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Kuby’s Commentary

Recession Obsession

Aug 19, 2019

Last Week:

On Wednesday night I got into an Uber and greeted my driver by saying that it was a beautiful evening. “Yes” he responded, “but the 2-10 curve has inverted and there is a recession coming in 18 months”. I’m not joking. That actually happened. The market had suffered its worst decline of the year that day as the yield inversion had triggered a tidal wave of algorithmic generated sell orders based on the historic relationship between an inverted yield curve and an economic recession. Let’s take a minute to examine the underlying principle that explains that relationship. Towards the end of an expansion resources get scarce as the economy overheats. That scarcity creates inflationary shocks to the system that drive short-term interest rates up to a level that then cools the economy down. Clearly that’s not what’s happening now. Quite to the contrary we have very low short-term rates with moderate growth and inflation rates. The reason the curve is inverted is because long-term interest rates are extraordinarily low, in fact negative yields are prevalent around the globe.

A nice rally on Friday minimized the losses for the S&P 500 to -1.03% for the week, while the Russell 2000 essentially broke even. The yield on the Ten-Year Treasury dropped 20 basis points to 1.53%, while the Thirty-Year yield fell below 2% for the first time ever. The Commerce Department released strong retail sales figures for July as spending at retail stores and restaurants rose 0.7% during the month, after a 0.3% gain in June. On the other hand, U.S. consumer sentiment fell to 92.1 in August, the lowest indicator readout since the start of 2019, according to data released Friday. The dip points to further uncertainty in the U.S. economy, as consumers navigate wild market swings and a constantly shifting trade environment. By way of reference, a reading of 92.1 still reflects a high level of consumer confidence. The trade environment remained in flux, with some nasty rhetoric early in the week giving way to a more conciliatory tone later. The U.S. dollar continued to strengthen, although the yuan had its biggest advance of the summer, easing concerns of the Chinese using their currency as a weapon in the trade war.

I would like to take a moment to apologize to all the hoopers who were unfortunate enough to be my teammates this week at the Highwood Recreation Center. Apparently my three-point shooting percentage approaches 0% when the yield curve inverts. The high volume of attempts was a testament to my motto that you never make a shot that you don’t take.

This Week:

The Fed will be back in focus with the FOMC minutes being released on Wednesday and Jerome Powell speaking on Friday at the annual Jackson Hole retreat. The ECB minutes being released on Thursday may give clues about the size and shape of their upcoming stimulus program. Earnings season will slow down to a trickle, with just 21 S&P 500 companies reporting results. Consumer-discretionary companies such as Home Depot are expected to post results that confirm that the U.S. consumer remains strong.

The tone on trade improved over the weekend after President Trump said that Tim Cook made a “very compelling argument” that the tariffs on Chinese imports gave Samsung an edge over Apple. Trump also tweeted that “We are doing very well with China, and talking!”

Stocks on the Move:

(AAL) -10.39%: American Airlines operates almost 7,000 flights per day to more than 350 destinations in 50 countries. Global recession concerns weighed heavily on the economically sensitive airline industry. AAL is a 1.63% holding in the North Star Opportunity Fund.

(CBS) -10.45%: CBS is a media conglomerate operating primarily in the U.S. CBS’ television assets include the CBS television network, 30 local TV stations, and 50% of CW, a joint venture between CBS and Time Warner. The Company and Viacom (VIA, VIAB) agreed to merge in an all-stock transaction valued at $11.7 billion. Under the terms of the deal, CBS shareholders will get 61% of the combined company, with the remaining 39% going to Viacom investors. Each Viacom share will convert into 0.59625 share of CBS. The agreement recombines the two media giants which had been separated in 2006 by the Redstone family in an effort to increase shareholder value. Efforts to merge the two have been ongoing since Sumner Redstone stepped down as executive chairman of both companies in 2016. Analysts had a muted reaction to the deal, with more price target and rating decreases than increases. CBS is a 0.83% holding in the North Star Opportunity Fund.

(NTN) -12.32%: NTN Buzztime Inc., delivers interactive entertainment and innovative dining technology to bars and restaurants in North America. Total revenues for the second quarter 2019 were $5.2 million, compared to $4.8 million in the first quarter of 2019 and $5.7 million in the second quarter of 2018. The year over year decrease reflects lower subscription and professional development revenue, partially offset by increases in advertising revenue. Direct costs were $1.7 million, compared to $1.9 million for the same period in 2018. Net loss attributable to common shareholders was $98,000, or $0.03 per share, improved from a net loss attributable to common shareholders of $132,000, or $0.05 per share, in the prior year quarter.  EBITDA was $686,000, compared to $691,000 in the prior year quarter. “During the second quarter, Buzztime Entertainment improved net loss compared to the prior year period and delivered its 13th consecutive quarter of positive EBITDA and gained traction on three important growth initiatives,” said Ram Krishnan, NTN Buzztime CEO. “Upon test-marketing our new capital-light product, called Buzztime Basic, we signed over 80 locations in the first 75 days after it was released. We launched our new ad platform in limited beta and began seeing transactions on the open exchange, both on a local and national basis. In addition, we completed a Nielsen study designed to measure the value of our audience, revealing we have one of the largest place-based advertising networks in the country and confirming we have a great market opportunity. The investments we made in the tablet platform continue to pay off in new markets. We’ve secured a second order from our jail partner that provides for $3.0 million of revenue through 2020 and continue to see momentum in our hardware and platform segment.” NTN is a 0.60% holding in the North Star Micro Cap 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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