ticker symbol $TBLT.

We sell investment advice on this stock, and are open for business today. Please reach out and we will tell you what we see.

​By close of business tomorrow we will be publishing a blogpost on the stock.

We are at market closed on July 3, 2024, with a long weekend ahead of us. I am happy to be able to relax with family, friends and fireworks to celebrate our nation.

I check the publicly available bills of lading on ToughBuilt, and boo-yah, another hit for ToughBuilt shipping StackTech TM products to Lowe's. July 2, 2024 on the Maersk Essen, we see 1,098 cartons weighing a combined 30,752 pounds shipped to Lowe's to fill two orders for a total of 1,722 units of StackTech. We found eight bills of lading showing shipments arriving on June 24, 2024, on both the CMS CGM Endurance and the Gustav Maersk to Lowe's both in Seattle and Los Angeles, and each BOL had about 550 cartons.

We generally see the first generation of StackTech products in Lowe's and occasionally they get in the 3-drawer large box which is what we would buy as the middle of our stack.

I have been buying product for personal use (and gifting) from Menards recently, mostly bags and tools. I also bought a Quickset Workbench which has been great for fixing interior doors. Solid and stable. I can plane and sand a large interior door on it with only two clamps. The product selection on the shelves is thinning out in Chicagoland, which means that Menards may not be restocking my local stores. They have been getting shipments to fill my orders, which I pick up in-store.

There is absolute silence in terms of press releases, SEC filings, and social media.

This stock has been at zero borrow (no shares available to short) since the run up in share price happened on June 20, 2024.  Consistently zero borrow, or the ability to borrow maybe 3000 shares, which goes to zero quickly. The cost of borrowing (the fee) now exceeds 100%, so shorting the stock for a year costs the full price anyway, plus what is paid when buying the stock to cover the short.

We have no available financial statements (10-K and 10-Q) since September of 2023. This has no immediate impact on investors, but if it continues then the stock moves to an over the counter listing, and is more costly to trade.

We remain optimistic on the stock and the company. Good luck to all.
Jeffrey Cohen
Happy Fourth of July Holiday for those who celebrate.

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.
​

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]
​

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.
​
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.

Jeffrey Cohen, US Advanced Computing Infrastructure, Inc.

We create a list of stocks with the largest price declines over the past year. We capture this by comparing the last close against the average price over the past year. This reflects the average loss from investors that bought the stock, and held it, over the past year.

All of these stocks are down by 85% or more in the past year, vs. average.

They say to buy low and sell high. However, sometimes buying low means holding lower. That is the case today, on May 28, 2024, watching the market after close.
​

We notice a few things.

• First, these stocks are overwhelmingly lower today, on a day when the NASDAQ reached a new high on NVIDIA strength.
• Second, these are small cap stocks. This is intuitively right. These stocks have fallen in value dramatically, and hence are low cap stocks. If these companies survive and thrive, then these valuations could become attractive in the single or double-digit equity capitalization levels.
• Third, we see our share of biotech and foreign firms. These can be hard to buy, hold, value and understand.

The number one stock on this list (bottom listing) is CRKN or Crown ElectroKinetics Corp. This stock was recently pumped up by 100% in a single day, then fell back. This stock is on the radar list for momentum trading. FFIE was recently $0.04 per share, and is now up over 25x to $1.17. These low-cap stocks can really move with the right momentum and attention, that reflects in volume and one-day excitement.

By Jeffrey Cohen, US Advanced Computing Infrastructure, Inc.

Today, we highlight a few stocks that had 10x or more of typical volume on May 24.

Why? These stocks were aggressively traded on Friday, and we expected them to be aggressively traded today (Tuesday, after a Monday holiday).

Stocks with the highest relative volume on May 24, 2024.
   1 LUCY   23374.9% Innovative Eyewear Inc                            
   2 NCPL   12439.2% Netcapital Inc                                    
   3 VSTM   7418.7% Verastem Inc                                      
   4 HLTH   6909.0% Cue Health Inc                                    
   5 SNPO   3652.1% Snap One Holdings Corp                            
   6 ONCO   2382.5% Onconetix Inc                                     
   7 SMX    2170.9% SMX (Security Matters) Plc                        
   8 GNLX   2147.5% Genelux Corp                                      
   9 KRMD   1736.0% KORU Medical Systems Inc                          
  10 KITT   1725.5% Nauticus Robotics Inc                             
  11 CNSP   1648.2% Cns Pharmaceuticals Inc                           
  12 MRUS   1461.7% Merus N.V                                         
  13 OPTT   1391.5% Ocean Power Technologies                          
  14 MBIO   1351.1% Mustang Bio Inc                                   
  15 SCPX   973.6% Scorpius Holdings Inc.                            
  16 TOVX   850.1% Theriva Biologics Inc                             
  17 WDAY   793.6% Workday Inc                                       
  18 KRON   661.5% Kronos Bio Inc                                    
  19 LIDR   658.2% AEye Inc                                          
  20 LILM   646.1% Lilium N.V                                        
  21 BCAB   643.5% BioAtla Inc                                       
  22 SLF    607.4% Sun Life Financial  Inc.                          
  23 AMPL   561.2% Amplitude Inc                                     
  24 BNED   540.3% Barnes & Noble Education Inc    

So, what happened today on Tuesday to stocks with 10x relative volume?

​Without looking, I know a few of these went crazy, with a few of them crashing lower.

​

The first note is that these stocks are typically very small capitalization names. They can be pumped, dumped, and massively impacted with relatively small volume...but with significant volume the sky (price up), or ground (price down), is the limit.

The second note is that these stocks were generally lower, with a few much lower. My guess or intuition (not advice) is that these stocks are being driven lower to allow for a Wednesday or Thursday pump higher, then another drive lower.

Some stocks are missing from our list based on intuition, which could be that they failed the data validation test in our quant run. 

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

We run our model frequently, but tonight we thought about it in a different way.
The best stock picked is a terrible stock with a back story. However, they paid out an outrageously large dividend and the stock fell 66%, or 3x the dividend, so this stock looks amazing to our model. Huge dividend payout. High expected return. Low variance. And now a low valuation. What could go wrong for the investor?

We don't know what could go right (it recovers) or wrong (it goes bankrupt), but we know that this is not the intention of the model. So, tonight, we are marking down the 'dividend adjustment' in our model from 100% to 50%. This works to 'add back' the price drop of the full dividend that we assume the market made on the ex-dividend date. We are lowering that adjustment today to add back 50% of the dividend paid to the stock price.

The second thing we did was to manually remove 11 stocks with a 20% or more dividend payout that actually happened in the past year, when divided by the stock price. For these 11 special stocks, one of which paid the outrageous 1x dividend, and another paid out a 1x dividend in response to a short attack. If they don't recur, we can add them back in a few months.

We also found a startling discovery. When we look at our stocks and use the raw variance and co-variance, we get a set of stocks to hold in our optimized portfolio. These have the best risk-adjusted return. However, when we look at a 'side calculation' we did to be able to compare all stocks, we divided actual variance by the square of the average stock price, and this gives a nice, simple percentage like 1% or 10% or in some cases, 100%. Low risk stocks score under 10%. This simplified model works when doing an excel spreadsheet analysis.

However, we are uncertain what would happen if we adjusted all risk factors before they are put into matrix form (variance, covariance, etc.). However, we do want to 'dampen down' the massively high expected returns for individual stocks in this smoking hot market, and we want to make variance more important in the selection of stocks. The market is so hot, and many stocks are now sporting BETA values greater than 3.0, that a hot stock could show an expected return of 40% or more.

We made a few adjustments to account for this. We set an adjustment factor to cut the CQNS_Power, or the relative weighting of expected returns, from no adjustment (or 100%) to 25%. This should significantly reduce the power of expected returns (which are running hot), and increase the relative power (unadjusted) of the stock price variance. A cut from one to one-fourth is a massive cut (over  90%), so we will see if it needs to be tuned to say one-third, one-half, three quarters, or even 95%).

We also cut the stock market return ceiling from 16% to 15%. We use the CAPM process to calculate expected returns. This assumes that the only thing that matters in predicting future stock price returns is to calculate the expected return to risk (or the return to holding risk assets over risk-free assets). We have now set a 1% lower cap to the return used in that calculation, from 16% to 15%. This should be a very small change, and within the realm of empirical evidence.

What do we expect to see:
1. We expect the dividend anomalies to be mitigated and eliminated. Paying out a 1x dividend will not 'head fake' our quant model.
2. We expect there still to be high expected returns (the market is hot), but they will have less weight on the model. The model should tip towards lower risk stock portfolios in this next run.
3. We will look at the small 'excel test' that compares the CQNS score and the simplified expected return - normalized variance calculation to see if the differences are still there, and if they are less intense.

Hope you enjoyed reading our 'inside baseball' on how we model our math and analyze stocks.

P.S. We recently decide to add back the smallest of the small cap stocks to our model. There is market action afoot that is pumping up small-capitalization stocks, so we want to bring visibility to those names. For those who only invest in larger capitalization stocks (say $250M and above), we can still tailor our run for your specifications.

Today was a pretty good day before the markets opened.

We were all getting used to 'higher for longer' interest rates by the Fed. Housing prices are rising, but so are mortgages, so as we expect housing sales fall. This creates a little drag in the economy. It also hurts income for the Pickup Truck Professional that works in construction, home improvement and related fields.

Current Events:
The war over Taipei has not started yet, but the People's Republic of China did send a few aircraft and ships to blockade it, so there was some tension there. The Ukraine vs. Russia war is not escalating, but Ukraine is losing. So, that isn't very good news. Israel and the proxies of Iran continue to fight, but that seems to have simmered down to a war of attrition. Politics are as usual. The news is fairly boring, and in fact I made it through about four new applications without a single 'oh no' or 'oh boy.'

The news from last night was that Nvidia was continuing to grow earnings because people want to buy their products. That seemed bullish.

We are still back to what the Federal Reserve Bank will do, but it seems they will keep interest rates between 5% and 6% for the next year or so, and continue to unwind their balance sheet every month.

So, what happened?

We are not sure. We did not hedge our one position that has somewhat liquid options, and we are upset about that because we have wasted the chance to cover about a 15% loss over the past week on one position. Hindsight is always 20/20, but I think we may be more aggressive in hedging. Need to remember that the hedge is not a martingale (in disguise). It is supposed to pay when the underlying stock goes the other way than what we want. Last time we did a huge martingale and lost (or spent) the option premium as we waited.

There are economic cycles at play here that nobody seems to be talking about, except manufacturing and retailer CEOs. Economic activity in terms of buying things at the retail level is slowing down. We could blame Amazon and eBay for taking all that business, but I am not sure this is a zero sum game. I think retail activity is down.

Well, let's see what tomorrow brings. If the market continues to fall, the high BETA stocks will fall faster than the low BETA stocks. For more information about BETA, please visit our negative BETA webpage here and our large and small stock BETA website here.

May 15, 2024
Jeffrey Cohen, President
US Advanced Computing Infrastructure, Inc.
​

We reviewed Q1 2024 earnings call transcripts for retailers and manufacturers in the home improvement, tools, and automotive tooling space. 

Companies reviewed:
Amazon.com, Emerson Electric, Home Depot, Fastenal, Snap-On, Hillman Solutions, and Stanley Black & Decker. 


AMAZON.COM (Retailer)
"We remain focused on making sure we're offering everyday low prices, which we know is even more important to our customers in this uncertain economic environment. As our results show, customers are shopping, but remain cautious, trading down on price when they can and seeking out deals."


Emerson Electric Company *(big, industrial tooling manufacturer)
"We continue to have confidence in the underlying market conditions. China weakness in the factory overshadowed by strength in India, Europe, Middle East and the rest of Asia."


Home Depot (Home improvement retailer)
"The quarter was impacted by a delayed start to Spring and continued softness in certain larger, discretionary projects. Big ticket count transactions or those over $1,000 were down 6.5% compared to the first quarter of last year. We continue to see softer engagement in larger discretionary – projects where customers typically use financing to fund the projects such as kitchen and bath remodels.

Pro and DIY customers’ performance was relatively in line with one another, but both were negative for the quarter. While Pro backlogs remain relatively stable, we hear from our Pros that homeowners continue to take on smaller projects."


Fastenal Company
"Sluggish demand. March was the first 50+ PMI reading after 16 consecutive months of sub-50 Purchasing Managers Index (PMI) readings. 

The tone of business activity from regional leadership is best characterized as steady at weak levels. Severe weather in January harmed demand."


Snap-On Tools (Automotive Industry tools manufacturer)
The automotive repair arena remains favorable. Vehicle OEM and dealerships continue investing in tools and equipment. Shops are humming, the bays are running at full capacity. Technicians (Techs) are well positioned, and they continue to invest but it's in quick payback items that will make a difference right away, but don't require a long-term payment stream."

Europe now has more than half a dozen countries in technical recession. China continues to struggle. India [is] booming.

Tools Group pivoting to smaller items, smaller purchases, with immediate payback. Sales [saw an] organic decrease of 7%."


Hillman Solutions Corporation (Home improvement items manufacturer)

"40 basis point headwind from price. The macroeconomic landscape in the home improvement sector continues to show muted signs of improving.

The Pick Up Truck Pro continues to be busy albeit, with smaller projects. DIY is starting to get more active, as the weather improved throughout the quarter. The overall market and foot traffic at our retailers were both negative compared to last year. Our retailers are cautiously optimistic for the second half of this year.

​We'll continue to manage our cost structure and business for this environment."


Stanley Black & Decker
"A significantly worse negative macro environment and corresponding revenue performance in 2023 and '24 versus our initial expectations at the outset of our transformation in mid-2022."

Cyclically depressed outdoor business. Professional (DeWalt) showed strength, but muted consumer and DIY demand, which pressured volume. Pricing was relatively flat, consistent with our expectations. Organic revenue for hand tools declined 7% pressured by lower DIY demand.

Tools & Outdoor performance by region. North America was down 2% organically, Europe, organic revenue was down 3% as declines in France and Germany were partially offset by growth in the Nordics and the UK. All other regions were up 7% organically in the quarter, driven by mid-teens growth in Latin America, Brazil, Mexico, Central America and the Caribbean"

May 14, 2024 Jeffrey Cohen, US Advanced Computing Infrastructure, Inc. 

Amazon.com
Let's look at Amazon's Q1 2024 sales and pricing performance. Not sure we can isolate home improvement, but we can capture global retail consumer trends. We will not be reviewing AWS, only Amazon Retail.

Dave Fildes - Vice President, Investor Relations
Andy Jassy - Chief Executive Officer
Brian Olsavsky - Chief Financial Officer

Increasing breadth in stores items, more selection: "Starting with our stores business, despite having hundreds of millions of items and the broadest selection available, we remain intensely focused on adding even more selection."

"We've recently launched a new generative AI tool that enables sellers to simply provide a URL to their own website, and we automatically create high-quality product detail pages on Amazon. Already, over 100,000 of our selling partners have used one or more of our GenAI tools."

"We remain focused on making sure we're offering everyday low prices, which we know is even more important to our customers in this uncertain economic environment. As our results show, customers are shopping, but remain cautious, trading down on price when they can and seeking out deals."

Speed in fulfillment matters

​"In this past Q1, we delivered to Prime members at our fastest speeds ever. In March, across our top 60 largest U.S. metro areas, nearly 60% of Prime members orders arrived the same or next day. And globally, in cities like Toronto, London, and Tokyo, about three out of four items were delivered the same or next day. Faster delivery times have another important effect. As we get items to customers this fast, customers choose Amazon to fulfill their shopping needs more frequently, and we can see the results in various areas, including how fast our Everyday Essentials business is growing and the continued increase in Prime member purchase frequency and total spend with us."

Amazon took market share from all retailers
"In the North America segment, first quarter revenue was $86.3 billion, an increase of 12% year-over-year. In the international segment, revenue was $31.9 billion, an increase of 11% year-over-year, excluding the impact of foreign exchange. "

Emerson electric Company (EMR)

Colleen Mettler - Vice President, Investor Relations
Lal Karsanbhai - President & Chief Executive Officer
Mike Baughman - Chief Financial Officer
Ram Krishnan - Chief Operating Officer

CEO Karsanbhai said, " We continue to have confidence in the underlying market conditions, driven by demand in the process and hybrid markets aligned with secular macro trends; energy security and affordability, sustainability, nearshoring and digital transformation."

"The P&L execution was nearly flawless in the quarter. Underlying sales grew 8% operations leveraged at 54% expanding EBITDA by 140 basis points to 26% and delivering 25% EPS growth and 32% free cash flow growth. 2024 is the year of execution with no major portfolio moves planned. And through the first half, we feel confident and have raised our outlook for the year."

"Sales, operating leverage and adjusted earnings, all exceeded Q2 expectations. Stronger volumes were driven by outstanding operational performance and more backlog conversion than expected. Price/cost and business segment mix were also more favorable than expected."

China weakness in the factory overshadowed by strength in India, europe, Middle East and the rest of Asia. "Factory automation demand remained soft with continued weakness in China. Europe, Asia and the Middle East were particularly strong in the quarter with persistent strength in process markets driven by energy transition and traditional energy markets. One noteworthy example is India, which has seen double-digit growth in five of the last six quarters, including this quarter, driven by broad economic expansion across multiple segments."

All this growth, with expanding margins
"In Q2 gross margin was 52.2%, a 430 basis point improvement from the prior year."