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Kuby’s Commentary

The Good the Bad and the Confusing

Jul 23, 2018

Last Week:

Wow, what a strange week. Let’s call it the Good, the Bad, and the Confusing.

The Good: Corporate earnings are terrific. It now looks like 20.8% net profit growth on a 9% revenue increase.

The Bad: US housing starts fell 12.3% in June to a nine-month low, making for the biggest percentage decline since November 2016 and the biggest relative to expectations since January 2007. Every region experienced a decline, so this isn’t about a regional weather condition. It’s important to differentiate between this slowness and the housing bubble that contributed significantly to the 2008 financial crisis.

The Confusing: (AKA “The Political”) The Helsinki meeting between Trump and Putin. The President criticizing the Federal Reserve, seemingly attempting to influence monetary policy. Trade policy; where are we anyway? I say “Confusing” rather than “Ugly”, because there are those who would argue that all this disruption will ultimately lead to a surprisingly positive end result.

The net result was a break-even week for the stock market, with the yield on the Ten-Year Treasury inching up 6 basis points to 2.89%.

This Week:

It’s the busiest week of earnings season with 174 S&P 500 companies (including eleven Dow 30 components) scheduled to report results for the second quarter. Most of the major U.S.-based banks and a few regional banks have already reported.  The results were generally positive, characterized by improving credit trends and stable loan growth that is consistent with reported GDP growth levels.  We will also get more on the housing sector with June’s New Home and Existing Home Sales reports, along with the second quarter Housing Price Index, and the MBA Mortgage Applications Index. Additionally, we will get more on the state of the manufacturing sector with the Durable Goods report on Thursday, and the first read on second-quarter GDP as well as the University of Michigan (Gottlieb) Consumer Sentiment will be released next Friday. I think the Consumer Sentiment reading will be particularly interesting, given the continuous cacophony of confusing cross currents.

Stocks on the Move:

ARC Document Solutions, Inc. (ARC) +49.1%: The Company announced that it will report 2% growth in revenues for their second quarter, driven by continued strength in print sales, and improvement in all strategic business lines. “We are encouraged by our preliminary estimates,” said Suri Suriyakumar, Chairman, President and CEO of ARC Document Solutions. “Rather than withholding these positive developments until our earnings call, we thought it prudent to announce ARC’s progress given the current volatility of the stock market and the disruption around our exit from the Russell 2000. We want to remind shareholders of the company’s improving revenue lines for the first time in several years.” ARC Document Solutions is engaged in providing document management solutions to businesses, including non-residential segment of architecture, engineering & construction industry. Its offering includes; onsite, digital, color & traditional reprographics. ARC is a1.5% holding in the North Star Micro Cap Fund.

Healthcare Services Group, Inc. (HCSG) -10.9%: Reported that revenues for the three months ended June 30, 2018 increased to $503.7 million compared to $470.9 million for the same period in 2017. Net income for the three months ended June 30, 2018 was $25.8 million, or $0.35 per basic and diluted common share compared to $0.30 in the year earlier period. Apparently, these results were not clean enough for the market. Healthcare Services Group provides management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry in United States.  HCSG is a 1.6% holding in the North Star Dividend Fund.

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