The Big Bad Bond Market once again bared its jagged teeth, as the yield on the Ten-Year Treasury climbed another 10 basis points to breach the 1.75% level for the first time in 14 months. The stock market showed signs of fear as the Dow and S&P fell 0.5% and 0.8% respectively, snapping two-week winning streaks, while the Nasdaq piggies in their straw houses lost 0.8%, posting its fourth negative week in five. Small-cap stocks and the Energy sector were the biggest losers, declining 2.7% and 7.6% respectively, although both remain top performers for 2021 following long stretches of disregard.
Investors turned to the Brick House Chairman, Jerome Powell, to protect us from the huff and puff of the Big Bad Bond Market, and on Wednesday, Powell’s familiar refrain of near-zero short-term rates and $120 billion a month of bond purchases briefly calmed the markets. The selling pressure on both stocks and bonds resumed on Thursday afternoon and Friday morning accounting for all of the weekly declines. Once again it was Powell to the rescue Friday afternoon after the Wall Street Journal published an op-ed from the Fed Chairman reiterating the central bank’s commitment to providing aid to the economy “for as long as it takes.”
On the economic data front, U.S. new weekly jobless claims unexpectedly rose last week to 770,000 even amid a wave of abating social distancing restrictions and improving weather. It is this slack in the labor market that allows this expansive monetary policy without creating concern about mounting inflationary pressures. We caution against complacency on the inflation front as the economy rebounds with the post-pandemic reopening of businesses. Over the last few months, I have been renting a car at a very reasonable weekly rate in the San Diego area. On Friday when I went to renew the rental agreement for another week, the millennial at the counter nonchalantly informed me that as a result of the surge in demand following the relaxed COVID-19 restrictions in the county that rate had “skyrocketed”. Whereas this example was egregious, the supply/demand dynamics will likely result in similar imbalances and spikes in overall inflation in the coming months. As such, we advise particular caution in fixed income investments, favoring short-term Treasury Inflation-Protected Securities (TIPS).
A friend made the following post on social media: “It is crazy to me to see the Fed buy more government bonds to avoid the yield on bonds getting too high when the same government is issuing a huge amount of bonds to finance government spending. Isn’t this a Ponzi scheme or just pure manipulation?” We would respond, based on the guidance of our economic consultant Robert Z. Aliber, that it is the U.S. Treasury, rather than the Fed, that is benefiting from the scheme, since its indebtedness has increased by nearly $5,000 trillion in the last 12 months, and its annual interest payments are $400 billion. Those interest payments are likely lower than they would otherwise be without Fed support of government debt prices. The Fed has one instrument, the quantity of bonds it buys and sells, to stabilize goods prices and bond prices. In 1979, the U.S. price inflation increased to more than ten percent a year because the Fed, then chaired by Bill Miller, wanted to prevent a significant decline in bond prices. The dynamics remain the same: the Fed can limit the decline in bond prices (and, inversely, limit the rise in bond yields and government deficit funding costs) for a few months, but eventually, it will recognize that the longer it intervenes to limit the decline in bond prices, the more rapid will be the increase in the goods price level.
We continue to have concern over the future value of the dollar, and as such believe an allocation to gold makes sense as a hedge. We recognize that internet currencies have supplanted gold as the trendy dollar-hedge but believe there is too much uncertainty for us to feel comfortable with that strategy.
The Bureau of Economic Analysis will issue reports later in the week on the strength of the recovery. On Thursday, it will release its final estimate of fourth-quarter GDP, which is expected to be unchanged from the last estimate in February of 4.1%. The more interesting report will come on Friday with the release of personal income and spending for February. Income is expected to decline 7.5% month over month, after jumping 10% in January. Spending is forecasted to be flat after increasing 2.4% the previous month. A surprise increase in spending would be a healthy sign for the economy but could also stoke inflation concerns. The Fed’s favorite inflation gauge, the PCE, is estimated to show a 1.5% rise in February. If that number runs hot, then the Fed’s playbook may need a rewrite.
To state the obvious, developments in the battle against the pandemic will remain of the utmost importance.
The NCAA basketball tournaments will be distracting some investors. My brackets suffered once again from what behavioral economists refer to as the “familiarity bias” by significantly overvaluing the Big Ten, as evidenced by my Final Four selections of Illinois, Michigan, Ohio State, and Iowa.
Stocks on the Move:
-14.1% Evolution Petroleum Corporation (EPM) explores for and produces oil and gas. The Company focuses on acquiring established oil and gas fields and applying specialized technology to increase production rates. There was no significant company news last week.
EPM is a 0.9% position in the North Star Micro Cap Fund.
-12.4% GATX Corporation (GATX), short for General American Transportation Corporation, leases, operates, manages, and remarkets long-lived, widely used assets, primarily in the rail and marine markets. There was no significant company news last week; however, announced this weekend was M&A activity in the rail market as Canadian Pacific Railway Ltd. (CP) agreed to purchase Kansas City Southern (KSU) for $25 billion. According to Bloomberg, this combination is the biggest purchase of a U.S. asset by a Canadian company since 2016 and will create a 20,000-mile network from Canada to Mexico.
GATX is a 1.3% position in the North Star Dividend Fund.
-11.0% Graham Corporation (GHM) designs and builds vacuum and heat transfer equipment for process industries around the world. The Company markets to the chemical, petrochemical, petroleum refining, and electric power generating industries. There was no significant company news last week.
GHM is a 0.8% position in the North Star Dividend Fund.
-17.2% LSI Industries Inc (LYTS) designs, manufactures, and markets a variety of lighting fixtures, menu board systems, and graphic products. The Company sells its products to the petroleum and convenience store market, the multi-site retail market such as restaurants and automobile dealerships, and the commercial and industrial lighting market. There was no significant company news last week. The North Star Research Team spoke with the Company on Tuesday, March 16th; key takeaways included optimism regarding charging station opportunities in the Electric Vehicle market as well as the continued shift to curbside pickup in the Restaurant and Grocery Retail industries.
LYTS is a 1.7% position in the North Star Dividend Fund.
+13.7% Weyco Group Inc (WEYS) imports and distributes men’s footwear, including mid-priced leather dress and casual shoes, sold under the Florsheim, Nunn Bush, and Stacy Adams brands. It also offers casual footwear for women and children under the BOGS and Rafters labels. There was no significant company news last week. There was no significant company news last week.
WEYS is a 0.9% position in the North Star Dividend Fund.
-10.0% Great Lakes Dredge & Dock Corporation (GLDD) offers marine services. The Company deepens and maintains waterways, shipping channels, ports, creates and maintains beaches, excavates harbors, builds docks and piers, and restores aquatic and wetland habitats. There was no significant company news last week.
GLDD is a 1.8% position in the North Star Micro Cap Fund.
-13.5% Westwood Holdings Group Inc (WHG) provides investment advisory services to a broad range of institutional clients. The Company also offers trust and custodial services to institutions and high-net-worth individuals. There was no significant company news last week.
WHG is a 0.5% position in the North Star Micro Cap Fund.