Waiting on Wyoming
The sell-off that started the previous Friday continued Monday, as concerns deepened over a more hawkish tone from Federal Reserve Chairman Jerome Powell on the upcoming Friday at Jackson Hole. The market treaded water on very low volume Tuesday and Wednesday, while Thursday brought a handsome rally. In less than ten minutes on Friday morning Chairman Powell delivered a knock-out punch to the optimist camp with the blunt message that the Fed plans to continue raising interest rates and hold them at a higher level until officials are confident inflation is under control.
Powell strongly stated that the Fed will “use [their] tools forcefully” to attack inflation that is still running near its highest level in more than 40 years. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” the Chairman said in prepared remarks. He continued, “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” Squashing any thoughts of the Fed easing policy in 2023 he concluded by saying reaching an estimate of the longer-run neutral rate is not a place to pause or stop: “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” he warned.
Looking ahead, Powell said the June FOMC projections suggest rates would rise to just below 4% through the end of 2023. Whereas most of the Chairman’s comments were simply restatements of his other recent comments, the “painful “ tone and the extension of tight monetary policy through 2023 were new. On the other hand, listening to the entire speech we found it less hawkish than the market’s reaction suggested. In particular, he made it clear that there was a lot of data between now and the next meeting and the degree of the next interest rate hike would depend on that data.
The market felt the pain immediately, suffering its worst losses and wiping out all gains made in August. For the week, the S&P 500 lost 4.0%, the Nasdaq Composite plunged 4.4%, and the Russell 2000 declined 2.9%. The dollar gained fractionally, oil advanced 2.5%, gold was essentially unchanged, and the yield on the 10-year Treasury inched up 4 basis points to 3.03%.
Founded by an act of Congress in 1913, the Federal Reserve System was established to make the American banking system more stable. In particular, the Fed was intended at its founding to be a stable lender to critical players in agriculture. The industry had become a periodic plague on U.S. banks that subsequently began to charge usury interest rates to the agricultural industry because of its tendency to frequently “boom and bust.” Banking panics had occurred often throughout the 19th century and were widely blamed on the nation’s “inelastic currency.” Since then, however, there has been immense mission creep even as recently as the past two years when Fed officials began emphasizing a possible role for the Fed in the climate change mitigation battle. In essence, a hundred years since its founding the Fed’s role in the financial markets and economy has expanded to a degree where we must wonder if the system needs to be overhauled. In that regard, we turned to noted economist and expert on monetary policy, Professor Robert Z. Aliber, for his insights. Specifically, we asked if a better policy would be one set by a computer model rather than relying on the Fed Presidents. The Professor countered that the creation of the model would rely on the inputs being set by individuals, and therefore would not solve the problem. He did note that while the Fed was created to reduce the shocks to the system, it has recently contributed to the shocks. We agree and hope that the in the future the Fed can become less of a headline grabber while sticking to less extreme shifts in policy and language.
Outside of Jackson Hole, the news was more upbeat with data showing that consumer spending edged up slightly in July while inflation eased considerably. The North Star research team met with several portfolio companies at the Midwest IDEAS Conference in Chicago covering consumer, real estate, and employment businesses. The message was consistent that 2023 is setting up to be a return to “normal,” with the obvious disruptive wildcards (pandemics, geopolitics) still creating some uncertainty. With the recent declines in share prices, valuations are once again at bargain levels for many fine companies.
Economic reports due in during the week include updates on consumer confidence, construction spending, and vehicle sales. The week ends with the U.S. jobs report for August, which is expected to show 300,000 jobs added for the month and an unemployment rate holding steady at 3.5%.
Painful selling continued Monday morning with the DJIA, S&P, and Nasdaq Composite opening down and continuing to drop through the early afternoon. Correspondingly, The Wall Street Journal reported that U.S. stock funds had recorded $1.2 billion in outflows from August 17th to August 24th, and almost $44.1 billion from equity funds in the months of June and July.
Stocks on the Move
+16.6% DallasNews Corporation (DALN) is the Dallas-based holding company of The Dallas Morning News and Medium Giant. The Dallas Morning News is Texas’ leading daily newspaper with a strong journalistic reputation, intense regional focus, and close community ties. Medium Giant is a media and marketing agency of divergent thinkers who devise strategies that deepen connections, expand influence, and scale success for clients nationwide. Last week, DALN announced a $1.50 special dividend in addition to a voluntary $5M contribution to its pension plan.
-12.3% 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 company news last week, although the stock did rally the week before on fiscal fourth quarter revenue beat and rumors it was considering a spin-off for its media and entertainment businesses.
+15.4% The Mosaic Company (MOS) is one of the world’s leading producers and marketers of concentrated phosphate and potash fertilizers and feed ingredients for the global agriculture industry. Fertilizer names surged last week after Poland’s top producer announced it would cut production and output due to record high gas prices.
-10.2% Sono Group N.V. (SEV) manufactures and sells electric cars with integrated solar cells and panels. In addition, the Company monetizes its variable battery technology for integration in numerous types of vehicles, including buses, trucks, camper vans, trains, and boats, as it aims to reduce carbon emissions and provide clean and affordable transportation for the masses. There was no significant company news last week, however the broad consumer sell-off hit the most speculative names, like Sono, the hardest.
-10.0% PetMed Express Inc (PETS), doing business as 1-800-PetMeds, operates as a pet pharmaceutical company. The Company provides prescription and non-prescription pet medications, as well as health and nutritional supplements. There was no specific company news last week, however the broad consumer sell-off hit the most speculative names, like PetMed Express, the hardest.
+12.5% Orion Energy Systems Inc (OESX) manufactures, sells, installs, and implements energy management systems for commercial office and retail, exterior area lighting, and industrial applications in North America. It offers interior light emitting diode (LED) high bay fixtures; smart building control systems; and LED troffer door retrofit for use in office or retail grid ceilings. In addition, it provides lighting-related energy management services, such as site assessment, utility incentive and government subsidy management, engineering design, project management, and recycling. There was no significant company news last week.
+27.6% Value Line Inc (VALU) produces investment related periodical publications. The Company also provides investment advisory services to mutual funds, institutions, and individual clients. All total, Value Line collects data and provides analysis on around 7,000 stocks, 18,000 mutual fund and 200,000 options. There was no significant company news last week.
-19.6% Superior Group of Companies Inc (SGC) designs apparel products. The Company manufactures and sells a wide range of uniforms, corporate identification, career apparel, and accessories. Super Group of Companies serves hospital and healthcare fields, hotels, fast food and other restaurants, public safety, industrial, transportation, and commercial markets. There was no significant company news last week.
-14.4% 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. There was no significant company news last week.
The stocks mentioned above may be holdings in our mutual funds. For more information, please visit www.nsinvestfunds.com.
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