Mr. Market: I want to say one word to you. Just one word.
Confused Investor: Yes, Sir.
Mr. Market: Are you listening?
Confused Investor: Yes, I am.
Mr. Market: Vaccine.
Confused Investor: Exactly how do you mean?
Mr. Market: There’s a great future once we have a COVID-19 vaccine. Until then, be careful and don’t do anything irrational (fade to Simon and Garfunkel’s “Mrs. Robinson”). (Reference: “One-word, Plastics, there’s a great future in Plastics” from the movie The Graduate)
Optimism reigned on Monday and Tuesday, but a spike in COVID-19 infections and cautionary language in the Fed’s bank stress test led to a steep sell-off later in the week leading to a 2.9% decline in the S&P 500.
Coronavirus cases (not deaths) surged across much of the United States leading to some governors to issue new restrictions for parts of the economy that had reopened. Dr. Anthony S. Fauci, (remember him?) the director of the National Institute for Allergy and Infectious Diseases made clear that the current approach to combating the virus was not working. He noted that some infected Americans are unknowing asymptotic spreaders, but others are choosing not to self-quarantine even though they are aware that they have been exposed to the virus.
The main surprise in the Fed’s bank stress test was mandating that dividends be based on current earnings, thereby linking those dividends more directly to the short-term economic impact of the coronavirus. That new rule combined with Dr. Fauci warnings that more stringent measures were likely necessary (thereby reducing economic activity) led to very sloppy day for financial stocks on Friday with a 6.1% decline for the S&P Bank Sector Index. We believe the Financials represent good long-term value at these depressed levels. JPMorgan Chase &Co. (JPM) and Bank of Hawaii Corp (BOH) are two of our favorites that we own in NSOIX and NSDVX respectively.
The yield on the Ten-Year Treasury slid 6 basis points to 0.64%, while Gold continued to advance rising 1.6% for the week to reach its highest weekly close in over seven years. We continue to believe that the case for Gold remains in place, particularly if the U.S. household shift from saving to spending which could lead to a spike in inflation (not sure what the intended statement is). The personal savings rate in May registered at 23.2%, although down from the record 32.2% in April, still quite a lofty level given the previous high was 17.3%. What would make households stop hoarding cash and start spending? One word, Vaccine.
Developments concerning COVID-19 will continue to move the market as will the policy responses from Washington. In an effort to keep hopes for a V-shaped recovery alive, another stimulus package is in the making, though what form it will take is still being debated. “Whatever we do it’ll be much more targeted, much more focused on jobs, bringing back jobs and making sure we take care of our kids,” Treasury Secretary Steven Mnuchin told reporters.
Mnuchin and Fed Reserve Chair Jerome Powell will both testify before Congress on Tuesday in what is expected to be a broad overview of the economy and monetary policy. On the economic calendar the June jobs report on Thursday will be in focus with expectations of 3 million jobs gained during the month of June.
The market will be closed on July 3 to celebrate Independence Day. There will be no parades in Mudville this year. Hopefully, mighty Casey will develop a vaccine before next season.
Stocks on the Move:
SGC +30.0%: Superior Group of Companies, Inc. formerly Superior Uniform Group, established in 1920, is a combination of companies that help customers unlock the power of their brands by creating extraordinary brand experiences for their employees and customers. The Company announced it is transitioning all HPI® Distribution Center operations in Alpharetta, Georgia and Gainesville, Georgia to the company’s largest and most technologically advanced semi-robotic worldwide distribution center, located in Eudora, Arkansas. The transition to Eudora will bring significant advantages, including updated material handling technology, decreased average receiving and shipment times, lower distribution costs, improved customer service and the ability to scale and handle aggressive growth plans. SGC is a 1.42% holding in the North Star Micro Cap Fund.
ESCA +27.1%: Escalade, Inc. manufactures and distributes sporting goods for a varied range of activities. These sports include archery, table tennis, basketball goals, trampoline, play systems, fitness, game tables like hockey and soccer, billiards, darting, and other outdoor games. A large insider stock purchase by Walter Glazer, Independent Chairman of Board of the company helped drive the share price to a 52-week high. ESCA is a 5.97% holding in the North Star Dividend Fund. ESCA is a 5.66% holding in the North Star Micro Cap Fund.
BHB +16.5%: Bar Harbor Bankshares is the parent company of its wholly owned subsidiary, Bar Harbor Bank & Trust. Founded in 1887, Bar Harbor Bank & Trust is a true community bank serving the financial needs of its clients for over 130 years. Bar Harbor provides full-service community banking with office locations in all three Northern New England states of Maine, New Hampshire and Vermont. There was no company specific news to explain the share price gain, which seemed particularly notable given the sharp sell-off in the bank stock sector. BHB is a 1.95% holding in the North Star Dividend Fund.
CNTY: -16.3%: Century Casinos Inc is a US-based international casino entertainment company. The company principally engages in the development and operations of gaming establishments as well as related lodging, restaurant, and entertainment facilities. Through its subsidiaries, it manages Century Casino & Hotel, Century Casino St. Albert, Century Casino Calgary, Century Downs Racetrack and Casino, Century Mile Racetrack and Casino in Canada: Century Casino & Hotel in United States and Casinos Poland in Poland. Shares of casino and other travel and leisure stocks have been extremely volatile based on the most recent perceptions of the COVID-19 pandemic. CNTY is a 0.93% holding 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.