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Kuby’s Commentary

TINA has Left The House

Jul 2, 2018

Last Week:

“TINA”, which stands for there is no alternative (to equities), has been the battle cry for the bulls during this nine- plus year rally in the market. The gamble by the Federal Reserve that pushing short-term risk-free interest rates down to zero percent would stimulate investment in riskier assets paid off handsomely. Most of the money flowed into the S&P 500, being the most liquid equity basket, which helped fuel outperformance by the major components of that index (self-fulfilling prophesy, as buying the index is essentially a momentum trade). The historic corporate tax rate cut that went into effect this year kept the party rolling despite the “normalization” of interest rates by the Fed, as estimates of after-tax profits for companies surged. The narrative has subtly shifted over the last five months, as concerns over inflation and uncertainty over global trade (self-inflicted), combined with the ALTERNATIVE of a risk-free short-term 2% return, has cooled the bull. Indeed, the S&P 500 has now gone 106 trading days without making a new high. Small-cap stocks have fared better, primarily because they are less likely to be hurt by the rising dollar and potential trade war, as they sell more of their products domestically. Technology stocks also have outperformed, perhaps because as a group they seemed less likely to suffer from the most recent proposed tariffs. I’ve been commenting on the “resiliency” of the markets for the past few weeks, given the myriad of troubling headlines. Last week was sloppy, with the S&P 500 declining 1.33%, and suffering dramatic intra-day reversals to the downside on Wednesday and Friday. Small-caps and the tech sector were the worst performers, declining 2.52% and 2.33% respectively, with the later suffering as reports of the White House barring China from investing in U.S. tech firms circulated. The yield on the Ten-Year Treasury slipped 5 basis points to 2.85%, leaving the spread between the Ten-Year and the Two-Year at 31 basis points, its lowest level since the financial crisis ended. As the yield curve flattens, predictions of a recession in 2019 or 2020 are becoming more common.

The good news is that a very strong second quarter earnings season will kick off next week. There is also good news for those in Los Angeles, as King Lebron with his new $153.3 million contract is bringing his talents to the Lakers.

This Week:

Despite a day off due to Independence Day, this week is packed with events. U.S. Tariffs on Chinese imports worth over $34B will go into effect on Friday; the implementation of these tariffs will be another test of the market’s aforementioned resilience. The FOMC minutes will be released on Thursday from the June 12-13 meeting where the Fed raised the benchmark rate a quarter of a percent for the second time this year and inflation exceeded the two-year projection by 2%. The U.S. June Jobs Report on Friday will be in focus. Hopefully Goldilocks didn’t leave the house with TINA. Economist expect a “not too hot, and not too cold” reading of 190,000 new jobs added with the unemployment rate holding steady at 3.8%.

With Independence Day falling on a Wednesday, it will be interesting to see who shows up for work on Thursday and Friday. The combination of low attendance and potentially significant news flow could lead to trading that is more volatile than normal.

Stocks on the Move:

WisdomTree Investments, Inc. (WETF) -10.1%: The Securities and Exchange Commission passed new rules that will expedite approval of new ETFs. Whereas these new rules should benefit the ETF industry, they could also result in a flood of new ETFs in the short-run. WisdomTree Investments is an exchange traded fund (ETF) and exchange traded product (ETP) sponsor and asset manager. It offers Equity ETFs, International Hedged Equity ETFs, Currency ETFs, and Fixed Income ETFs. WETF is a 3.1% position in The North Star Opportunity Fund.

CVS Health Corp. (CVS) – 8.9% and Walgreens Boots Alliance, Inc. (WBA) -11.7%: Shares of pharmacy companies slumped after Amazon announced that it purchased PillPack, a full-service pharmacy that sorts and delivers medication direct to consumers. CVS Health operates in the healthcare sector. Its primary business is that of operating retail pharmacies. Walgreens Boots Alliance is a pharmacy led health and wellbeing company. It operates retail pharmacy store chain in the United States. The firm sells and markets its products under brands such as Walgreens, Duane Reade, Boots and Alliance Healthcare. CVS is a 1.7% position in The North Star Opportunity Fund and WBA is a `1.7% position in The North Star Opportunity Fund.

BG Staffing, Inc. (BGSF) +7.3%: Shares continued to climb, probably driven by “technicals” as there has been no recent fundamental news. We are not complaining. BG Staffing provides temporary staffing services in the U.S. in Multifamily, Professional, and Commercial. Its temporary staffing services consist of on-demand or short-term staffing assignments, contract staffing, & on-site management administration. BGSF is a 2.6% position in The North Star Dividend Fund.

Salem Media Group, Inc. (SALM) +9%: The Company’s share price continued its recovery that started after reporting solid earnings on May 8th, after declining sharply for the previous 12 months. Salem Media Group is a domestic multimedia company with integrated operations including radio broadcasting, digital media, and publishing. The Company has three operating segments, Broadcast, Digital Media, and Publishing. SALM is a 1.7% position in The North Star Dividend Fund and SALM bonds are 2.4% position in The North Star Bond Fund.

Lee Enterprises, Inc. (LEE) +26.1%: Joined with BH Media Group, Inc, in an agreement for Lee to manage Berkshire Hathaway’s newspaper and digital operations in 30 markets, beginning July 2, 2018. The agreement provides Lee with flexibility to implement revenue initiatives and business transformation consistent with how it manages its own newspaper and digital operations in 49 markets, while Berkshire Hathaway continues as owner of BH Media. Warren E. Buffett, chairman and CEO of Berkshire Hathaway, said: “I love our newspapers and am passionate about the vital role they serve in our communities. Although the challenges in publishing are clear, I believe we can benefit by joining efforts. Lee Enterprises’ growth in digital market share and revenue has outpaced the industry. Lee also has led the industry in overall innovation and performance, all while faithfully fulfilling its public trust as an indispensable source for local news, information and advertising. Our missions and goals match exactly, our markets are similar, and we both have excellent managers. Operating together will strengthen both of us, and Lee is logical to lead the process.” Lee Enterprises is a premier publisher of local news, information and advertising in midsize markets, with 46 daily newspapers and a joint interest in four others, rapidly growing online sites. LEE is a 2.4% position in The North Star Opportunity Fund and LEE bonds are a 1.4% position in The North Star Bond 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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