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Kuby’s Commentary

The Good, the Bad and the Politics

Oct 21, 2019

Last Week:

The Good: Third quarter corporate earnings are off to a handsome start, with more than 14% of S&P 500 companies having reported through Friday, FactSet data shows that 81% posted earnings that beat analyst expectations. To be sure, the companies are being rated on a very low bar this earnings season as the consensus expectations call for third-quarter earnings to fall by 4.6%.

The Bad:  Retail sales data for September showed a decline of 0.3% from August, but 4.1% higher than September 2018. The estimate had been for a 0.4% monthly increase. With the well publicized slowdown in manufacturing, the consumer remains the key to keeping the economy growing. These  monthly numbers are both volatile and somewhat imprecise, so the September 2019 report was not bad enough to be alarming.

The Ugly: One word, politics.

Despite sell-offs in DJIA components Boeing, Johnson & Johnson, and IBM, the S&P 500 managed to gain 0.5% to close within 1% of its record high. The yield on the Ten-Year Treasury remained steady at 1.75%, while the U.S. Dollar weakened by over 1%. We believe a slightly weaker Dollar is not a problem, but any acceleration in the decline could suggest the onset of the exit of foreign investment, which would be a major issue.

This Week:

Corporate earnings should be in focus as 120 S&P 500 companies, or around 24%, are scheduled to release their quarterly results. There are several important upcoming international events, such as another round of Brexit votes, Canadian elections, and Mario Draghi’s final ECB meeting. The domestic economic calendar is pretty light, with the Census Bureaus release of Durable Goods for September and the IHS Manufacturing PMI both on Thursday possible market movers if the numbers are substantially worse than expectations. The “Recessionistas” are still out there, and evidence supporting their gloom has recently resulted in sell-offs (shallow and short-lived thankfully).

Stocks in the News:

CAH +9.8%: Cardinal Health Inc is the third- largest global logistics provider engaged in wholesale pharmaceutical and medical products. Talks to settle opioid lawsuits sent drug distributor stocks soaring. CAH is a 1.28% holding in the North Star Opportunity Fund.

PPSI -16.2%: Pioneer Power Solutions Inc manufactures, sells and services a broad range of specialty electrical transmission, distribution, and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. The share price remained under pressure in reaction to  the decision by the Superior Court of California enjoining distributions to shareholders, including the announced one-time special cash dividend of $1.37 per share planned and, at the time of the court’s order, already in process to be paid on October 7, 2019. Pioneer has indicated that it will contest the matter, but shareholders have clearly lost patience. On August 22, PPSI completed the sale of its liquid filled and dry type transformer businesses to private equity firm Mill Point Capital for base price of $68 million. After this recent decline the Company’s market capitalization is $29.7 million. PPSI is a 0.90% holding in the North Star Micro Cap Fund and a 1.27% holding in the North Star Opportunity Fund.

EML +9.8%:  The Eastern Co is a manufacturer of industrial hardware, security products, and metal castings. It operates in three business segments: Industrial Hardware, Security Products, and Metal Products. There was no news to account for the share price rise.  EML is a 4.29% 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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