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Kuby’s Commentary

Goldilocks and the 74 Hot Dogs

Jul 9, 2018

Last Week:

Goldilocks is still alive and well, as evidenced by the Bureau of Labor Statistics initial report on the labor situation in June, which was neither too hot nor too cold. While the unemployment rate increased slightly from 3.8% to 4.0%, the entire increase was due to an estimated approximately 600,000 people entering the workforce in search of work; such an estimated increase typically is taken as a sign of optimism among workforce and is therefore supportive of an expanding economy. When those “Not in the Labor Force” decide to pursue work, the unemployment rises initially but so does the “Labor Force Participation Rate,” which in June was estimated at 62.9% up from 62.7% but still far below the long-term historical average of approximately 65%-66%. Wage inflation remained at a temperate 2.7%, easing inflationary concerns.

In the true patriotic spirit of the Independence Day Holiday, tariffs on $34 billion of Chinese imports kicked in on Friday. Is there method to this madness? Whereas we agree that the status quo does not represent a fair playing field, and that the U.S. economy has suffered because of the practices of many of our trading partners (most notably China), it’s not clear to us that this game of chicken is going to end well. The stock market, on the other hand, seems to be more sanguine, as the S&P 500 rallied 1.6% in holiday-shortened light trading. The bond market is sending a different message altogether, as the yield on the Ten-Year Treasury slipped 2 basis points to 2.83%, and the spread between the Ten and Two-Year Treasuries narrowed to 28 basis points, as the odds of a 2019 or 2020 recession increase.

It’s unfortunate (particularly for Fox Sports) that the U.S. failed to qualify for the World Cup, as it would have made great holiday TV viewing if we had a dog in this fight. Instead we did have Joey Chestnut downing a record 74 franks to capture his 11th title at the annual Nathan’s Famous July Fourth hot dog eating contest.

This Week:

Second quarter earnings season will commence, with nine S&P 500 companies reporting results. Those numbers should be very upbeat, as the estimated year-over-year earnings growth rate for Q2 2018 has increased from 18.9% on March 31 to 20.0% today. All eleven sectors are predicted to report year-over-year earnings growth. Seven sectors are projected to report double-digit earnings growth for the quarter, led by the Energy, Materials, Telecom Services, and Information Technology sectors. If 20.0% is the final growth rate for the quarter, it will mark the second highest earnings growth reported by the index since Q3 2010 (34.0%), trailing only the previous quarter (24.8%). It will also mark the third straight quarter in which the index has reported double-digit earnings growth. The wildcard will be the forward-looking comments, particularly if companies insert cautionary language because of the uncertainties relating to global trade and supply chain disruptions. Inflation will also be in focus, with June PPI due out on Wednesday and CPI on Thursday.

Stocks on the Move:

There was lots of movement without any specific news, as trading momentum seemed to dictate the action.

American Software, Inc. (AMSWA) +11.7%: American Software develops enterprise management and supply chain related software and services. Its solutions consist of global sourcing, workflow management, customer service applications, and ERP solutions. The Company’s shares are up 42.5% this year, driven by solid revenue growth and benefitting from the overall strength in the Tech sector. AMSWA is a 4.3% position in the North Star Dividend Fund and a 3.9% position in the North Star Micro Cap Fund.

Blackstone Group LP (BX) +10.4%: The sharp rise in the shares of KKR after converting to a corporation from a partnership, has led to speculation the BX will follow suit. Blackstone Group is an alternative asset manager. Its alternative asset management businesses include investment vehicles focused on private equity, real estate, hedge fund solutions, non-investment grade credit and secondary funds. BX is a 3.5% holding in the North Star Opportunity Fund.

Boot Barn Holdings Inc (BOOT) +12.4%: Acquired certain assets of Drysdales, Inc., a retailer with two stores in Tulsa, Oklahoma. As part of the transaction, Boot Barn purchased inventory and offered employment to the Drysdales team at both store locations. Boot Barn funded the acquisition from cash on hand. Jim Conroy, Chief Executive Officer, commented, “Tulsa is a market that is core to the western and workwear industry and Drysdales is the market leader. Drysdales opened its first store in 1981 and has successfully operated its business for more than 35 years. As we looked to expand into Tulsa, the opportunity to acquire these stores and their experienced team of associates was very compelling. Under the leadership of Jim McClure, these stores have successfully served the needs of the western and work customers in this area. We are looking forward to the opportunity to continue to grow the business and further expand theBoot Barn presence in Oklahoma.” Boot Barn Holdings Inc operates specialty retail stores that sell western and work boots and related apparel and accessories. The Company operates retail locations throughout the U.S. and sells its merchandise via the Internet. BOOT is a 2.2% holding in the North Star Micro Cap Fund.

Salem Media Group, Inc. (SALM) +15.5%: Salem Media Group is a domestic multimedia company with integrated operations including radio broadcasting, digital media, and publishing. The Company has three operating segments, Broadcast, Digital Media, and Publishing. The Company’s shares have advanced over 80% since reporting first quarter results on May 8, essentially recovering from the swoon it suffered after reporting third quarter 2017 results in October. SALM is a 2.2% holding in the North Star Dividend Fund and SALM corporate bonds are a 2.4% holding in the North Star Bond 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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