Kuby's Commentary

Party On to New Highs

2018-09-24T09:10:46+00:00September 24th, 2018|

Last Week:

Curiouser and curiouser. How does this market keep setting new highs? During this past week, decliners and new lows outnumbered advancers and new highs, yet the S&P 500 notched a 0.85% gain and the DJIA surged 2.25% to finally reach new record. The usual suspects did not drive the rally, as both the Nasdaq and the Russell 2000 experienced modest declines. Instead, there was a rotation into the three sectors that had been dramatically underperforming this year, namely Basic Materials, Oil &Gas, and Financials. The trade and interest rate headlines were discomforting, with the Trump administration imposing tariffs on $200 billion of Chinese products, and China retaliating with levies on $60 billion of U.S. goods. Meanwhile the yield on the Ten-Year Treasury jumped 7 basis points to close just below its highest level in 7 years. The glass must be half-full. The tariff announcements were viewed as less bad than feared, as the prevailing opinion continues to be that this negotiating strategy will ultimately result in a better deal for us, and the rise in rates were viewed as an indication of strength in the economy.

Perhaps most curious was the new highs (pun intended) that many of the Cannabis stocks enjoyed. The poster child for euphoria was Tilray (TLRY), whose shares were trading at $25 a month ago, closed the previous Friday at $109, and peaked at $300 on Wednesday, representing a $30 billion market cap; the intraday trading range of more than $100 is quite normal for a stock like Berkshire Hathaway at more than $200,000 per share, but not a stock trading in the area of $100 to $200. Three weeks ago, the Company posted a $4.7 million quarterly EBITDA loss on $9.7 million of revenue. I don’t want to ruin anyone’s buzz, but those numbers don’t make sense.

This Week:

The economic calendar is full with August New Home Sales, Durable Goods, Personal Income, and Consumption, as well as September Consumer Confidence, Purchasing Managers Index, and PCE Deflator, all scheduled for release. The focus will be on Wednesday’s interest rate announcement by the FOMC, with near universal consensus that it will hike the federal-funds rate by a quarter of a percentage point to 2%-2.25%. The language of the release will be carefully examined for any hints as to the path for future hikes.

On Monday, the tariffs between China and the U.S. are expected to take effect. China cancelled talks scheduled for the end of the month, and it is now unlikely that any progress can be made on this front until after the mid-term elections. Despite the obvious adverse consequences of these trade barriers, the market has so far been immune to this escalation.

Stocks in the News:

American Software, Inc. (AMSWA) -10.6%: Two weeks ago, we did a lengthy discussion of the recent decline in the Company’s share price, noting that the one analyst who follows AMSWA had downgraded the shares and reduced his price target following a modestly disappointing earnings report. The same analyst reduced his target price further, applying a lower multiple of revenue, leading to another double-digit decline. I suspect that at least part of the rationale for the target price reduction was that analyst would have been compelled to upgrade his rating to “buy” based on the steep discount of the share price to that target price. American Software develops enterprise management and supply chain related software and services. Its solutions consist of global sourcing, workflow management, customer service applications, and ERP solutions. AMSWA is a 2.9% holding in the North Star Micro Cap Fund and a 3.1% holding in the North Star Dividend Fund.

Pioneer Power Solutions, Inc. (PPSI) +12.8%: Hurricane Florence likely has created near-term excess demand for the Company’s on-site power generation products. Pioneer Power Solutions manufactures, sells and services a broad range of specialty electrical transmission, distribution, and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. PPSI is a 1.0% holding in the North Star Micro Cap Fund and a 1.9% holding in the North Star Opportunity Fund.

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