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Kuby’s Commentary

The Heat is On

Jun 7, 2021

Last Week:

“The heat is on, it’s on (Wall and Main) street, the heat is on, on, on.”

The economy has been rebounding sharply, and with that rebound, there has been a surge in inflationary pressures and related concerns over interest rate increases. As such, the market treaded water waiting for Friday’s May jobs report for a heat check on employment and the implications for Fed policy. The number came in at 550,000 which was strong, but below expectations. In response to that evidence that the economy was not overheating, stocks rose sharply, taking the S&P 500 into the green for the week with a + 0.61% gain, the Nasdaq + 0.48%, and the Russell 2000 +0.77%. The yield on the Ten-Year Treasury declined 2 basis points to 1.56%. The dollar firmed modestly, while gold slipped about 0.6%. It is noteworthy that after rising rapidly for the first 100 days of 2021, both the S&P 500 and the Ten-Year rate have flatlined for the last 6 weeks.

Given the focus on employment let’s take a more detailed look at the jobs report.  Most of the gains came from industries that were most heavily impacted by the pandemic. Foodservice establishment added 186,000 workers in the month, while amusements, gambling, and recreation, hotels and accommodations, added 93,000. In schools, employment rose by 144,000 as in-person learning resumed across the country. There are about 9.3 million people classified as unemployed last month and 8.1 million unfilled jobs, suggesting substantial further gains are likely in the coming months.

Business owners continue to report difficulty filling open positions, with 48 percent of all small businesses surveyed by the National Federation of Independent Business reporting unfilled job openings, a record high for the business group and 26 points higher than the decades-long average of 22 percent. Wage pressure was evident, as hourly earnings rose a solid 0.5% after shooting up 0.7% in April.

This Week:

Treasury Secretary Janet Yellen was busy over the weekend, first championing an agreement with G7 nations on a global minimum tax. The framework would prevent companies from shifting profits to low tax jurisdictions and ensure the biggest multinationals pay more tax in the countries in which they operate. In return, the U.S wants European nations and others to drop their Digital Service Taxes that target American Big Tech companies, but many negotiations still await.

Fresh off her return from the G7 meeting in London, Secretary Yellen went on Bloomberg News with a message that Biden should push ahead with his infrastructure plans valued at $4T, even if that pushes inflation into 2022. Her position that slightly higher interest rates would be a positive development is an important moment in the journey to normalize monetary policy.

On the economic calendar, all eyes will be on the CPI report, which will be a crucial data set for the Federal Reserve in front of the upcoming policy meeting. Economists forecast CPI will be up 4.7% for May compared to last year after rising 4.2% in April. That temperature reading would suggest that the heat is definitely on.

Stocks on the Move:

+19.2% Evolution Petroleum Corporation (EPM) explores for and produces oil and gas. The Company focuses on acquiring established oil and gas fields and applying specialized technology to increase production rates. There was no significant company news last week.

EPM is a 1.1% position in the North Star Micro Cap Fund and a 2.7% position in the North Star Dividend Fund.

+13.1% PetMed Express Inc (PETS), doing business as 1-800-PetMeds, operates as a pet pharmaceutical company. The Company provides prescription and non-prescription pet medications, as well as health and nutritional supplements. Last week, PETS reached its highest level since January as its high short interest grabbed the attention of Reddit investors.

PETS is a 1.1% position in the North Star Micro Cap Fund and a 2.7% position in the North Star Dividend Fund.

-10.4% Consolidated Communications Holdings Inc (CNSL) offers telecommunications services. The Company offers local and long-distance telephone, high-speed internet access, and digital television services to individuals and businesses in the States of Illinois, Pennsylvania, and Texas. Last week, Consolidated Communications slipped after a Citi analyst downgraded the stock to Sell attributing the rating to “significant EBITDA headwinds” and a step down in CAF II funding. The North Star Research Team contacted management to discuss the downgrade who stated the note was generated on no change in the business and the company’s internal models have accounted for the RDOF auction results since Q4 2020.

CNSL is a 1.2% position 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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