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Kuby’s Commentary

Consumer Low Market High

Aug 31, 2020

Last Week:

The S&P 500 gained 3.26% to set another record high, while the yield on the Ten-Year Treasury jumped 9 basis points to 0.73%, its highest level since June 10th. Tech stocks continued to surge, with the Nasdaq composite adding 3.39% and is now up an incredible 30.35% YTD. The most significant development of the week came from the new monetary policy framework that Federal Reserve Chairman Jerome Powell unveiled, essentially suggesting that the Fed would no longer consider strong employment as a sign of incipient inflation requiring a tightening of rates. This change in policy emphasis may be less relevant in the near-term because new weekly unemployment claims have remained stubbornly high in the area of one million; but financial markets participants generally like visibility, and the new policy emphasis provided visibility that any sudden and/or fast improvement in labor market conditions will not automatically trigger a corresponding rate hike campaign by the Fed. This looser framework should provide a boost to financial companies and other economically sensitive companies. Perhaps also increasing the odds of the long-awaited rotation into small cap value stocks.

Gold gained 1% and would be another asset that would benefit from increased inflation expectations, while the Dollar dropped 1% to its lowest level since May 2018. We think a weakening currency is a warning sign for a nation’s financial assets (stock and bond markets).

We also monitor consumer confidence in establishing our outlook for the markets. The Conference Board published its data on Tuesday, which showed its Consumer Confidence Index (a combination of its Present Situation and Expectations Index) falling for the second month in a row and dropping below its recent low in April. After reaching a recent high of 132.6 in February, it fell to 85.7 in April due to Covid-19. The Index rebounded for two months to 98.3 in June but fell to 91.7 in July and deteriorated further to 84.8 in August, which is the lowest reading since May 2014. The University of Michigan August survey results published on Friday, also showed consumer sentiment at levels not seen since 2004.

I’ve been very concerned about the incremental $2.3 trillion of government debt that was issued to fund the CARES Act in March, as I felt we were increasing the burden on future generations to pay it back. As previously disclosed, I wasn’t a great economics student, but fortunately we have Robert Z. Aliber, Professor Emeritus at the University of Chicago Graduate School of Business, for guidance on these matters. Bob explains that the government will never pay back the money, and that it is really the interest expense that is relevant. Moreover, it is essentially a wash since the money was essentially just transferred from the public sector to the private sector. The real issue is that individuals have saved rather than spent the money, which has led to a more severe recession than might have resulted from a better orchestrated policy (like the British governments direct payment of 50% on all meals eaten at restaurants). The good news is that the nature of the U.S. consumer makes it highly likely that post-pandemic those savings will become spending. The bad news is that the economy and the stock market seem vulnerable until confidence is restored. (The mystery remains why the stock market continues to set record highs in this environment.)

This Week:

COVID-19 developments will remain of the utmost importance. The trend has been somewhat encouraging over the last few weeks, hopefully that will continue during the back to school experiment. The weekly new claims for unemployment on Thursday and the monthly jobs report on Friday will be the most important economic releases as we approach the Labor Day Holiday.

Mea Culpa: To all my friends, Romans, and other countrymen, that I have talked out of buying Tesla shares because they seemed perpetually ridiculously over-priced. Ouch! Nevertheless, it still seems irrational that the Company can be worth more than all the other car makers in the world combined. The shares will start trading on Monday after a 5-for-1 stock split, having increased 56% since announcing the split on August 11. In theory, and historically, stock splits really don’t increase the value of the underlying company. I read a comment on a message board that said the Elon Musk’s net worth will increase five-fold after the split. It just doesn’t work that way. Apple will also be trading after its 4-for-1 stock split on Monday. AAPL’s shares increased 34.7% since announcing the split a month ago.

Stocks on the Move:

LRN -12.5%: K12, Inc. is a technology-based education company that offers proprietary and third-party curriculum, software systems and educational services designed to facilitate individualized learning for students in kindergarten through 12th grade. The learning systems combine curriculum, instruction, and related support systems for virtual and blended public schools, school districts, charter schools, and private schools. This week, the Company announced a 39% YoY increase in student enrollment as well as an intention to raise $300 million from the sale of convertible senior notes. LRN is a 2.68% holding in the North Star Micro Cap Fund and a 1.52% holding in the North Star Opportunity Fund.

CRM +30.6%:, Inc. enables companies of every size and industry to connect with their customers in new ways through existing and emerging technologies, including cloud, mobile, social, blockchain, voice and artificial intelligence, to transform their businesses. This week, the Company announced one of the best quarterly earnings in its history with revenue of $5.15 billion, a 29% increase from a year ago according to Barron’s. CRM is a 1.43% holding in the North Star Opportunity Fund.

DENN +11.6%: Denny’s Corporation is one of America’s largest franchised full-service restaurant chains. Known as America’s Diner, Denny’s has been offering quality food and a warm, friendly atmosphere for over 65 years. There was no significant company news this week. DENN is a 1.12% holding in the North Star Micro Cap Fund.

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