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Even Jeff Bezos Suggests Consumers Should Slow Spending, Can Holiday Spending Meet Expectations?

Posted on November 28, 2022November 29, 2022 by phoffman@channelchek.com

Retailers May See More Red After Black Friday as Consumers Say They Plan to Pull Back on Spending

Retailers are gearing up for another blockbuster holiday shopping season, but consumers burned by the highest inflation in a generation may have other ideas.

Industry groups are predicting another record year of retail sales, with the National Retail Federation forecasting a jump of 6% to 8% over the US$890 billion consumers spent online and in stores in November and December of 2021.

But Jeff Bezos, founder and chairman of the biggest retailer of them all, seems to be anticipating a much less festive holiday for businesses. In November 2022, Amazon said it is laying off 10,000 workers, one of several big companies announcing job cuts recently. Bezos even cautioned consumers to hold off on big purchases like cars, televisions and appliances to save in case of a recession in 2023.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Ayalla A. Ruvio, Associate Professor of Marketing and the Director of the MS of Marketing Research program, Michigan State University and Forrest Morgeson, Assistant Professor of Marketing, Michigan State University.

Results from our new survey suggest consumers appear to be already taking Bezos’ advice, as a combination of soaring consumer prices, rising borrowing costs and growing odds of a recession weighs on their wallets. And if our survey results do pan out, it may mean the recession everyone’s worried about happens sooner than expected.

Crisis Behaviors

We conducted our survey in mid-November, about a week before Black Friday, the historical start of the holiday shopping season. The day after Thanksgiving is known as Black Friday because it signals the period when retailers hope to sell enough goods so that their income statement shows “black,” or profit, for the year rather than “red,” which refers to losses.

We asked over 500 consumers a series of questions about their spending plans, concerns and priorities during this year’s holiday season. Participants were split evenly between men and women, and almost two-thirds had a household income of $70,000 or less.

Overall, the most alarming conclusion from our research is that consumers are reporting consumption behaviors typically exhibited during an economic crisis, similar to those observed in 2009 by consultancy McKinsey during the Great Recession.

One data point stands out: An overwhelming 62% said they were concerned about their job security, while almost 35% indicated they were “very” or “extremely” worried about their financial situation.

Here are three behaviors we found in our survey that suggest consumers are behaving as if the U.S. economy is already in a recession.

1. Spending Less

Not surprisingly, cutting spending is the first thing consumers do during economic turmoil.

A study by McKinsey in early 2009 found that 90% of U.S. households cut spending due to the Great Recession, with 33% of consumers indicating a significant cut.

Similarly, respondents to our survey said they plan to spend, on average, around $700 this holiday season, substantially lower than the roughly $880 consumers spent during each of the past three seasons – including early in the pandemic in 2020.

About a third of our sample intended to spend “slightly” or “much” less than in 2021, while 35% said they would spend “about the same” – which from a retailer’s perspective means spending less because last year’s dollars don’t go as far today. The rest said they planned to spend a little or much more.

Inflation is one of the key reasons consumers say they are spending less. Almost 80% of respondents said they are either moderately, very or extremely concerned about the surge in prices, and 87% said those concerns would affect their holiday spending behavior, such as by buying gifts for fewer people or purchasing less expensive items.

Some of our respondents even said they were planning to make their own gifts or buy used goods, rather than shop for new items. The secondhand market has boomed in the last few years, and many shoppers view this option as a way to combat inflationary pressures.

2. Planning Ahead

Another thing consumers do when they sense a troubled economy is they plan their purchases more carefully and maintain self-control over spending.

Common strategies include spending more time searching for the best deals, adhering to strict shopping lists, prioritizing necessities and making purchases earlier to spread out their spending – all of which were mentioned by our survey respondents.

We may already be seeing signs of this last strategy. Retail sales for October were up 1.3% from the previous month and up 8.3% from October 2021, which may reflect consumers’ early holiday shopping. If that is the case, this early shopping may result in slumping sales in December.

Also, purchasing early, aided by the plethora of steep discounts offered well in advance of Black Friday, allows consumers to control their shopping behavior better and reduces the risk of impulse buying. Reduction of impulse buying is a strong indicator that consumers are shopping like the economy is in recession.

In our survey, we found that over 50% of participants said that they would be using savings to cover the cost of holiday spending, with many stressing that they would pay with cash. Using cash as a primary form of payment is the main tool consumers have to control spending.

Only 15% of our respondents said that they would use buy-now-pay-later options, which to us is another sign that consumers are preferring cash over forms of credit that creates a new debt.

3. Hypersensitivity to Price

During economic crises, consumers become hypersensitive to prices, which trump most other considerations in the minds of consumers.

A whopping 90% of our respondents confirmed that price is their major consideration when shopping during the holidays this year. Other elements of price sensitivity are free shipping, product value and the level of discount, if any.

The singular focus of consumers on price gives retailers a wide range of potential responses, including promoting house brands and private labels that are perceived as having greater value for money. In fact, according to the 2009 McKinsey report, one of the biggest shifts in consumer behavior during and after the 2008 recession was the switch in preference from high-priced premium brands to value brands that tend to have lower prices but still decent quality. During an economic slowdown, consumers typically stop buying brands they are not strongly connected with or loyal to.

Consumers in our survey said buying brand names will be one of the least important influences on their purchases this season.

While economists debate whether a recession is coming, or even whether the U.S. is already in one, our data suggests consumers are beginning to behave like one is already here. That risks becoming a self-fulfilling prophecy as consumers tighten their belts.

Deciding if You Should Attend an Investor Roadshow

Posted on November 28, 2022November 28, 2022 by phoffman@channelchek.com

Roadshows Help Investors Truly Understand a Company’s Prospects

Around the office, we debate whether Roadshow should be one word or two. We’ll never all agree, but we do all know that an investor that strives to be diligent in understanding companies in which they may invest, would likely benefit from attending an available management roadshow.

If you aren’t familiar, a roadshow is usually a series of meetings in various locations where the management of a company with either outstanding securities or undergoing an initial public offering (IPO), makes themselves available to investors in a presentation format. Each meeting’s presentation will typically include its business model, current performance, and future potential, along with competitive advantage. When an event like this is available with a company an investor would consider, there may be no better supplement to the investor’s other research than to sit with management and be able to hear from the person at the helm what their expectations are, and the biggest risk to those expectations.

Roadshows are typically organized by a financial firm that has a relationship with the company. In an IPO, this may be the firm bringing them public; for a debt issue, it may be the underwriter. For issuers already public with current outstanding securities, the introducing firm may have a relationship with the company where they are looking to bring more awareness to the opportunity.

Roadshow Events

Potential investors ask to be invited to attend a roadshow, then gather and listen to the management presentations and participate in the question/answer period. This could occur in a private room at restaurant, over cocktails, in a company office, or basically any other forum where a clear picture of the company can be conveyed and the attendees can get the information they need to understand the opportunity.

As the purpose is to get in front of and increase investor awareness, these presentations are most often held in cities that help allow maximum motivated investor participation. Technology has ushered in an increase in roadshows that are now held virtually. This allows for a broader audience in faraway locations. Smaller investors that have never been to a roadshow should not be shy in asking for a determination if they meet the expected investor level, to attend. Often times companies actually prefer to be broadly traded by many small investors than to have a few large shareholders.

Channelchek’s Involvement

The ongoing mission of Channelchek is to provide actionable ideas and quality equity research to investors in small and microcap companies. Along with Noble Capital Markets, we hold ongoing Meet the Management investor meetings with companies with interesting stories and prospects. These roadshows are often in person and at times online. To see if a company you may be interested in will be meeting in your town, click here for the current list of Channelchek/Noble Capital Markets roadshows.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.channelchek.com/news-channel/noble_on_the_road___noble_capital_markets_in_person_roadshow_series

The “Pilgrims” of Today

Posted on November 24, 2022November 24, 2022 by Admin

Entrepreneurial Courage and Perseverance Define the Pilgrims

Originally Published November 27, 2019 (Channelchek)

This week, across the U.S., families and friends, young and old, will gather to celebrate the “most American” of holidays, Thanksgiving. The gatherings will most surely include traditional foods of the holiday while families enjoy their own tradition of sharing and gratitude. Thoughts may also drift to almost 400 years ago when in 1621 a determined group of 102 Pilgrims persevered to achieve a mission they believed in – an accomplishment that has had a positive impact for centuries. They met challenges from the very beginning during their two-month-long voyage on the Mayflower, and they struggled as the first Winter took the lives of half the population of settlers. These resolute individuals share many of the same characteristics as today’s newer business owners who are making sacrifices in their own lives, for a better tomorrow for themselves and their descendants.

Dictionary.com has four definitions for the word “entrepreneur,” the first reads: “a person who organizes and manages any enterprise, especially a business, usually with considerable initiative and risk.” It’s not a stretch to call the original settlers of Plymouth Massachusetts entrepreneurs. Their grit, ingenuity, initiative, and even willingness to learn and rely on others more experienced in their environment, was certainly entrepreneurial.

The Mayflower colonists did not go by the moniker “Pilgrims,” that tag came 200 years after their landing at Plymouth Rock. Instead they referred to themselves as the “Saints” to indicate their purity and feelings of being special or chosen. This feeling must have been a strong driver as they risked so much in a way that is extreme by any standard in modern America.

Today’s Pilgrims

The risk-takers today, at least those looking to sacrifice more than others for the dream of a better tomorrow, whether for themselves and their families or for the world at large, are the business entrepreneurs. Especially in fields that are “uncharted territory.” Some examples are companies relying on developing technology, scientific breakthroughs, or mineral exploration. As with most “firsts”, there are always unknowns, long lead times before any profit, and a shortage of capital. These are among the reasons building a business today, particularly in a groundbreaking field with unproven outcome, is a path taken by very few. Those that do, and then survive and thrive, have embraced being nimble, building alliances, persistence, belief in themselves, and asking for help when needed.

“All great and honorable actions are accompanied by great difficulties, and both must be enterprised and overcome with answerable courage.” – William Bradford, Second Governor, Plymouth Colony

Flexibility

The Pilgrims initially went to Holland, where they expected to be welcomed by people of different religions. Their main reason for having left England was to worship without constraints. The Pilgrims made their home at first in Holland, but the more secular life they found there was not going to lead to a future that matched their vision. They wanted to build their own colony where they would attract others who believed as they did – even if it meant starting with close to nothing. As entrepreneurs, they didn’t accept an undesirable outcome; they pivoted, changed their plans and redirected their effort, deciding to establish themselves and their future near Virginia’s Hudson River. While traveling, storms pushed them into Massachusetts, where they decided to rethink their plan once again. They then revised their plan and decided to find an area close to where they landed that would be suitable for farming.

To begin the two-month trip across the Atlantic, the Pilgrims borrowed money that, at the time, was an astronomical amount. The loan from, English capitalists looking to profit off the venture was for 1700 pounds. At the time, the average Englishman earned a tenth of a pound per day. As colonists, they first worked collectively to pay back this loan. They later divided acreage to work individually at farming their own land.

Alliances

After the first brutal Winter, the Pilgrims, who raised money in a business arrangement to finance their journey, again opened themselves up to being helped. This time by native Americans. They learned how to best plant corn, where to fish, and how to trap beaver and other furs. This helped lead the pilgrims to an abundance just one year later and a profit in their second year. Their debt was fully paid off in 23 years.

There are now over 10 million living Americans who are descendants of the Mayflower passengers. The undeniable traits of the entrepreneurs we now call Pilgrims have impacted the world. Entrepreneurs of today share the same traits and skills of those that came before; intention toward a dream, plan, persevere, adjust, negotiate, orchestrate help, and implement. The impact of entrepreneurs continues to shape the world and continue to have a positive impact on the future with their efforts.

Giving Thanks

Ideas have the ability to change the world. Those ideas that improve lives and positively impact the world are on the list of things we can be thankful for.

Paul Hoffman

Managing Editor, Channelchek

Scientists Uncover a Surprise in the Function of Essential Genes

Posted on November 22, 2022November 22, 2022 by phoffman@channelchek.com

Image Credit: National Human Research Institute (Flickr)

Scientists Unveil the Functional Landscape of Essential Genes

Nicole Davis | Whitehead Institute

A team of scientists at the Whitehead Institute for Biomedical Research and the Broad Institute of MIT and Harvard has systematically evaluated the functions of over 5,000 essential human genes using a novel, pooled, imaged-based screening method. Their analysis harnesses CRISPR-Cas9 to knock out gene activity and forms a first-of-its-kind resource for understanding and visualizing gene function in a wide range of cellular processes with both spatial and temporal resolution. The team’s findings span over 31 million individual cells and include quantitative data on hundreds of different parameters that enable predictions about how genes work and operate together. The new study appears in the Nov. 7 online issue of the journal Cell.

“For my entire career, I’ve wanted to see what happens in cells when the function of an essential gene is eliminated,” says MIT Professor Iain Cheeseman, who is a senior author of the study and a member of Whitehead Institute. “Now, we can do that, not just for one gene but for every single gene that matters for a human cell dividing in a dish, and it’s enormously powerful. The resource we’ve created will benefit not just our own lab, but labs around the world.”

Systematically disrupting the function of essential genes is not a new concept, but conventional methods have been limited by various factors, including cost, feasibility, and the ability to fully eliminate the activity of essential genes. Cheeseman, who is the Herman and Margaret Sokol Professor of Biology at MIT, and his colleagues collaborated with MIT Associate Professor Paul Blainey and his team at the Broad Institute to define and realize this ambitious joint goal. The Broad Institute researchers have pioneered a new genetic screening technology that marries two approaches — large-scale, pooled, genetic screens using CRISPR-Cas9 and imaging of cells to reveal both quantitative and qualitative differences. Moreover, the method is inexpensive compared to other methods and is practiced using commercially available equipment.

“We are proud to show the incredible resolution of cellular processes that are accessible with low-cost imaging assays in partnership with Iain’s lab at the Whitehead Institute,” says Blainey, a senior author of the study, an associate professor in the Department of Biological Engineering at MIT, a member of the Koch Institute for Integrative Cancer Research at MIT, and a core institute member at the Broad Institute. “And it’s clear that this is just the tip of the iceberg for our approach. The ability to relate genetic perturbations based on even more detailed phenotypic readouts is imperative, and now accessible, for many areas of research going forward.”

Cheeseman adds, “The ability to do pooled cell biological screening just fundamentally changes the game. You have two cells sitting next to each other and so your ability to make statistically significant calculations about whether they are the same or not is just so much higher, and you can discern very small differences.”

Cheeseman, Blainey, lead authors Luke Funk and Kuan-Chung Su, and their colleagues evaluated the functions of 5,072 essential genes in a human cell line. They analyzed four markers across the cells in their screen — DNA; the DNA damage response, a key cellular pathway that detects and responds to damaged DNA; and two important structural proteins, actin and tubulin. In addition to their primary screen, the scientists also conducted a smaller, follow-up screen focused on some 200 genes involved in cell division (also called “mitosis”). The genes were identified in their initial screen as playing a clear role in mitosis but had not been previously associated with the process. These data, which are made available via a companion website, provide a resource for other scientists to investigate the functions of genes they are interested in.

“There’s a huge amount of information that we collected on these cells. For example, for the cells’ nucleus, it is not just how brightly stained it is, but how large is it, how round is it, are the edges smooth or bumpy?” says Cheeseman. “A computer really can extract a wealth of spatial information.”

Flowing from this rich, multi-dimensional data, the scientists’ work provides a kind of cell biological “fingerprint” for each gene analyzed in the screen. Using sophisticated computational clustering strategies, the researchers can compare these fingerprints to each other and construct potential regulatory relationships among genes. Because the team’s data confirms multiple relationships that are already known, it can be used to confidently make predictions about genes whose functions and/or interactions with other genes are unknown.

There are a multitude of notable discoveries to emerge from the researchers’ screening data, including a surprising one related to ion channels. Two genes, AQP7 and ATP1A1, were identified for their roles in mitosis, specifically the proper segregation of chromosomes. These genes encode membrane-bound proteins that transport ions into and out of the cell. “In all the years I’ve been working on mitosis, I never imagined ion channels were involved,” says Cheeseman.

He adds, “We’re really just scratching the surface of what can be unearthed from our data. We hope many others will not only benefit from — but also build upon — this resource.”

This work was supported by grants from the U.S. National Institutes of Health as well as support from the Gordon and Betty Moore Foundation, a National Defense Science and Engineering Graduate Fellowship, and a Natural Sciences and Engineering Research Council Fellowship.

He adds, “We’re really just scratching the surface of what can be unearthed from our data. We hope many others will not only benefit from — but also build upon — this resource.”

Reprinted with permission from MIT News” ( http://news.mit.edu/ )

Michael Burry Appears Negative on Cryptocurrency and Positive on Gold Investments

Posted on November 18, 2022November 18, 2022 by phoffman@channelchek.com

If Cryptocurrency is not the Safe Haven it was Expected to Be, Will Assets Move Into Gold Investments?

In addition to any information discovered from Michael Burry’s 13F filing earlier this week, he’s been coming out in support of gold. He seems to expect that those that were seeking a “safe harbor investment” in various crypto-related investments are now having a change of mind. Despite his long positions held on September 30 and made public on November 14, he has teased that he could be extremely short the market; presumably, this could include any tradeable asset when you’re an investment analyst of this caliber.

Will Investors Rediscover Gold?

“Long thought that the time for gold would be when crypto scandals merge into contagion,” Burry wrote in a tweet this week.

The financial pressures spreading across the crypto industry that have helped destroy the crypto exchange FTX and exposed characters like Sam Bankman-Fried that may have been given too much trust, are causing reduced trust in digital assets.

Supporters and believers in the benefit of crypto had been using bitcoin and other tokens as a means of storage outside of securities. Their expectation has been that crypto is superior as a store of value during periods of inflation, currency depreciation, and economic turmoil.

Crypto prices have not offered much protection against plunging stock, bond, and real estate values. In fact, relative to the strong US dollar, crypto’s value has fallen off a cliff, offering no protection. The overall outstanding crypto worth has gone from $2.2 trillion to around $830 billion. Gold has not been rising during this period, but relative to US dollars, it is down only 3%.

Burry’s likely message is that the escalating cryptocurrency negatives will reduce demand for coins, yet demand for a safe haven asset would not be reduced. This could make gold again one of the only games in town for investors looking to protect against asset erosion.

Is Burry Short?

“You have no idea how short I am,” Burry said in a tweet this week.

He does not say he is short at all in this tweet. However, against the backdrop of many previous tweets warning against a market he believes will become more bearish, coupled with a holding report released that has five long holdings, the hedge fund manager of The Big Short fame is likely warning investors not to read too much positive into his fund’s holdings report. That report was released just before the tweet.

The value of long securities held in his roughly $292 million AUM was $41 million. As he demonstrated during the financial crisis, there are non-publicly reported ways to be short, even short beyond your AUM. Fund managers with assets over $100 million only have to disclose US-listed stocks in their 13F filings with the SEC each quarter. Excluded in the reporting are shares sold short, overseas-listed stocks, and other assets such as commodities.

In actuality, Burry’s increased positions in prison stocks and exposure to the company involved in making Artemis’ rocket boosters is more likely a sign that he likes the prospects of some companies while at the same time doesn’t like the broader market outlook.

Positive Tweets

In addition to his positive tweet on gold, Burry has suggested the Federal Reserve’s interest-rate hikes, which have weighed on market prices, could end in the spring. This was reflected in his October 24 tweet “Still think the Fed back off on QT early next year.”

Investing in Gold

Investors that look to gain exposure to gold, will typically buy gold bullion, gold funds, gold futures, and the stocks of gold mining companies. All have unique advantages. Investors looking to research junior miners of gold and other precious metals and natural resources, find Channelchek as an excellent resource to discover and research many different unique, actionable possibilities. Start here.

Paul Hoffman

Managing Editor, Channelchek

Michael Burry Just Reported His Long Positions

Posted on November 15, 2022November 15, 2022 by phoffman@channelchek.com

Scion Asset Management and Michael Burry Report Third Quarter Holdings

Four times a year, the quarter-end holdings of famous hedge fund manager Michael Burry become public through his firm’s required 13-F filing with the SEC. It’s newsworthy because people are interested in this iconic investor’s thinking. The list of 13-F securities is rarely more than a dozen positions and is just a one-day snapshot, but it can help one to understand his preferences and expectations.

The latest 13-F filing became public on Monday (November 14). It shows that he is not negative on all stocks, as he has built on his one position from the last reporting period, and added a few others. He clearly does not limit himself to only meg-cap companies. In fact two of his positions are small-cap stocks, one is a midcap, and one large cap.

Scion Asset Management’s Positions

His largest position is Geo Group (GEO) and represents 37.65% of the five. The shares represent 0.409% of GEO’s outstanding stock or 501,360 shares. The average price was listed as $6.42 per share.

The quarter-end market value of Scion’s GEO position was $3,309,000 consisting of 501,360 shares. This represents 0.4092% of the company. According to Scion’s Form ADV, filed on April 18, 2022, Scion had assets under management of $291,659,289. The GEO position is not likely a significant portion of his entire portfolio, but it represents more than a third of the firm’s 13F reportable securities.

Michael Burry first reported owning GEO Group during the fourth quarter of 2020. It’s a unique company, which may be positioned to take advantage of changes in the U.S. and internationally.

The GEO Group, based out of Boca Raton, FL, specializes in owning’ leasing, and managing secure confinement facilities, processing centers, and reentry facilities in the United States and globally. In addition to owning and operating secure and community facilities, GEO provides compliance technologies, monitoring services, and supervision and treatment programs for community-based parolees, probationers, and pretrial defendants.

For the year ended December 31, 2021, The GEO Group generated approximately 66% of its revenues from the U.S. Secure Services business, 24% from its GEO Care segment, and 10% of revenue from its International Services segment.

On October 28, in a quarterly research report, Noble Capital Markets, Senior Research Analyst Joe

Gomes confirmed his earlier price target of $15.00 and reported solid operating results during the third quarter.

Scion’s third largest position is mentioned second because it also provides for correctional facilities and ancillary service, it is CoreCivic Inc. (CXW). CoreCivic is a private detention facility with three segments, CoreCivic Safety, CoreCivic Community, and CoreCivic Properties. It provides a broad range of solutions to governments with corrections and detention management, a growing network of residential reentry centers to help address America’s recidivism crisis, and government real estate solutions.

In his November 4 research report on CXW Joe Gomes pointed to the excess capacity of CXW, indicating that much of that could soon be utilized as covid restrictions loosen. Corecivic has ample excess capacity from which to add to their bottom line under improving conditions.

Burry’s second largest 13-F holding is Qurante Retail Group, Inc. (QRTEA). The company is involved in video online commerce and owns the well-known HSN (Home Shopping Network) and QVC shopping network. Its segments market and sell a wide variety of consumer products in the United States, primarily using its televised shopping programs and via the Internet through their websites and mobile applications; QVC International segment markets and sells a wide variety of consumer products in several foreign countries, primarily using its televised shopping programs and via the Internet through its international websites and mobile applications; and Zulily markets and sells a wide variety of consumer products in the United States and several foreign countries. Its geographical segments include the United States, Japan, Germany, and Other countries.

Aerojet Rocketdyne Holdings, Inc. (AJRD) is a midcap company that is Scion’s fourth largest holding. It designs, develops, manufactures, and sells aerospace and defense products and systems in the United States. It operates in two segments, Aerospace and Defense and Real Estate. The Aerospace and Defense segment offers aerospace and defense products and systems for the United States government, including the Department of Defense, the National Aeronautics and Space Administration, and aerospace and defense prime contractors. This segment provides liquid and solid rocket propulsion systems, air-breathing hypersonic engines, and electric power and propulsion systems for space, defense, civil, and commercial applications, and armament systems. The Real Estate segment engages in the re-zoning, entitlement, sale, and leasing of the company’s excess real estate assets. It owns 11,277 acres of land adjacent to the United States Highway 50 between Rancho Cordova and Folsom, California, east of Sacramento. The company was formerly known as GenCorp Inc. and changed its name to Aerojet Rocketdyne Holdings, Inc. in April 2015. Aerojet Rocketdyne Holdings, Inc. was incorporated in 1915 and is headquartered in El Segundo, California.

Burry’s smallest holding is the largest company. As the only large-cap stock of the five, Charter Communications, Inc. (CHTR) operates as a broadband connectivity and cable operator serving residential and commercial customers in the US. The company offers subscription-based video services, video on demand, high-def TV, DVR, and pay-per-view. It also has Web-based service management and sells local advertising across various platforms for networks, such as TBS, CNN, and ESPN to local sports and news channels.

Take Away

Michael Burry’s 13F filing for the third quarter showed two of his top three holdings are privately held correctional facilities that had relied on government contracts. The lifting of covid restrictions may help bolster future profits. Along with Aerojet, his fourth-largest position, GEO and Corecivic own real estate. Could this be part of Burry’s attraction?

The TV shopping channels owned by Qurante seem obscure, but the defense company Aerojet Rocketdyne should come as no surprise in a world that is moving more militarily and Space Force is gearing up.

If you have not already signed up to receive email from Channelchek with up-to-the-minute research reports on companies like GEO Group and Corecivic, along with insightful articles, sign-up here.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.forbes.com/advisor/investing/small-cap-stocks/

https://www.channelchek.com/company/GEO/research-report/3910

https://whalewisdom.com/filer/scion-asset-management-llc#tabholdings_tab_link

https://channelchek.com/news-channel/What_Might_be_in_a_Portfolio_Allocated_for_a_Republican_Majority_in_the_House_

https://www.sec.gov/divisions/investment/13flists

Telomeres and New Findings on Cancer Mortality

Posted on November 11, 2022November 11, 2022 by phoffman@channelchek.com

How Cancer Cells can Become Immortal – New Research Finds a Mutated Gene that Helps Melanoma Defeat the Normal Limits on Repeated Replication

A defining characteristic of cancer cells is their immortality. Usually, normal cells are limited in the number of times they can divide before they stop growing. Cancer cells, however, can overcome this limitation to form tumors and bypass “mortality” by continuing to replicate.

Telomeres play an essential role in determining how many times a cell can divide. These repetitive sequences of DNA are located at the ends of chromosomes, structures that contain genetic information. In normal cells, continued rounds of replication shorten telomeres until they become so short that they eventually trigger the cell to stop replicating. In contrast, tumor cells can maintain the lengths of their telomeres by activating an enzyme called telomerase that rebuilds telomeres during each replication.

*Telomeres are protective caps at the ends of chromosomes*

Telomerase is encoded by a gene called TERT, one of the most frequently mutated genes in cancer. TERT mutations cause cells to make a little too much telomerase and are thought to help cancer cells keep their telomeres long even though they replicate at high rates. Melanoma, an aggressive form of skin cancer, is highly dependent on telomerase to grow, and three-quarters of all melanomas acquire mutations in telomerase. These same TERT mutations also occur across other cancer types.

Unexpectedly, researchers found that TERT mutations could only partially explain the longevity of telomeres in melanoma. While TERT mutations did indeed extend the life span of cells, they did not make them immortal. That meant there must be something else that helps telomerase allow cells to grow uncontrollably. But what that “second hit” might be has been unclear.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Pattra Chun-On Ph.D. Candidate in Environmental and Occupational Health, University of Pittsburgh Health Sciences and Jonathan Alder Assistant Professor of Medicine, University of Pittsburgh Health Sciences.

We are researchers who study the role telomeres play in human health and diseases like cancer in the Alder Lab at the University of Pittsburgh. While investigating the ways that tumors maintain their telomeres, we and our colleagues found another piece to the puzzle: another telomere-associated gene in melanoma.

Cell Immortality Gets a Boost

Our team focused on melanoma because this type of cancer is linked to people with long telomeres. We examined DNA sequencing data from hundreds of melanomas, looking for mutations in genes related to telomere length.

We identified a cluster of mutations in a gene called TPP1. This gene codes for one of the six proteins that form a molecular complex called shelterin that coats and protects telomeres. Even more interesting is the fact that TPP1 is known to activate telomerase. Identifying the TPP1 gene’s connection to cancer telomeres was, in a way, obvious. After all, it was more than a decade ago that researchers showed that TPP1 would increase telomerase activity.

We tested whether having an excess of TPP1 could make cells immortal. When we introduced just TPP1 proteins into cells, there was no change in cell mortality or telomere length. But when we introduced TERT and TPP1 proteins at the same time, we found that they worked synergistically to cause significant telomere lengthening.

To confirm our hypothesis, we then inserted TPP1 mutations into melanoma cells using CRISPR-Cas9 genome editing. We saw an increase in the amount of TPP1 protein the cells made, and a subsequent increase in telomerase activity. Finally, we returned to the DNA sequencing data and found that 5% of all melanomas have a mutation in both TERT and TPP1. While this is still a significant proportion of melanomas, there are likely other factors that contribute to telomere maintenance in this cancer.

Our findings imply that TPP1 is likely one of the missing puzzle pieces that boost telomerase’s capacity to maintain telomeres and support tumor growth and immortality.

Making Cancer Mortal

Knowing that cancer use these genes in their replication and growth means that researchers could also block them and potentially stop telomeres from lengthening and make cancer cells mortal. This discovery not only gives scientists another potential avenue for cancer treatment but also draws attention to an underappreciated class of mutations outside the traditional boundaries of genes that can play a role in cancer diagnostics.

Are Trump-Related Media SPAC Investors in for More Surprises?

Posted on November 8, 2022November 8, 2022 by phoffman@channelchek.com

Image Credit: Trump White House Archive (Public Domain)

The Wild Ride of Digital World Acquisition Corp. Has Mostly Been Positive

You never know what kind of surprise you may eventually end up with when purchasing a Special Purpose Acquisition Corp (SPAC). Digital World Acquisition Corp. (DWAC) is the perfect example of how a SPAC can provide a wild ride for those that were originally involved in the IPO and those that have since been involved in the stock of the “blank check company.” Before plans to merge with Truth Media, a subsidiary of Trump Media Group, it started out as most SPACs do, with a $10 a share price and a description of what an appropriate target would look like, and credentials of managing a financial company.

Most Recent

News impacting social media competitors to Truth Social and information involving the former President’s stature have historically driven prices of the acquiring company in a sporadic fashion. On Monday, DWAC took off by 66.5% to $29.10 during the trading day. On the prior trading day it had already risen 7% to $17.48. The impetus for this was news that Donald J. Trump was making plans to announce his candidacy as a Republican hopeful in the 2024 election.

The strong updraft of the DWAC price came the day before the US Election Day when political power struggles are at the forefront of most investors’ minds. It also occurred on the same day the former President announced plans to make a “Big” announcement next week.

Last week the SPAC shares rose after management delayed a shareholder vote — for the sixth time — on whether to approve a year extension to complete its merger with Trump Media and Technology Group. The shareholders meeting is now set for Nov. 22. DWAC’s deadline to complete its merger with Trump’s company had originally been in early September. However, the SPAC has said an SEC investigation of the merger deal delayed progress.

Highlights of DWAC Price Action

October 2021 – The chart above shows the upward SPAC spike (1,650%) as it became known in late October of its intent to merge with Trump’s fledgling social media venture. A retail trading frenzy had sent prices of the Trump media-linked SPAC, Digital World Acquisition Corp., ripping up an incredible 1,650% in just two days.

The stock reached a peak of $175, within two days and closed the week up 845% from an unusual amount of enthusiasm from retail interest.

News reports at the time highlighted the company had no fundamentals to speak of and te action was purely speculation and momentum.

Digital World Acquisition Corp. ended on the Friday at $94.20 after closing Wednesday at $9.96.

December 2021 –The stock traded off after the initial enthusiasm, especially after the media company fell short of its plan to have a beta version of Truth Social in November. It then caught fire later during the first week of December 2021. The impetus here was an announcement that the former President was raising $1 billion (mostly from family offices and hedge funds) to support the company’s projects.

Federal regulators cast a dark cloud over the deal, beginning the second week of December. The SEC was overall looking at tax and accounting of all SPACs, this had the potential to impact DWAC. Additionally, FINRA requested information to investigate whether than were any improper communications between Trump Media and Digital World.

Moving forward that December, a new CEO of Truth Social was appointed. This was a former representative to the House, Devin Nunes from California.

January 2022 – On the 7^th of January, the stock rose 20%, up 505% from the day the plans to merge was announced. The stock’s market cap was also up by the same percentage at $2.24 billion.

Plans were made to launch the social platform on February 21^st. The company had been still sitting at lofty heights on faith, not an actual product.

In late January, the SPAC experienced its largest one-day jump of the year (to date), a 21% increase on no new information. There was, however speculation that the stock’s rally may have been connected to a Trump rally the still politically active Trump held in his home state.

As shown on the chart above, momentum for the stock was again building after a January 6 announcement of the launch date, the stock climbed 71%. Phunware (PHUN), the designer of the platform, was up 25%.

February 2022 – The Trump social media platform becomes available in the app store in late February and the price of DWAC increases 28% pre-market open. Institutional investors gain a new respect for the power of self-directed retail investors and the power they hold. Prices in February are sitting at a 750% increase from the day the SPAC merger was announced.

April 2022 – Two private investors bail on Truth Social, and shares of Digital World drop following a negative (30%) March. The share value has now declined 70% from its all-time high. Adding to the drag on values, new SPAC rules from the SEC cast even more doubt on the ability to bring the deal to a close.

June 2022 – Since the beginning of the year, the stock’s value dropped 47%. The SEC began expanding its inquiry into the proposed merger, having subpoenaed the company for more information on the deal. Investors think the deal will likely be delayed, perhaps even torpedoed.

July 2022 – Elon Musk made good on a Tweet to offer to buy Twitter. His intent was to “free the bird” and allow open discourse, in other words, turn it into what Trump envisioned for Truth Social. Both Trump and Musk have fans and foes, so the drama picked up when Elon suggested openly Trump ought to “hang up his hat and sail into the sunset.”

Prices of DWAC originally declined but then found their footing as expectations of Elon Musk successfully buying the huge competitor of Truth Social waned.

August 2022 –Digital World says it isn’t sure whether they are the right vehicle to take Truth Social public. And it wants to keep financials under wraps until it can decide. The SEC allows an automatic five-day extension.

It’s the regulatory and legal obstacles DWAC’s been faced with since announcing the merger that could have caused them to look for the surrender flag. The two entities were subjected to a federal criminal probe that caused every single one of the SPAC’s board members to receive a subpoena after already warning that any investigations would jeopardize the deal. Shares were down 73% since October.

November 2022 – The momentum that may have been responsible for the original run-up over a year earlier again surfaces as it is rumored that the ex-President with a massive amount of loyal followers will be running to be re-elected. “In a very, very, very short period of time, you’re going to be very happy,” former president Donald Trump told attendees at a rally on November 5.

Trump Media’s merger with DWAC still faces many legal and financial hurdles that have resulted in at least $138m in investment being pulled. Trump will post on Truth Social exclusively for 8 hours before posting elsewhere. He has been widely followed on the social platforms he has been part of, so whether investors support the potential candidacy, they’re almost certain it’ll drive traffic to the app.

Take Away

One never knows what target companies a SPAC may unearth, if any, as a suitor for its acquisition plans. For investors that jump into the unknown early, before a SPAC announces any plans, their downside is somewhat limited as their investments are held in escrow as the target is procured. Should a deal be struck, they get to decide if they wish to stay involved. If, after two years, the SPAC fails to close on a target, investors still holding shares receive the original purchase price (usually $10), fewer expenses, plus interest. Considering how volatile other investments have been, this effectively puts a floor in to protect against the downside for investors near the $10 level.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.theverge.com/2021/12/6/22821450/devin-nunes-ceo-tmtg-spac-dwac-truth-social-media

https://www.cbsnews.com/news/trump-announcement-november-15-mar-a-lago/

https://www.tradingview.com/symbols/NASDAQ-DWAC/history-timeline/#trump-spac-goes-soaring-2021-10-15

https://www.reuters.com/markets/us/exclusive-trumps-social-media-venture-seeks-1-billion-raise-sources-2021-12-01/

www.investors.com/dwac

Inflammation as a Cause of Disease

Posted on November 7, 2022November 7, 2022 by phoffman@channelchek.com

What is Inflammation? Two Immunologists Explain How the Body Responds to Everything from Stings to Vaccination and Why it Sometimes Goes Wrong

When your body fights off an infection, you develop a fever. If you have arthritis, your joints will hurt. If a bee stings your hand, your hand will swell up and become stiff. These are all manifestations of inflammation occurring in the body.

We are two immunologists who study how the immune system reacts during infections, vaccination and autoimmune diseases where the body starts attacking itself.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Prakash Nagarkatti, Professor of Pathology, Microbiology and Immunology, University of South Carolina and Mitzi Nagarkatti Professor of Pathology, Microbiology and Immunology, University of South Carolina

While inflammation is commonly associated with the pain of an injury or the many diseases it can cause, it is an important part of the normal immune response. The problems arise when this normally helpful function overreacts or overstays its welcome.

What is Inflammation?

Generally speaking, the term inflammation refers to all activities of the immune system that occur where the body is trying to fight off potential or real infections, clear toxic molecules or recover from physical injury. There are five classic physical signs of acute inflammation: heat, pain, redness, swelling and loss of function. Low-grade inflammation might not even produce noticeable symptoms, but the underlying cellular process is the same.

Take a bee sting, for example. The immune system is like a military unit with a wide range of tools in its arsenal. After sensing the toxins, bacteria and physical damage from the sting, the immune system deploys various types of immune cells to the site of the sting. These include T cells, B cells, macrophages and neutrophils, among other cells.

The B cells produce antibodies. Those antibodies can kill any bacteria in the wound and neutralize toxins from the sting. Macrophages and neutrophils engulf bacteria and destroy them. T cells don’t produce antibodies, but kill any virus-infected cell to prevent viral spread.

Additionally, these immune cells produce hundreds of types of molecules called cytokines – otherwise known as mediators – that help fight threats and repair harm to the body. But just like in a military attack, inflammation comes with collateral damage.

The mediators that help kill bacteria also kill some healthy cells. Other similar mediating molecules cause blood vessels to leak, leading to accumulation of fluid and influx of more immune cells.

This collateral damage is the reason you develop swelling, redness and pain around a bee sting or after getting a flu shot. Once the immune system clears an infection or foreign invader – whether the toxin in a bee sting or a chemical from the environment – different parts of the inflammatory response take over and help repair the damaged tissue.

After a few days, your body will neutralize the poison from the sting, eliminate any bacteria that got inside and heal any tissue that was harmed.

Asthma is caused by inflammation that leads to swelling and a narrowing of airways in the lungs, as seen in the right cutaway in this image. BruceBlaus/Wikimedia Commons, CC BY-SA

Inflammation as a Cause of Disease

Inflammation is a double-edged sword. It is critical for fighting infections and repairing damaged tissue, but when inflammation occurs for the wrong reasons or becomes chronic, the damage it causes can be harmful.

Allergies, for example, develop when the immune system mistakenly recognizes innocuous substances – like peanuts or pollen – as dangerous. The harm can be minor, like itchy skin, or dangerous if someone’s throat closes up.

Chronic inflammation damages tissues over time and can lead to many noninfectious clinical disorders, including cardiovascular diseases, neurodegenerative disorders, obesity, diabetes and some types of cancers.

The immune system can sometimes mistake one’s own organs and tissues for invaders, leading to inflammation throughout the body or in specific areas. This self-targeted inflammation is what causes the symptoms of autoimmune diseases such as lupus and arthritis.

Another cause of chronic inflammation that researchers like us are currently studying is defects in the mechanisms that curtail inflammation after the body clears an infection.

While inflammation mostly plays out at a cellular level in the body, it is far from a simple mechanism that happens in isolation. Stress, diet and nutrition, as well as genetic and environmental factors, have all been shown to regulate inflammation in some way.

There is still a lot to be learned about what leads to harmful forms of inflammation, but a healthy diet and avoiding stress can go a long way toward helping maintain the delicate balance between a strong immune response and harmful chronic inflammation.

Powerball Growing Prize Money is Linked to Fed Tightening

Posted on November 7, 2022November 9, 2022 by phoffman@channelchek.com

Why the Future Value of the Lottery’s Grand Prize is Significantly Higher than Last Year

There is a link between the current $1.9 billion Powerball prize money and Federal Reserve Chair Jerome Powell – and it is inflating the prize money.

A new billionaire was not minted over the weekend, at least not because of winning the enormous Powerball jackpot prize. So the weekend prize money, plus a small fortune more, is up for grabs at 10:59 PM Monday, November 7. The headline prize money, in this case, $1.9 billion, is the future value of the cash award, which, according to Powerball.com, is $929.1 million. The larger, almost two billion amount, would not have been nearly as large last year. Its sum is much bigger because the Fed has been jacking up interest rates.

To drill down a bit more, the prize calculation uses the 30-year U.S. Treasury bond interest rate to determine the annuity paid to the winner based on the cash lump sum award. The present value of that number, even if on par with a cash award a year ago, would pay a substantially larger annuity. And it is the annuity that is the advertised prize, which draws more and more players as it grows. The more players, the higher the present value or cash prize.

A year ago (November 8, 2021), the 30-year US Treasury bond had a yield of 1.90%. This was used to calculate the headline prize amount. Today, the same term Treasury is yielding 4.27%. This yield impact is roughly reflected in the average prizes over the years.

The Numbers Boiled Down Further

Of all ticket sales, 34% of Powerball ticket sales fund the grand prize. Another 16% fund the lower-tier prizes. (The remaining 50% goes to various state programs, operating costs, and retailer commissions.) If a winner chooses the lump sum payout, they receive the 34%. If instead, the winner chooses the jackpot in annual payments over 30 years, the prize money is invested in a portfolio of bonds.

The last time a winner chose an annuity was in 2014.

Economists who have researched lotteries have learned that once jackpots near the $500 million mark, non-regular lottery players are more likely to take a chance. The $500 million or more mark is where the media begins to make “lottery fever” a news event worth reporting on. The added publicity then feeds more money into the pot.

The prize pools are also growing because the games of chance have become statistically more difficult to take the top prize. In 2015, Powerball increased the cost of the ticket and altered the game to make it easier for players to win smaller prizes while reducing the odds of winning the headline prize.

Only 3.8% of drawings so far this year had had a winner, down from roughly 11% in 2014, the last full year before the change went into effect.

This is why the five times in the U.S. where $1 billion has been surpassed have all been recent. They include the biggest one, a $1.58 billion prize from Powerball in 2016, followed by a $1.53 billion Mega Millions jackpot in 2018 and this week’s $1.5 billion Powerball prize.

Lottery tickets also tend to become more popular during economic downturns and when people become more money conscious.

Even though the odds of winning Powerball are 1 in 292.2 million, players will take a shot and buy a ticket to have the fantasy. If the prize money continues to reach over $500 million on a regular basis, it may work against the program as those who don’t normally play won’t feel it is a special event.

Good luck to those of you holding a ticket.

Paul Hoffman

Managing Editor, Channelchek

Sources:

www.powerball.com

https://www.wsj.com/articles/powerball-jackpot-lottery-federal-reserve-interest-rates-ticket-sales-11667479535?mod=hp_lead_pos12

The Week Ahead – Inflation Data Worries and Election Outcome

Posted on November 7, 2022November 7, 2022 by phoffman@channelchek.com

Federal Reserve President Speeches With Elections and CPI to Shape the Week’s Trading

Yes, the stock markets are open on Veterans Day (Friday). But bond trading, which the stock market has been more keenly focused on this year, will be taking the day off along with other U.S. government services. Equity traders can get a sense of interest rate sentiment on Friday by turning to the Chicago Board of Options and viewing tickers ZF=F (5 yr. USTN), ZN=F (10 yr. USTN), ZB=F (30 yr. USTB).

All markets are open on Election Day, and the outcome, as measured by House seats and Senate seats distributed among the major political parties, has the potential to be market-moving.

It’s a quiet week for economic numbers, except for Thursday, when the CPI report is released. This has the potential of changing those calling for a 50 bp hike at the next meeting to up their expectations or those still forecasting 75bp to lower their call. Certainly, the Fed governors will be watching this and all measures of inflation up to the December 14-15 meeting. There are a number of Fed governors speaking this week; this could alter the tone; however, the next meeting is far out into the future.

Election Day.

Monday 11/7

3:00 PM ET the amount of consumer installment credit for September, including credit cards, auto loan, and student loans outstanding, indicate current consumer spending and borrowing patterns. The markets tend to ignore this number as we are already in November and this report measures September
3:40 PM ET, the Federal Reserve Bank Presidents Mester (Cleveland) and Collins (Boston), will be speaking. Both are considered fairly hawkish.
6:00 PM ET, the Federal Reserve Bank President Harkey (Philadelphia) will be speaking.

Tuesday 11/8

Election Day.
Meet the Management; Noble Capital Markets hosts Management of Entravision Communications (EVC) in West Palm Beach, FL. This is a no-cost-to-attend, in-person breakfast meeting with investors. If interested, click here.
Meet the Management, Noble Capital Markets hosts Management of Entravision Communications (EVC) in Boca Raton, FL. This is a no-cost-to-attend, in-person lunch meeting with investors. If interested, click here.

Wednesday 11/9

It can be expected that the newswires will be filled with Election Day outcomes and market-moving conjecture.
7:00 AM ET Mortgage Applications. The Mortgage Bankers Association (MBA) creates a statistic from several mortgage loan indexes. The Mortgage Applications index measures applications at mortgage lenders. It’s considered a leading indicator and is especially important for single-family home sales and housing construction. Both are considered foundational in a strong economy.
10 Year Treasury Note Auction is held in the middle of each month and settles on or around the 15^th (depending on weekends). The yield is a benchmark for 30-year mortgages and has recently been noted by investment markets because it has been trading at a yield lower than shorter maturities. This inversion of the yield curve has some market players suggesting a recession is expected in the future. Any surprises at the auction will reverberate through the stock market.
10:30 AM ET, EIA Petroleum Status Report.
11:00 AM ET, Federal Reserve President Barkin (Philadelphia) speaks.
Meet the Management; Noble Capital Markets hosts Management of Entravision Communications (EVC) in Winter Park, FL. This is a no-cost-to-attend, in-person breakfast meeting with investors. If interested, click here.
Meet the Management; Noble Capital Markets hosts Management of Entravision Communications (EVC) in Orlando, FL. This is a no-cost-to-attend, in-person lunch meeting with investors. If interested, click here.

Thursday 11/10

8:30 AM ET, U.S. Consumer Price Index (CPI) is the inflation indicator most widely broadcast. With inflation being a primary focus, this will be the big number coming out this week. The number represents a basket of goods considered typical for an urban consumer and is taken as the change in the cost of that basket of goods. A percentage is derived from the change. CPI is also reported with food and energy removed as it is considered that other non-economic factors influence these prices. The September report indicated CPI rose 0.4% for the month and 8.2% YOY. Expectations are for an increase to 0.7% for October and a YOY rate of 8.0%.
8:30 AM ET U.S. Jobless Claims which represent the prior week’s employment are expected to have increased to 221,000 from 217,000. From jobless claims, investors can gain a sense of how tight or how loose the job market is. If wage inflation takes hold, interest rates will likely rise, and bond and stock prices will fall. Remember, the lower the number of unemployment claims, the stronger the job market, and vice versa.
10:30 AM ET, EIA Natural Gas Status Report.

Friday 11/11

Veterans Day, the stock market is one, the futures markets are open, and the bond market and other U.S. government-related offices are closed.
10 AM ET Consumer Sentiment, November (preliminary). This barometer, reported by the University of Michigan, questions households each month on their assessment of current conditions and expectations of future conditions. This “preliminary” release is for the month of November and is expected to have fallen to 59.6 versus 59.9 last month.

What Else

It is a light week for economic releases and Fed governor addresses, but the election outcome and CPI have the potential to whip markets around.

We’re entering the holiday shopping season when there will be a number of measures that investors focus on that will give a hint as to how strong the consumer is in the current economy.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/newsevents/calendar.htm

http://global-premium.econoday.com/byweek.asp?cust=global-premium

https://www.channelchek.com/news-channel/noble_on_the_road___noble_capital_markets_in_person_roadshow_series

https://www.econoday.com

How the Fed’s Balance Sheet Trimming Impacts You

Posted on November 3, 2022November 3, 2022 by phoffman@channelchek.com

Fed Faces Twin Threats of Recession and Financial Crisis as its Inflation Fight Raises Risks of Both

The Fed raising the overnight rate is only half the reason the economy may be driven into a recession and create a financial crisis according to a Mississippi Professor of Finance. He believes the Fed’s interest rate approach, which is most talked about, may create problems, but Professor Blank also points out and defines the Fed’s balance sheet changes and what they could mean for markets, the economy, and the world of finance.

There is wide agreement among economists and market observers that the Federal Reserve’s aggressive interest rate hikes will cause economic growth to grind to a halt, leading to a recession. Less talked about is the risk of a financial crisis as the U.S. central bank simultaneously tries to shrink its massive balance sheet.

As expected, the Fed on Nov. 2, 2022, lifted borrowing costs by 0.75 percentage point – its fourth straight hike of that size, which brings its benchmark rate to as high as 4%.

At the same time as it’s been raising rates, the Fed has been quietly trimming down its balance sheet, which swelled after the COVID-19 pandemic began in 2020. It reached a high of US$9 trillion in April 2022 and has since declined by about $240 billion as the Fed reduces its holdings of Treasury securities and other debt that it bought to avoid an economic meltdown early in the pandemic.

As a finance expert, I have been studying financial decisions and markets for over a decade. I’m already seeing signs of distress that could snowball into a financial crisis, compounding the Fed’s woes as it struggles to contain soaring inflation.

Fed Balance Sheet Basics

As part of its mandate, the Federal Reserve maintains a balance sheet, which includes securities, such as bonds, as well as other instruments it uses to pump money into the economy and support financial institutions.

The balance sheet has grown substantially over the last two decades as the Fed began experimenting in 2008 with a policy known as quantitative easing – in essence, printing money – to buy debt to help support financial markets that were in turmoil. The Fed again expanded its balance sheet drastically in 2020 to provide support, or liquidity, to banks and other financial institutions so the financial system didn’t run short on cash. Liquidity refers to the efficiency with which a security can be converted into cash without affecting the price.

But in March 2022, the Fed switched gears. It stopped purchasing new securities and began reducing its holdings of debt in a policy known as quantitative tightening. The current balance is $8.7 trillion, two-thirds of which are Treasury securities issued by the U.S. government.

The result is that there is one less buyer in the $24 trillion treasury market, one of the largest and most important markets in the world. And that means less liquidity.

Loss of Liquidity

Markets work best when there’s plenty of liquidity. But when it dries up, that’s when financial crises happen, with investors having trouble selling securities or other assets. This can lead to a fire sale of financial assets and plunging prices.

Treasury markets have been unusually volatile this year – resulting in the biggest losses in decades – as prices drop and yields shoot up. This is partly due to the Fed rate hikes, but another factor is the sharp loss of liquidity as the central bank pares its balance sheet. A drop in liquidity increases risks for investors, who then demand higher returns for financial assets. This leads to lower prices.

The loss of liquidity not only adds additional uncertainty into markets but could also destabilize financial markets. For example, the most recent quantitative tightening cycle, in 2019, led to a crisis in overnight lending markets, which are used by banks and other financial institutions to lend each other money for very short periods.

Given the sheer size of the Treasury market, problems there are likely to leak into virtually every other market in the world. This could start with money market funds, which are held as low-risk investments for individuals. Since these investments are considered risk-free, any possible risk has substantial consequences – as happened in 2008 and 2020.

Other markets are also directly affected since the Fed holds more than just Treasuries. It also holds mortgages, which means its balance sheet reduction could hurt liquidity in that market too. Quantitative tightening also decreases bank reserves in the financial system, which is another manner in which financial stability could be threatened and increase the risk of a crisis.

The last time the Fed tried to reduce its balance sheet, it caused what was known as a “taper tantrum” as debt investors reacted by selling bonds, causing bond yields to rise sharply, and forced the central bank to reverse course. The long and short of it is that if the Fed continues to reduce its holdings, it could stack a financial crisis on top of a recession, which could lead to unforeseen problems for the U.S. economy – and economies around the globe.

A Two-Front War

For the moment, Fed Chair Jerome Powell has said he believes markets are handling its balance sheet rundown effectively. And on Nov. 2, the Fed said it would continue reducing its balance sheet – to the tune of about $1.1 trillion a year.

Obviously, not everyone agrees, including the U.S. Treasury, which said that the lower liquidity is raising government borrowing costs.

The risks of a major crisis will only grow as the U.S. economy continues to slow as a result of the rate hikes. While the fight against inflation is hard enough, the Fed may soon have a two-front war on its hands.

Will Equity Investors Return Back to the Future?

Posted on November 3, 2022November 4, 2022 by phoffman@channelchek.com

Image: Statue of Liberty Torch, Circa 1882 – Ron Cogswell (Flickr)

Current Technology May Be Leading the Next Shift in Stock Market Investing

Investor exposure to the stock market has grown and evolved through different iterations over the years. There is no reason to believe that it isn’t evolving still. The main drivers of change have been the cost of ownership, technology, and convenience, which are related to the other two drivers. There seems to be a new transformation that has been happening over the past few years. And with each change, there will be those that benefit and those that fall short. So it’s important for an investor to be aware of changes that may be taking place around them.

Recent History

Your grandfather probably didn’t own stocks. If he did, he bought shares in companies his broker researched, and he then speculated they would out-earn alternative uses of his capital – this was expensive. Mutual funds later grew in popularity as computer power expanded, and an increased number of investors flocked to these managed funds – the price of entry was less than buying individual stocks. Charles Schwab and other discount brokers sprang up – they offered lower commissions than traditional brokers. Mutual funds were able to further reduce fees charged by offering easier to manage indexed funds or funds linked to a market index like the Dow 30 or S&P 500. Indexed exchange-traded funds (ETF) took the indexed fund idea one step further – they have a much lower cost of entry than either mutual funds or even discount brokerage accounts. An added benefit to indexed ETFs is they can be traded at intraday prices and provide tax benefits.

Just as Schwab ushered in an era of low-commission trades, Robinhood busted the doors open to no-commission trades, and most large online brokers followed. This change allows for almost imperceptible costs in most stock market transactions. It also changed the concept of a round-lot, or transacting in increments of 100 shares. In fact, the most popular brokers all offer fractional share ownership now.

Are Index ETFs Becoming Dinosaurs?

Funds made sense for those seeking diversification of holdings, it used to take a large sum of money to do that; investors with a $10,000 account or more can easily achieve acceptable diversification with odd-lots and fractional shares ability.

Today investors can create their own index-like “fund,” or as they called it in your grandparent’s day, “portfolio management.”

One big advantage to creating your own portfolio, even if you rely heavily on stocks from a specific index to choose from, is that you can adapt it more toward your sector or company expectations. Indexed funds are stuck with their index holdings, they have no ability to change. One may increase or decrease risk by leaving out stocks or even whole industry groups. Also, it can be managed with greater tax efficiency than an index fund tailored to your situation.

There is also the DIY thrill that one gets from creating anything themselves rather than to just buying one off the shelf. There have been a number of renowned investors like Peter Lynch and Michael Burry warning that indexed funds no longer provide expected diversification and that many of the stocks are valued higher because so many dollars are on “auto-invest” into indexes that the bad has been pushed up with the good.

An example of what added demand does to the valuation of a company when being added to an index can be seen over the last month when it became clear that Twitter would be leaving an empty slot that would be filled by Arch Capital (ACGL). The added demand for ACGL pushed up the value by an estimated 25%. Was it undervalued before (when stand-alone), or is it over-valued now? Some stocks that are getting more attention because they are in an index could, as Michael Burry warned, be in bubble territory.

Setting Up a Portfolio

The more you do to ensure your portfolio weightings mimic an index, the closer your performance is likely to be to that index. You may want to limit your holdings to names that are actually in the index and shift the weightings for return enhancement. Another concern often cited with indexes is the way that they weight holdings; you may choose to weight your portfolio using the market capitalization of each company to own the same percentage of the company’s value or use another method like pure cost measures or cost per P/E.

Picking Stocks

While studies suggest that market diversification can be achieved by owning as few as five stocks and doesn’t improve much after 30 holdings, the more you own, providing they aren’t overweighted in a sector, it stands to reason the more diversification protection you can achieve.

As a DIY, self-directed investor, it makes sense not to chase after whatever YouTube influencer, loud-mouthed-TV analyst, or Stocktwit tells you. This is your baby, and the results, good or bad, are yours. Do what you can to make informed decisions, even if some turn out unexpected. The benefit of this is you can lean away from stocks that are still in indexes that don’t have good future prospects and lean into more companies that do.

I’m hearing from more of my self-directed investor friends and investment advisors that more people are looking to own companies that have non-financial objectives they, as an investor, support. And for some of them, there is no standard ESG framework that they support. They have decided, because they do care, to do more portfolio management with individual stocks than before. This is so they can individually look under the hood at employee policies, or environmental stature, etc. While ESG funds exist, the investor or client of the investment advisor would prefer not to own anything they oppose if they can avoid it. What better way than being able to say no to $XYZ company because they do this, this, and this that is against my own fabric?

Channelchek is a great resource for any percentage of your personally managed fund that includes stocks in the small-cap or microcap categories. These stocks could add a bit more potential for return but could also change your risk characteristics. Sign-up to get research from FINRA-licensed analysts.

Take Away

Stock investing has evolved and become more inclusive. But the future may be more like the past, with individuals creating portfolios of stocks for themselves. You don’t have to be rich anymore to buy stocks, and you don’t have to own a fund to get affordable diversification on nearly any size account. There’s a trend toward building one’s own personalized, diversified, low-transaction portfolio. Channelchek is helping investors find possible fits with its free research platform.

Paul Hoffman

Managing Editor, Channelchek