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Kuby’s Commentary

The Headline Olympics

Mar 5, 2018

Last Week:

It was the headline Olympics last week, with Putin, Mueller, Powell, and Trump competing for medals. Putin failed to make the podium, despite boasting of a new generation of “invincible” nuclear -capable Russians weapons. Mueller earned the bronze medal, with a flurry of recent activity, including expanding the investigation into possible ties between the United Arab Emirates and the White House. The silver medal went to Fed Chair Jerome Powell, who rattled the markets on Tuesday with more hawkish language about inflation, which was widely interpreted as indicating that the Fed would raise interest rates faster than expected. On Thursday, he seemed less hawkish, and the market briefly let out a sigh of relief. President Trump secured the gold medal, and sent the markets into a tumble, later Thursday, by announcing that he would sign an order imposing a 25% tariff on steel and a 10% tariff on aluminum. By the closing bell on Friday, the S&P 500 had lost 2.04%, while the yield on the Ten-Year Treasury declined 1 basis point to 2.86%, with the action on Thursday and Friday snapping the trading link between the S&P and the Ten-Year rate.

The consensus opinion is that Trump’s tariff plan is a disaster, as it would spark a trade war and have serious inflationary consequences. I was a mediocre economics student, so I turned to a legitimate expert, Professor Robert Z. Aliber, for his thoughts on this policy. “Good objective, terrible execution” was the short version of his response. Please refer to the end of the blog for his complete response.

This Week:

Investors will continue to focus on the economic consequences of the tariffs, as well as the potential retaliation from our trading partners. On Friday morning, the Bureau of Labor Statistics will release the latest reading of the employment market, with the consensus calling for 205,000 new jobs created in February. Keep in mind that it was the 2.9% jump in wages in the January report that triggered the jump in interest rates and the spike in the stock market volatility.

Stocks on the Move:

Douglas Dynamics, Inc. (PLOW) +13.8%: Net sales in the fourth quarter were $138.0 million, an increase of 6.0% when compared to the prior year fourth quarter net sales of $130.1 million. The increase relates to stronger demand in Work Truck Attachments and incremental sales related to ramping up new facilities in Work Truck Solutions. Adjusted net income of $12.1 million, or $0.53 per diluted share, compares with adjusted net income of $10.3 million, or $0.45 per diluted share, for the fourth quarter of 2016. James L. Janik, Chairman, President and Chief Executive Officer commented, “We were pleased to close out the year on a positive note, producing overall results that were in line with our expectations. We continue to see sequential improvements in chassis availability for both our municipal products and in our Work Truck Solutions segment. We believe the negative impact on our operations from the chassis availability delays during the past year is slowly diminishing and our teams are working diligently to upfit and deliver trucks to our customers.” Douglas Dynamics is a manufacturer and upfitter of commercial vehicle attachments and equipment. Its products include snow plows, sand and salt spreaders, and turf-care equipment sold under the Blizzard, Fisher, Snowex, Western, and Turfex brands. The North Star Dividend Fund holds a 3.1% position in PLOW.

Heritage -Crystal Clean, Inc.(HCCI)+17.7%: Revenue for the fourth quarter of 2017 was $115.8 million compared to $106.7 million for the same quarter of 2016, an increase of 8.5%. Net income attributable to common shareholders for the fourth quarter was $11.7 million compared to net income attributable to common shareholders of $3.4 million in the year earlier quarter. Basic earnings per share was $0.51 in the fourth quarter of fiscal 2017 compared to earnings of $0.15 in the fourth quarter of fiscal 2016. Brian Recatto, the Company’s President and CEO commented, “Looking back at my first year as CEO of the company, I am proud of the challenges we have overcome and the record results we’ve produced as we look forward to continued success during fiscal 2018.” Heritage-Crystal Clean provides parts cleaning, used oil re-refining and hazardous and non-hazardous waste services to small and mid-sized customers in both the manufacturing and vehicle service sectors. The North Star Micro Cap Fund holds a 1.5% position in HCCI.

Acme United Corp. (ACU) -9%: Announced that net sales for the fourth quarter ended December 31, 2017 were $30.2 million, compared to $26.4 million in the comparable period of 2016, an increase of 14%. Adjusted net income (non-GAAP), excluding tax charges related to the recently enacted U.S. Tax Cuts and Jobs Act, for the quarter ended December 31, 2017 was $590,000, or $0.16 per diluted share. This compares to $546,000, or $0.15 per diluted share, for the comparable period in 2016, an 8% increase in net income and 7% increase in earnings per share. Chairman and CEO Walter C. Johnsen said, “During 2017, we built our first aid and safety business and added substantial new business for 2018. We grew the Clauss professional cutting tools and introduced new Camillus knives that will add new revenues in 2018. Although we lost a major promotion in the Westcott family in 2017, we were able to regain it for 2018, which we expect to have a positive impact on our business in the coming year. Our European business had record sales and earnings in 2017.” Acme United is a supplier of cutting, measuring, first aid and sharpening products to the school, home, office, hardware, sporting goods and industrial markets. The North Star Micro Cap Fund holds a 3.1% position, the North Star Dividend Fund holds a 2.3% position and the North Star Opportunity Fund holds a 3.1% position in ACU.

Chatham Lodging Trust (CLDT)-14%: Portfolio Revenue per Available Room (RevPAR) increased 1.1 percent, slightly above guidance, to $120, compared to the 2016 fourth quarter, for Chatham’s 40, wholly owned hotels. Average daily rate (ADR) improved 0.8 percent to $159, and occupancy grew 0.4 percent to 75.3 percent. Adjusted FFO decreased $1.0 million, or 5.7 percent, to $16.0 million versus $17.0 million in the 2016 fourth quarter. Adjusted FFO per diluted share was $0.36 versus $0.44 in the 2016 fourth quarter, compared to guidance of $0.35-$0.38 per share. “We had a very productive fourth quarter from a strategic and operations perspective, achieving RevPAR growth at the upper end of our range, generating pro-forma FFO per share above consensus and importantly executing on our strategic directive to recycle capital and position Chatham to take advantage of future growth opportunities,” stated Jeffrey H. Fisher, Chatham’s president and chief executive officer. Chatham Lodging Trust is an internally-managed real estate investment trust. The company is organized to invest in upscale extended-stay and premium-branded select-service hotels. The North Star Dividend Fund holds a 0.9% position in CLDT.


by Robert Z. Aliber, Professor Emeritus, University of Chicago

President Trump’s initiatives to reduce the U.S. trade deficit should be applauded because they may forestall further job losses in U.S. manufacturing. His approach is unnecessarily confrontational, and his comment that “trade wars are good and easy to win” imbecilic, on a par with his braggadocio that he would have rushed unarmed to confront Nikolas Cruz in the high school in Parkland, Florida.

His initiatives toward washing machines, steel, and aluminum confuse the generic problem that some of the U.S. trading partners have followed “beggar thy neighbor” currency policies with specific excesses in a few commodities. The good news is that American consumers have benefited from the low U.S. prices for imports that have resulted from cheap foreign currencies, which are comparable to export subsidies. The bad news is that the United States has lost about three million manufacturing jobs because a large number of U.S. trading partners have maintained low prices for their currencies and have adopted other protective measures to promote exports and reduce imports. Most of the American workers that have been displaced by the more rapid increase of U.S. imports than U.S. exports have moved into the service sector; their real incomes have declined. The profit rates in the U.S. firms that produce exports and import competing goods have been depressed, thousands of firms have gone out of business. Taxable incomes in the United States have increased less rapidly because of the increase in the U.S trade deficit, which has eroded the U.S. tax base and contributed to the more rapid increase in the U.S. fiscal deficit.

There is a lot of chatter that the Trump administration will adopt a twenty-five percent tariff on U.S. imports of washing machines from South Korea. South Korea is an amazing success story; it has a current account surplus of nearly $80 billion, more than five percent of its GDP. The United States is one of a handful of countries with a significant trade deficit, if the South Korean trade surplus were smaller, the U.S. trade deficit would be smaller, and there would be more jobs in U.S. manufacturing. The central bank in South Korea buys U.S. dollars to limit the increases in the price of the South Korean won. If market forces set the price of the won so that the country’s trade were more or less balanced, the price of the won would be twenty percent higher, and U.S. prices of Samsung TVs, Kia and Hyundai autos, and Lucky washing machines would be significantly higher.

South Korea has been an important ally of the United States for more than sixty years, 30,000 American military personnel are stationed there. The Trump administration’s adoption of a tariff on U.S. imports of washing machines is blunt rather than strategic. Instead the U.S. government should have obtained a commitment from the Seoul government that it would commit to reduce its trade surplus by twenty to twenty five percent a year for each of the next five years. That commitment would have become a model for negotiating similar commitments from other U.S. trading partners that have large trade surpluses. The United States could apply an across-the-board tariff to imports from countries that continued to pursue beggar-thy neighbor policies.

The likelihood that Trump tariffs on washing machines, steel, and aluminum will start a trade war is small; most foreign countries have large trade surpluses with the United States and have much more to lose if they retaliate by raising tariffs on imports from the United States. The investor demand for U.S. dollar securities would decline more rapidly because of an increase in anti-Trump sentiment, which would lead to a further fall in the price of the U.S. dollar, and a more rapid increase in the U.S. inflation rate and a more rapid decline in U.S. stock prices.

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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