Powell’s Policy Persists
On Friday, at the Jackson Hole Economic Symposium, Chairman Powell delivered the message that whereas tapering is coming, the Delta variant makes the timing uncertain. He also made it clear that the plan to taper does not suggest that any interest rate increases are contemplated in the near term. In brilliant messaging, he also added that “the prospects are good for continued progress toward maximum employment.” In other words, easy money and an improving economy, the perfect cocktail for the stock market party to continue. Indeed, the S&P 500 finished the week at a new record high after gaining 1.52%, while the yield on the Ten-Year Treasury inched up 5 basis points to 1.31%. Small caps fared the best with the Russell 2000 surging 5.05%, although still trading below the high set in March. With share prices the same after six months of spectacular earnings growth, we believe there are terrific bargains to be found in a well-constructed portfolio of small-cap value stocks. Crude oil and gold both rallied, while the dollar slipped about 1%.
The recent economic data has provided some warning signs that support the need for continued easy money, as consumer spending growth slowed to a modest 0.3% in July. When combined with the previous week’s release that showed a sharp drop in consumer sentiment, it is becoming clear that the consumer is feeling some stress, both from the Delta variant and from the sharply rising cost of goods and services.
We understand that there is no such thing as a free lunch and that one day there will be a substantial price to pay for the $7 trillion increase in government debt and the related expansion of the Fed’s balance sheet. Additionally, we recognize the Herculean task that Chairman Powell faces. Robert Z. Aliber, the economist for whom we have the utmost respect, believes that a bond market storm of historic proportions is brewing because of the current monetary policy. In his recent client letter, Professor Aliber suggested “Jerome Powell will go down in the history books as the worst ever Chair of the Federal Reserve, he will displace Bill Miller from this dubious distinction. Before Powell’s first term is over in February 2022, the U.S. inflation rate will be in the range of eight to ten percent, the inflation rate now is over five percent. When Arthur Burns was Chair of the Fed from 1970 to 1978, he said that the U.S. inflation rate then was in the four or five percent range as a result of supply-side shocks—the disappearance of the anchovies off the coast of Peru, the oil price increases, the bad wheat harvests in Russia. Powell has a different chapter in the same playbook, the shortage of computer chips, the lumber shortage, the marriage of Russia to the OPEC cartel, the blockage of the Suez Canal by the container freighter the Ever Given, the shortage of freight containers in China, the cessation of auto production in April and May 2020 because of the pandemic, the closure of meat-packing plants because of the pandemic, etc. A Fed Chairman can never acknowledge that the source of the problem is that the monetary aggregates have increased rapidly on his watch”.
Professor Aliber points out that the ultra-dovish monetary policy will likely continue for the rest of 2021 and beyond: “Changes in monetary policy are like trying to change the course of a massive aircraft carrier – it takes a long time for the carrier to slow after the decision has been made to slow the carrier. The Fed is in the pre-announcement stage about reducing the number of its monthly purchases of Treasury securities and mortgage-backed securities; this phase is likely to continue at least until February 2022, when President Biden must decide whether to reappoint Powell as Chair of the Fed. The earliest the Fed might begin to taper is the Spring of 2022, six months away. Tapering is a slow process because the Fed does not want to disrupt the bond markets, so the Fed will reduce its bond purchase to $60 billion a month, then to $50 billion a month (these are guesses designed to illustrate the process). It might not be until February 2023 that the Fed has finished its bond tapering process. If the Fed tapers too swiftly, there is the risk that investors will sell a significant amount of their holdings of bonds. The implication is that the Fed’s expansive policies will be adding to the liquidity of the economy for at least eighteen more months.”
This outlook suggests that investors would be well-advised to own equities that will perform best during periods of high inflation, have an allocation to hard assets such as copper, gold, timber, and real estate, and heavily skew one’s fixed income holdings to short-term TIPS (Treasury Inflation-Protected Securities).
Still Combating Covid
Most of the economic reports are expected to show modest softening, starting with the Chicago Business Barometer on Tuesday, followed by Manufacturing Purchasing Managers Index on Wednesday, and Services Purchasing Managers Index on Friday. The most significant release will be the jobs report for August on Friday, with the consensus forecast suggesting the economy added 781,000 positions with the unemployment rate edging down to 5.2% from 5.4% the month earlier.
COVID-19 news will perhaps be the most important storyline, as the school year commences while cases surge for the youth demographic, and some states impose restrictions to combat the spread. For example, effective August 30th in Illinois all teachers must be vaccinated, and individuals 2 and up must wear a mask in indoor public places, such as restaurants, gyms, and grocery stores.
Stocks on the Move
+26.7% 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. MSGE rallied last week after reporting second-quarter revenue of $99.0M, up 1,008.9% year-over-year and beating consensus estimates by almost $29.0M. The beat reflected the return of live events to the Company’s performance venues. Additionally, MSGE announced the official return of the Christmas Spectacular starring the Radio City Rockettes with 163 shows scheduled for the 2021 holiday season.
MSGE is a 2.2% position in the North Star Opportunity Fund.
+21.4% Build-A-Bear Workshop Inc (BBW) is an interactive and entertainment mall-based retailer that invites guests of all ages to create their own customized stuffed animals with clothing, shoes, and accessories through a bear-making process. Build-A-Bear reported another quarter of outstanding results last week with earnings per share of $0.43 and revenue of $94.7M, up 134.4% year-over-year and beating the consensus estimate by $13.7M. In addition to raising its full-year 2021 guidance, the Company expects its third-quarter e-commerce demand to remain flat with last year’s third quarter while still representing triple-digit growth over 2019.
BBW is a 2.6% position in the North Star Micro Cap Fund.
+18.0% Movado Group Inc (MOV) designs, manufactures, retails, and distributes watches, as well as jewelry, tabletop, and accessory products. Its brands include Movado, Hugo Boss, Lacoste, Ferrari, Coach, and Tommy Hilfiger. Movado Group reported record Q2 2021 earnings on Friday of $0.82 per share and revenue of $173.87M, up 96.4% year-over-year and beating consensus estimates by $33.87M. Movado.com e-commerce grew over 70% versus the same period in the prior year, and overall performance was driven by design innovation and powerful marketing programs.
MOV is a 0.6% position in the North Star Micro Cap Fund.
+15.0% Evolution Petroleum Corporation (EPM) explores for and produces oil and gas. The Company focuses on acquiring established oil and gas fields and applying specialized technology to increase production rates. There was no significant company news last week.
EPM is a 1.1% position in the North Star Micro Cap Fund and a 2.7% position in the North Star Dividend Fund.
+15.6% Century Casinos Inc (CNTY) operates as an entertainment company. The Company owns casinos, hotels, and luxury cruise vessels. There was no significant company news last week.
CNTY is a 1.3% position in the North Star Micro Cap Fund.
+10.7% Napco Security Technologies Inc (NSSC) manufactures electronic security devices, fire detection products, access control systems, and digital lock equipment used in residential, commercial, institutional, and industrial installations. There was no significant company news last week.
NSSC is a 1.7% position in the North Star Micro Cap Fund.