Currency, Covid, Chaos, and (Yes) Catalysts

In a week of troubling headlines, we take notice that the Dollar reached its highest level of 2021. We monitor the strength of the greenback as a proxy for the world’s perception of the attractiveness and safety of U.S. financial markets.

The most troubling news story was the collapse of the Afghan government following our withdrawal which resulted in chaos and panic. An informed discussion of U.S. involvement in Afghanistan is beyond the scope of our commentary, but the short-term impact on our economy seems very limited. For example, direct exports of goods to Afghanistan are low, about one-twentieth of one percent of total U.S. exports.

Unfortunately, Covid-19 is back on the top of the news feed, and last week was the highest number of new cases and deaths since early March.  The expedited timetable for the Fed’s tapering of bond purchases was another headline of concern. Stocks had reached their low point of the week Thursday in the aftermath of the release of the minutes from the Federal Reserve policy meeting that focused on when to reduce bond purchases. On Friday the market rallied after Dallas Federal Reserve President Robert Kaplan said the surge in coronavirus cases could cause him to adjust his views on tightening monetary policy. Kaplan had been the first Fed official to say it should consider tapering sooner than anticipated. However, the stock market’s bounce on Friday was not enough to prevent the three major stock indexes from finishing the week lower with the Dow dropping 1.1%, the Nasdaq Composite closing down 0.7% and the S&P 500 slipping 0.6%. Oil & Gas stocks were the worst-performing, with that sector sinking 7.15% following a decline of nearly 10% in the price of Crude Oil. Small-cap stocks continued to be under pressure, with the Russell 2000 retreating 2.5%. In our weekly review of our small-cap funds, NSMVX and NSDVX, we are comforted to see the combination of terrific earnings growth and some share price declines that have resulted in historically low valuation measures (bargains).

The economic data was mixed, with a soft retail sales report, but encouraging industrial production data and the lowest jobless claims number since the onset of the pandemic.

The bond market is showing no signs of stress, and the yield on The Ten-Year Treasury ended the week down 3 basis points at 1.26%.

In our opinion the slopes of coronavirus cases and interest rate hikes will be inversely correlated, in other words, the market should not be concerned with both a surge in cases and higher rates at the same time.

Hot Topics

Monetary policy will continue to be in focus as Fed officials meet virtually for their annual symposium, which is normally held at Jackson Hole, Wyoming. The hot topic will be the intention of many Fed officials to move away from easy monetary policy. While a major policy announcement is not anticipated in front of the September FOMC meeting, Chairman Jerome Powell’s road map on how the Fed plans to taper will be watched closely. We continue to believe that despite the hot inflation numbers, the Fed will not be able to raise rates while the economy faces a new challenge from the resurgence of Covid-19.  Moreover, to the extent that the Fed remains firmly in control of short-term interest rates, it seems very open to ‘mission creep,’ adding more and more topics that require expansionary monetary policy to its agenda, including climate change and social justice.

Economic updates due out during the week include reports on existing home sales, new home sales, durable goods and second quarter GDP.

Stocks on the Move

Whereas it was a very challenging week for small cap stocks, only one of our portfolio holdings experienced a double-digit decline, that being Century Casinos Inc.

-11.9% Century Casinos Inc (CNTY) operates as an entertainment company. The Company owns casinos, hotels, and luxury cruise vessels.

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

+12.9% 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.

VALU is a 0.8% position in the North Star Dividend Fund.

+13.3% Q.E.P. Co Inc (QEPC) manufactures, markets, and distributes tools and related products for the home improvement market. The Company’s brand names include QEP, O’Tool, and Roberts. Products include trowels, floats, tile cutters, wet saws, spacers, nippers, and pliers that are marketed for the use in surface preparation and installation of ceramic tile, carpet, marble, and drywall.

QEPC is a 2.2% position in the North Star Micro Cap Fund.

Overall, there was no significant company news for each of North Star’s stocks on the move.

Chicago Sports Update: Despite the 41-15 preseason drubbing from Mitch Trubisky and the Buffalo Bills, it is premature for Bears fans to panic.

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