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Kuby’s Commentary

Big Bad Bond Market

Mar 8, 2021

Last Week:

On Monday all 11 sectors rallied and the S&P posted its biggest daily gain since June, as the combination over the previous weekend of the positive vaccine news from Johnson & Johnson, the approval of the stimulus plan by the House, and a decline of 5 basis points in the yield on the Ten-Year Treasury set the trading tone. I can’t remember another trading session with as strong an advance/decline ratio.

As the week progressed, however, the Big Bad Bond market bared its teeth as rates reversed their recent declines and the yield on the Ten-Year Treasury resumed its push higher. Markets reacted negatively to comments Fed Chair Jerome Powell made during a conference Thursday with stocks sliding and Treasury yields jumping further. Some investors and economists had been looking for him to address the recent surge in rates, with the possibility of adjusting the Fed’s asset purchase program. Fed observers were also looking for hints of a replay of “Operation Twist” in which the Fed buys longer-dated bonds and sells short-term notes to stem the rise in long-term rates. A surprisingly strong increase of 379,000 in February nonfarm payrolls magnified the movement in the markets Friday morning, with the S&P dropping another 1% and the Ten-Year reaching its highest level since February 2020. As lunchtime approached, the bond market reversed course, as investors seemed to look deeper into the labor report and the less-positive details came into focus. Most notably, the stubbornly low Labor Force Participation Rate (LFPR), indicating 5 million people displaced by the Covid pandemic remain out of work, and a drop in the average weekly work hours by those who are employed. Another theory suggests that comments from Bank of Japan President Kuroda triggered the mid-day decline in interest rates.

In any event, the stock market staged a dramatic rally Friday afternoon to finish the week with the S&P up 0.81%. Mega-cap tech and small-cap stocks still finished in the red, losing 2.1% and 0.4% respectively.

The dollar advanced and gold declined, while crude oil rallied toward $70 a barrel after OPEC+ surprised forecasters by choosing not to relax supply curbs even as the global economy pulls out of its pandemic-driven slump. We believe all three of these trends will reverse as the year progresses and continue to underweight the energy sector while holding a long gold position in anticipation of a weakening dollar. That strategy is based on the apparent oversupply of oil reserves not in production and dollars issued but not in circulation.

This Week:

February Inflation data will dominate the economic reports, with CPI on Wednesday and PPI on Friday. The juxtaposition of those reports with the final congressional approval of the stimulus bill could result in the Big Bad Bond market baring its sharp teeth again. There is a $38 billion 10-year auction on Wednesday and a $24 billion 30-year bond auction on Thursday. Traders will be watching those auctions carefully given how poorly the 7-year Treasury note auction went in late February.

With economies reopening, Consumer Confidence should see a nice bump on Friday’s release of the University of Michigan Sentiment Index. Then again Wolverine fans might be depressed following the lesson the Fighting Illini basketball team taught then in recent Big 10 action!

Stocks on the Move:

+15.1% ViacomCBS Inc (VIAC) operates as a multimedia company. The Company provides television and radio stations, produces and syndicates television programs, broadcasting, publishes books, and online content, as well as provides outdoor advertising. ViacomCBS has recently benefitted from its participation in the “Streaming Wars” with the launch of Paramount Plus.

VIAC is a 5.3% position in the North Star Opportunity Fund.

+10.1% Sprott Inc (SII) provides investment management services. The Company offers portfolio management, broker-dealer activities, and consulting services to clients. Its offerings primarily involve equity strategies, ETFs, and physical bullion trusts that give institutional and individual investors exposure to precious metals. There was no significant news last week.

SII is a 1.8% position in the North Star Dividend Fund.

-19.5% Turtle Beach Corporation (HEAR) operates as a sound technology company. The Company designs and markets audio peripherals for video game consoles, personal computers, and mobile devices. Last week, Turtle beach reported Q4-2020 results and gave strong Q1-2021 guidance driven by the recent video game and video game console sales boom. For the year, revenue was up 31% and adjusted EBITDA hit an all-time high of $61.4M.

HEAR is a 4.4% position in the North Star Micro Cap Fund.

+11.3% Bar Harbor Bankshares (BHB) operates as a bank in Maine. The Bank offers education funding, retirement, investment planning, insurance, risk management, and online banking services. There was no significant company news last week.

BHB is a 1.3% position in the North Star Micro Cap Fund and a 2.7% position in the North Star Dividend Fund.

+19.7% 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 1.2% position in the North Star Micro Cap Fund and a 2.9% position in the North Star Dividend Fund.

+13.3% Greif, Inc (GEF) manufactures and markets industrial packaging products and services for home appliances, small machinery, and grocery and building markets. The Company provides steel, plastic, fiber, flexible and corrugated containers, packaging accessories, and containerboard, as well as provides blending, filling, and packaging services. There was no significant company news last week.

GEF is a 1.7% position in the North Star Dividend Fund.

+10.1% Oil-Dri Corporation of America (ODC) develops, manufactures, and markets sorbent products to the grocery products industry, mass merchandisers, warehouse clubs, and pet specialty retail outlets. The Company’s cat litter products are marketed under the Cat’s Pride and Jonny Cat brands; additionally, ODC manufactures the Fresh Step brand exclusively for Clorox. There was no significant company news last week.

ODC is a 3.6% position in the North Star Dividend Fund.

+11.5% Telephone and Data Systems Inc (TDS) is a diversified telecommunications company. The Company operates primarily in the cellular (U.S. Cellular), local telephone, and personal communication services markets. There was no significant news last week; however, this morning the Company jumped up a bit as Citi reported TDS could be an acquisition target for Dish Network.

TDS is a 2.8% position in the North Star Dividend Fund.

+10.4% Blue Bird Corporation (BLBD) designs and manufactures school buses and commercial buses for school districts, large national fleets, businesses, government agencies, and non-profit organizations. There was no significant company news last week.

BLBD is a 2.2% position in the North Star Micro Cap Fund.

+15.2% Consolidated Communications Holdings Inc (CNSL) offers telecommunications services. The Company offers local and long-distance telephone, high-speed internet access, and digital television services to individuals and businesses in the States of Illinois, Pennsylvania, and Texas. Last week, it was announced the Company would offer $400M of senior secured notes due 2028 in which the proceeds will be used to repay a portion of term loans outstanding under another credit agreement.

CNSL is a 1.0% position in the North Star Micro Cap Fund.

+11.6% Johnson Outdoors Inc (JOUT) designs, manufactures, and markets outdoor recreational products. The Company offers products including outdoor clothing, tents, canoes, compasses, sailboats, flotation devices, diving equipment, and motors. There was no significant company news last week.

JOUT is a 4.8% position in the North Star Micro Cap Fund. 

+10.3% Miller Industries Inc (MLR) is a domestic and foreign manufacturer of vehicle towing and recovery equipment. The Company has developed and acquired brands in the towing and recovery equipment manufacturing industry. Last week, Miller reported Q4-2020 GAAP EPS of $1.05 and revenue of $178.3M. Although 2020 was a year marked by steady growth, the first quarter of 2021 has brought challenges like delivery delays and supply chain disruptions. Miller’s business and software improvements will get the Company back on schedule to meet customer demand.

MLR is a 2.0% position in the North Star Micro Cap Fund.

+11.1% Nathan’s Famous Inc (NATH) owns and franchises restaurants under the Nathan’s Famous brand name, as well as sells products bearing the Nathan’s Famous trademarks. The Company also has license agreements for the manufacture, distribution, marketing, and sale of Nathan’s Famous branded hot dogs, sausages, and corned beef products in refrigerated consumer packages to be resold through retail channels, such as supermarkets, groceries, mass merchandisers, and club stores. Nathan’s Famous was founded in 1916 and is based in Jericho, New York. There was no significant company news last week.

NATH is a 0.5% position in the North Star Micro Cap Fund.

The information provided in this commentary is not an offer to sell or the solicitation of an offer to purchase any security, product, or brokerage service. The information is not intended to be used as the basis for investment decisions, nor should the information be construed as advice designed to meet the particular needs of any investor. This commentary is presented to illustrate examples of the securities that North Star Investment Management Corporation and/or its affiliates (“North Star”) may have bought for client accounts and the diversity of markets in which North Star Investments may invest, and may not be representative of current or future investments. You should not assume that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary will be profitable or will be equal to any corresponding performance levels that might be indicated. Past performance is no guarantee of future results. Investments in securities involve risks including the possible loss of the principal invested. North Star and others associated with it, including employees, may have positions in and effect transactions in securities of companies mentioned or indirectly referenced in this commentary. North Star may buy, sell or hold these securities in proprietary or client accounts. North Star will not be providing regular updates or advising you of any changes in the views expressed herein. Investors should consider their investment objectives, risk tolerance, and financial situation and needs before investing in any security. Tax considerations, commissions, fees and other costs should be carefully evaluated with one’s investment and/or tax advisors. Information provided is obtained from sources deemed to be reliable, but North Star cannot guarantee the accuracy or completeness of the information. This material may not be reproduced, distributed or transmitted to any other person in whole or in part without the prior written consent of North Star. A copy of North Star Investment Management Corporation’s Form ADV Brochure, Privacy Notice and Business Continuity Plan summary can be obtained by calling 312-580-0900.

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