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Kuby’s Commentary

The Song Remains the Same (and out of tune)

Apr 20, 2020

Last Week:

My standard opening:

“Hang in there! As expected, more evidence of the economic fallout, combined with a continued ramp up in global coronavirus cases, has resulted in a 24/7 stream of disturbing headlines.”

Unemployment claims surged and retail sales plunged. Global COVID-19 cases and deaths continued to climb, although the curve did flatten further in the U.S., leading to guidelines for a three-phase plan to reopen the economy. The governor of each state has the authority to implement measures based on their specific situation. Some restrictions have already been lifted. On Friday, Florida Gov. Ron DeSantis gave some municipalities the green light to reopen beaches with restricted hours for walking, biking, hiking, fishing, running, swimming, taking care of pets and surfing. Speaking at the White House on Saturday, President Trump said Texas and Vermont would allow certain businesses to open on Monday with “appropriate social distancing precautions”. Other state governors have warned against the lifting of restrictions until more testing is available.

These are confusing times. It doesn’t help that the numerous “news” outlets seem to have agendas to advance. One report suggests we should all go about our business and the next suggests we would be best to shelter-in-place for the next two years.

It reminds me of the Bob Dylan lyrics (that I never fully understood):

“There must be some way out of here, said the joker to the thief,
There’s too much confusion, I can’t get no relief.
Businessmen, they drink my wine, plowmen dig my earth,
None of them along the line know what any of it is worth.

No reason to get excited, the thief, he kindly spoke,
There are many here among us who feel that life is but a joke.
But you and I, we’ve been through that, and this is not our fate,
So let us not talk falsely now, the hour is getting late.”

The world is awash with thieves and jokers, relentless false talk, and way too much confusion.

Meanwhile back on Wall Street, the S&P 500 gained 3%, to close approximately 20% higher than the recent bottom and about 15% below the record high set on Feb 21, 2020 (yes, just two months ago). Small stocks continued to fare worse, with the Russell 2000 declining 1.41%. The small-cap index is down almost 30% from its high reached in August 2018 and stands -26.3% YTD. The bear case against small caps is that the companies don’t have the financial strength to weather the storm. We think there are incredible bargains in that universe, our favorites of course are in our two small cap funds, The North Star Dividend Fund (NSDVX) and the North Star Micro Cap Fund (NSMVX). This week’s Barron’s highlighted one such company, Compass Diversified Holdings (CODI) in Ben Levisohn’s “The Trader” column, with the heading “This Small-Cap Is Ready to Pounce”. He concludes “Investors who missed Compass stock’s spectacular rise in2019 have a rare second swing at it”. We are taking that swing in NSDVX which has 2.01% of its assets invested in CODI.

Despite the OPEC + agreement to cut production by almost 10%, crude prices continued to slide, losing another 20% during the week. For the time being, there’s just too much supply and too little demand. Gold slid 2.7% in value, retreating from its recent multi-year high. The yield on the Ten-Year Treasury slipped 7 basis point to 0.65%, and some short-term treasuries traded hands at negative yields. The U.S. government has committed $6.3 trillion to rescue the economy, between the fiscal funds and Fed purchases. That’s a lot of taxes that someone is going to have to pay someday.

First quarter earnings season is well under way, with the blended decline growing to -14.5%, slightly worse than the decline of -12.0% expected as of last week. Negative earnings surprises reported by companies in the Financials sector were mainly responsible for the increase in the overall earnings decline during the week. Looking at future quarters, analysts predict a (year-over-year) decline in earnings in the second quarter (-26.6%), third quarter (-13.3%), and fourth quarter (-4.8%) of 2020. These earnings estimates are clearly just guesstimates given all the uncertainty.

This Week:

Earnings season will be in full swing with about 20% of the S&P 500 reporting first quarter results. Investors anticipate a decline in Q1 with even grimmer, or withdrawing, guidance for Q2. The focus will more likely be on the ability of balance sheets to withstand the downturn. The economic data will show a steep drop in home sales and durable goods, and another sobering jobless claims report. All those reports will be background noise to developments related to COVID-19, the hopeful continued flattening of the curve and advancements on testing, therapeutics, and the holy grail (vaccine).

The economic calendar gets busier as the week progresses. According to the Wall Street Journal, “on Tuesday the U.K. will release figures for the number of people claiming unemployment benefits during March, and they are expected to record a surge in applications. U.S. existing-home sales for March are expected to reflect a steep decline in activity during the second half of the month. [Later in the week on Thursday], Surveys of purchasing managers in the U.S., Europe and Japan are expected to record another sharp decline in activity during April as lockdowns persisted, with the services sector suffering unprecedented falls in output while businesses cut payrolls; U.S. jobless claims for the week ending April 18 are expected to show millions more job losses across the country, though there are signs that the pace of layoffs has passed its peak. More than 20 million Americans filed for unemployment benefits from mid-March through April 11. [In addition], European Union leaders are scheduled to discuss the economic response to the coronavirus crisis, with southern countries likely to push for commitments from wealthier governments to pledge a trillion-euro-plus fund to help drive an eventual recovery. Few expect any quick decisions. [On Friday], U.S. durable-goods orders for March will capture factory closures and a big drop-off in demand for long lasting goods; [and] The University of Michigan’s preliminary consumer sentiment gauge for April showed a sharp deterioration in confidence. Economists are forecasting a downgrade in the final reading, confirming a sour mood about the economy.”

Final Thought:

Keep breathing, but not on anyone. We will survive.

I’m running out of relevant songs to reference. Please email with suggestions. One sleeve of golf balls per reader with a viable entry. Gloria Gaynor’s “I will survive” not eligible.

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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