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Kuby’s Commentary

FOMOTINA Rally Resumes

Jul 29, 2019

Last Week:

As we approach half-time of earnings season, the usual pattern of companies reporting results that are above estimates is unfolding. Those positive “surprises” are responsible for the decrease in the expected overall earnings decline to -2.6% from -3.4% last week. Revenues are expected to increase at a tepid 4.0% clip, and the trailing P/E ratio is a rather elevated 19.8, while based on growth expectations for later in the year the forward P/E is 17.1. The yield on the Ten-Year Treasury remains at an extremely low level of 2.08%, up 3 basis points for the week. Our core belief is that earnings, interest rates, and emotion are the primary determinants of stock prices. “Fear of missing out” (FOMO) is still the theme, as is “there is no alternative” (TINA), and so the FOMOTINA rally continued with the S&P 500 gaining 1.7% to close at a new record high.

The House passed a two-year debt-ceiling deal that provides an additional $320 billion in new spending. The Senate is expected to pass the bill this week. This deal is market friendly as it removes the theatrics of the partisan debates over a government shut-down. On the other hand, at some point the mountain of government debt will need to be addressed.

Second quarter GDP came in at 2.1%, which was stronger than expectations, and inflation was 1.8% which was below expectations. Across the pond economic data was weaker, and outgoing European Central Bank President Mario Draghi’s testimony confirmed that further rate cuts and other stimulative measures were coming. There is already over $13 billion of global government debt obligations with yields below zero percent.

The tone of trade negotiations between the U.S. and China remained constructive, with China perhaps stepping up agriculture purchases and the U.S. considering Huawei waivers. This dance will likely continue until the end of time and will certainly be used as a campaign issue in 2020.

This Week:

It will be another busy week of earnings reports with 168 S&P 500 companies reporting second quarter results. The FOMC interest rate decision on Wednesday afternoon will be in focus, with a 25-basis point cut widely expected. What comes next for monetary policy is the big question. Recent data that suggests some strengthening in the economy undermines the case for further easing. Thursday’s July Institute of Supply Management Manufacturing report and Friday’s July Job report will provide fodder to that debate. Goldilocks has developed a taste for slightly cold porridge, so a repeat of June’s job growth might burn investors’ tongues.

Stocks on the Move:

(GOOGL) +10%: Alphabet is a holding company, with Google, the Internet media giant, as a wholly owned subsidiary. Google generates 99% of Alphabet revenue, of which more than 85% is from online ads. The company handily beat Wall Street targets on higher ad sales and touted growth at its cloud unit, a high-margin business it is leaning more on to drive growth. GOOGL is a 1.98% holding in the North Star Opportunity Fund.

(HCSG) -18.4%:  Healthcare Services Group Inc., is a provider of housekeeping and facility-management services to the healthcare industry. The company operates two business segments: housekeeping and dietary.  Revenue for the quarter was $462 million, down $14 million sequentially, primarily due to the Company exiting facilities in conjunction with operator transitions, including those related to the previously announced Chapter 11 reorganization of Senior Care Centers. Ted Wahl, Chief Executive Officer, stated, “Over the past few months, we continued to make progress on our near-term priorities of systems adherence, customer payment frequency and management development in what is still a tough environment for the industry.”

Mr. Wahl added, “We worked through hundreds of facility operator changes, sometimes under difficult circumstances, and there was an unusually high number of new facility operators with whom we were unable to come to agreeable terms and ultimately exited. We saw that reflected in the revenue step down this past quarter. Additionally, the high number of facility operator changes also impacted some of the new business activity, as our field-based leaders focused their attention on facility operator transitions and retention, as opposed to new business opportunities.”  HCSG is a 2.01% holding in the North Star Dividend Fund.

Portfolio holdings are subject to change and should not be considered investment advice.

North Star Investment Management Corp. is the Advisor for the North Star Family Mutual Funds.

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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