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Kuby’s Commentary

Hey June, You Took a Sad Song and Made it Better

Jul 1, 2019

Last Week:

The twin narrative of a dovish Fed and optimism surrounding a potential trade deal at the G20 spilled over into small cap stocks (hallelujah!) as the Russell 2000 jumped 1.09%. The S&P 500 slipped modestly for the week, but  posted its best June since 1955 with a 6.89% gain.

Before we uncork the champagne bottles, it’s worth remembering that May was not very merry, and we are essentially back to the levels of the end of April.

Or the end of September for that matter. I’m focusing on that time horizon because that’s when trade and Fed policies took center stage.

The picture is worse for small cap stocks over that period of time.

The University of Michigan (Gottlieb) consumer sentiment index for June came in at 98.2, down from 100 in May. Consumers’ assessment of current conditions actually rose a bit, rising to 111.9 from 110, but the index of consumer expectations fell to 89.3 from 93.5. In the past that dispersion between current and future consumer sentiments has been a pretty reliable forecaster of an upcoming recession. The silver lining of the economic slowdown is the downward pressure on interest rates. The yield on the Ten-Year Treasury declined 6 basis points to settle at 2% on the nose. A series of Fed comments trimmed hopes of a 50-basis point cut in July, but more or less guaranteed a 25-basis point cut at that meeting, with the high likelihood of two more cuts before the end of the year. The very low interest rates combined with record corporate profit levels make up the case for equities at current levels of around 17x forward earnings estimates.

As for the China trade talks, I once again reference Professor Aliber’s comment that the U.S. and China will be negotiating trade terms “until the end of time”. In the latest dialogue, President Trump has softened his stand on Huawei, which should help the Chinese save face in making concessions.

This Week:

The takeaways from The G20 will set the tone in the holiday-shortened trading week. President Trump told reporters on Saturday that the trade talks were “right back on track”, so investors will likely be able to enjoy their July 4th parties without worrying about additional tariffs on their BBQ grills. The Institute for Supply Management will release its Manufacturing Index for June on Tuesday, with forecasts of a 51 reading down from May’s 52.1, but still barely signaling expansion rather than contraction. On Friday the Bureau of Labor Statistics will release the June jobs reports, which is expected to recover to 180,000 new jobs from 75,000 the month earlier.

Stocks on the Move:

(AMC) -11.98%: AMC Entertainment Holdings, Inc. is involved in the theatrical exhibition business. It owns, operates or has interests in theaters located in the United States and Europe. Despite reporting solid growth in their subscription business, the shares continued to trade lower. AMC Stubs A-List is a winner at its first birthday party, but the proud parent cheering its toddler’s achievements has been a surprising loser. AMC Entertainment stock hit 52-week lows last week, closing in the single digits for the first time since late 2017. The stock has shed 32% of its value since launching the service, surrendering more than half of its value since peaking last September.  AMC is a 1.30% holding in the North Star Opportunity Fund.

(AMSWA) -10.3%: American Software, Inc. develops enterprise management and supply chain-related software and services. The company reported “mixed” results the previous week, with earnings exceeding estimates but revenues falling short.  AMSWA is a 2.44% holding in the North Star Dividend Fund and a 1.14% holding in the North Star Micro Cap Fund.

(CLCT) +12.08%: Collectors Universe, Inc. provides authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs and historical and sports memorabilia. There was no company specific news to account for the share price gain last week.  Possible impact of RealReal (NASDAQ: REAL) going public?  CLCT is a 3.46% holding n the North Star Micro Cap Fund and a 4.25% holding in the North Star Dividend Fund.

(ODC) +11.28%:  Oil-Dri Corp of America develops, manufactures, and markets sorbent products made primarily from clay. Its absorbent offerings, which draw liquid up, include cat litter, floor products, toxin control substances for livestock, and agricultural chemical carriers. There was no company specific news to account for the share price gain last week.  ODC is a 2.86% holding in the North Star Dividend Fund.

(SCS) +10.61%:  Steelcase, Inc. is a furniture company primarily based in the United States and has operations in Europe, the Middle East, and Africa. Shares rebounded from a sharp decline after reporting earnings the previous week that we thought were ok, but the market didn’t like. SCS is a 1.11% holding in the North Star Dividend Fund.

(WHG) +17.33%: Westwood Holdings Group, Inc. through its subsidiaries is engaged in managing investment assets and providing services for its clients. Once again, no news for the bounce of depressed levels.  WHG is a 3.33% holding in the North Star Dividend Fund.

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