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Kuby’s Commentary


Jul 19, 2021

Last Week:

Whereas the major headline indexes set record highs again on Monday, the undertone of the market continues to soften, with declining issues increasingly outnumbering advancing issues. In fact, excluding the Fab FAANG Five (Facebook, Apple, Amazon, Netflix, & Google) plus Microsoft, the rest of the market has been primarily in retreat for the past month, with Small-Cap and Value faring the worst. We believe the renewed COVID-19 concerns, inflationary pressures, and the peak earnings theory are responsible for this shift in investor behavior in recent weeks.

Looking back on our April 26th blog we highlighted that “The race between vaccine distribution and COVID-19 new cases will continue to be of the utmost importance. The trend in the U.S. has modestly improved recently, and I was very encouraged by Dr. Scott Gottlieb’s prediction that the next few months should show a sharp drop in new cases, hospitalizations, and deaths.” The good times rolled, and we made little mention of the pandemic until July 6th when we noted “Perhaps at the core of these recent movements is concern that the Delta variant of Covid-19 might disrupt the recovery later in the summer or in the fall. In any event, small caps have been very moody recently, exhibiting substantially more day-to-day volatility than their big-cap brethren.” On Friday, Dr. Gottlieb expressed his concern that the U.S. is significantly undercounting the number of Covid delta infections, making it difficult to know whether the highly transmissible strain is causing higher-than-expected hospitalization and death rates. Even with that potential undercounting, cases in the U.S. have been rising due to the delta variant, with the seven-day average up 67% from a week ago. The weekly average of new daily deaths is up 26% from a week ago, to 273, according to CNBC’s analysis. “People who are worried about Covid have largely been vaccinated. I realize not everyone has been able to get vaccinated, but most people have been vaccinated who are worried about this infection,” said Gottlieb. “People who remain unvaccinated aren’t worried about the infection and don’t want to be wearing masks either. Now, the bottom line, that means this is just going to spread through the population.” We would add that the future economic impact of this likely spread of the virus has created a stiff headwind for the “reopening” businesses.

Regarding the inflationary pressures, Tuesday’s consumer price index came in very hot at 5.4%, making three months in a row of elevated prices. Since the Fed is sticking to their storyline concerning the temporary nature of these price pressures, we are now left trying to define the duration of “transitory” as it pertains to monetary policy.

The good news is that corporate earnings reports have been extremely strong. Overall, 8% of the companies in the S&P 500 have reported actual results for Q2 2021 to date. Of these companies, 85% have reported actual EPS above estimates. In aggregate, companies are reporting earnings that are 22.9% above estimates, which is significantly above the 5-year average of 7.8%. The blended earnings growth rate for the second quarter is now a staggering 69.3%! Positive earnings surprises reported by companies in the Financial sector (led by Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, and Goldman Sachs) were mainly responsible for the improvement in overall earnings for the index during the past week. The bad news is that market forecasters are discounting these results as representing peak earnings. In fact, the Financial Sector ETF (XLF) was down 2.56% last week despite the terrific earnings report.

The S&P 500 declined a modest -0.97%, the S&P Midcap Index was down -3.31%, and the Russell 2000 sank -5.12%, leaving the small caps down over 7% so far in July. The yield on the Ten-Year-Treasury slipped another 6 basis points to 1.3%, while gold and the dollar were both steady. The Oil and Gas sector suffered a 7.7% decline during the week as crude oil dropped 3.7%.

This Week:

U.S. stock futures followed the global markets lower over the weekend, and the “Fear Index” (VIX) jumped 6% going into Monday’s trading session.

Earnings season will be in full swing, with 79 S&P 500 companies scheduled to release results. Economic reports due out include updates on housing starts on Tuesday, existing home sales as well as the Leading Economic Index on Thursday. The ECB will also be announcing its monetary-policy decision on Thursday, with it being widely expected to keep short-term rates at negative 0.5%.

Stocks on the Move:

-11.3% CarParts.Com Inc (PRTS) retails automobile parts online. The Company offers mirrors, engines, headlights, brakes, interior and exterior accessories, tools, wheels, lighting, bumpers, and other aftermarket autobody parts in its network of over 1.2 million SKUs. Last week, Unique Logistics (OTCPK: UNQL) renewed and extended its existing partnership with PRTS. As part of the extension, Unique Logistics will continue to offer ocean freight services for between the Philippines, India, China, and Taiwan to the U.S.

PRTS is a 4.2% position in the North Star Micro Cap Fund.

+18.1% Westwood Holdings Group Inc (WHG) provides investment advisory services to a broad range of institutional clients. The Company also offers trust and custodial services to institutions and high-net-worth individuals. Last week, the financial advisory firm spiked after a report that Americana Partners made a $25/share all-cash offer. Westwood has not engaged with Americana on the offer.

WHG is a 1.2% position in the North Star Micro Cap Fund.

-11.8% Madison Square Garden Entertainment Corp (MSGE) produces, presents, and hosts various live entertainment events, including concerts, family shows, and special events, as well as sporting events, in its venues including New York’s Madison Square Garden, Hulu Theater, Radio City Music Hall, the Beacon Theater, and The Chicago Theater. The Company also operates entertainment dining and nightlife venues in New York City, Las Vegas, Los Angeles, Chicago, Singapore, and Australia under the Tao, Marquee, Lavo, Avenue, Beauty & Essex, and Cathédrale brand names. There was no significant news last week.

MSGE is a 1.6% position in the North Star Opportunity Fund.

-10.4% Pitney Bowes Inc (PBI) sells, finances, rents, and services integrated mail and document management systems. The Company offers a full suite of equipment, supplies, software, and services for end-to-end mail stream solutions. There was no significant news last week.

PBI is a 0.9% position in the North Star Dividend Fund.

-12.2% 1-800-Flowers.Com Inc (FLWS) is an e-commerce provider of floral products and gifts. The Company’s product offerings include fresh-cut and seasonal flowers, plants, floral arrangements, home and garden merchandise, and gift baskets. There was no significant news last week.

FLWS is a 2.7% position in the North Star Micro Cap Fund.

-11.7% Century Casinos Inc (CNTY) operates as an entertainment company. The Company owns casinos, hotels, and luxury cruise vessels. There was no significant news last week.

CNTY is a 1.1% position in the North Star Micro Cap Fund.

In an otherwise difficult week, it was great celebrating my mother’s birthday last Tuesday. The future is uncertain, so on a professional level, I recommend that everyone keep their equity allocations in line with their risk profile, and on a personal level, if you are fortunate to have your folks around, give them a big hug.

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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