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Kuby’s Commentary

Transitory Bears

Sep 13, 2021

New Vaccine Mandates

The definitions of “transitory” found on the internet range from “of brief duration” to “not permanent.” We believe that the two major economic challenges of inflation and COVID-19 will not be brief or permanent, so perhaps somewhere in the middle of the transitory range. Looking at inflation, the Labor Department reported on Friday that U.S. producer price index rose 0.7% in August, down from a 1% jump in July. The core producer price index, which excludes volatile food and energy prices, rose 0.3% in August, down from a 0.9% gain in the prior month. Despite that improvement, producer prices are up 8.3% in August from a year earlier, the largest gain since the data was first collected in November 2010. Turning to the pandemic, daily deaths reached its highest level since early March in the U.S., but there was a slight downtick in new cases, as COVID cases appear to be declining in 41 of 50 states. This decline may accelerate over the coming days. Additionally, President Biden announced a vaccine mandate on Thursday, covering hundreds of public and private companies and tens of millions of American workers. It mandates vaccines and eliminates testing options for federal government employees, including those in the health-care sector, and calls for stiff penalties for those who don’t comply. The President also ordered the Department of Labor to create a new rule requiring any company with more than 100 employees to mandate vaccines for their employees or weekly Covid tests for workers who cite religious or health reasons for not getting vaccinated.

Investors returned from the holiday weekend in a (hopefully transitory) selling mood, as even with one fewer trading day, the S&P had its worst week since June, down 1.7%, with all eleven sectors suffering declines. Declining issues outnumbered advancing issues 2,491 to 983, and Small Caps fared the worst, with the Russell 2000 shedding 2.81%. Gold pulled back 2.2% after reaching a multi-month high the previous week, while the dollar gained 0.7%, and the yield on the Ten-Year Treasury inched up 2 basis points to 1.34%.

The Chicago Bears 2021 campaign got off to a rough start Sunday night in Los Angeles. We hope the sloppy tackling will also be transitory, otherwise it could be a long, dark, and chilly winter for Bears fans.

Look Out for Modest Rebounds

The economic calendar includes the consumer price index report on Tuesday, which is forecasted to show a 0.4% advance in the CPI from the prior month and a 5.3% increase from August of 2020. If the actual number is closer to the elevated PPI number from last week, then the pressure would be on the Fed to tighten monetary policy sooner.

On Friday, the University of Michigan Consumer Sentiment index for September will be released. The August figure was the lowest since December 2011, and only a modest rebound is anticipated. A particularly weak reading would embolden the Fed to continue its ultra-easy monetary policies. It might also put pressure on Congress to come to an agreement on providing additional fiscal stimulus.

A hot PPI combined with cold Consumer Sentiment (the likely scenario) will further confuse the already cloudy near-term outlook for equities, at least for a transitory period. At North Star, we view these periods as good opportunities to uncover bargains, particularly in the more economically sensitive Small Cap universe.

Stocks on the Move

-13.4% Lakeland Industries Inc (LAKE) manufactures and distributes protective work clothing. The Company offers disposable, chemical, cleanroom, hand, arm, fire, and heat protective clothing for on-the-job hazards, toxic-waste cleanup, and industrial work. Last week, Lakeland reported a Q2 earnings miss with GAAP EPS of $0.31 and revenue of $27.47M, down almost 22% year-over-year. Management attributed the miss to a temporary lack of disposables inventory in the United States, which is likely to be worked down in the coming months as the country combats the Delta-variant.

LAKE is a 2.6% position in the North Star Micro Cap Fund.

-10.35% Allied Motion Technologies Inc (AMOT) designs, manufactures, and sells motion control products into applications that serve various industry sectors. The Company supplies precision motion control components that incorporated into several end products, including high-definition printers, barcode scanners, surgical tools, robotic systems, wheelchairs, and weapon systems. There was no significant company news last week.

AMOT is a 0.9% 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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