Kuby's Commentary

Tweeting Away the Complacency

2019-05-15T14:53:13-05:00May 13th, 2019|

Last Week:

“He rocks in the White House all day long
Hoppin’ and a-boppin’ and singing his song
All the little traders on Wall Street
Love to hear the President go tweet-tweet-tweet”

Adapted from the Bobby Day classic “Rockin Robin”

These are strange times indeed that we live in. Last Sunday around noon President Trump tweeted that the trade negotiations with the Chinese were going too slowly and that the tariff truce would end on Friday unless a deal was agreed to on Thursday. From Monday through Thursday global stock markets shed an estimated $2 trillion in value, and further losses were mounting on Friday until Trump’s tweet that talks were “candid and constructive” triggered a 2% afternoon gain in the market. Despite that rally, the S&P 500 still finished with a loss of 2.18% and the Russell 2000 dropped 2.54%. The action was largely in the equity markets as the dollar, gold, and oil were all virtually unchanged, while the yield on the Ten-Year Treasury declined 8 basis points to 2.46%.

During this tense trade “war” with China, it seems worth noting that we rely on them to rein in Kim Jong-un, to avoid a real war. It’s probably not a coincidence that North Korea launched short-range ballistic missiles on Thursday for the second time in a week. Although the tests were well short of the distances that the U.S. has been most worried about, the tests highlight the potential risk to Seoul or American troops based in South Korea.

Also probably not a coincidence, one year after the U.S. pulled out of the Iran nuclear accord, Tehran has indicated that it is no longer committed to parts of the deal. On Wednesday, President Hassan Rouhani said the remaining signatories – the U.K., France, Germany, China and Russia – had 60 days to implement their promises to protect Iran’s oil and banking sectors, giving them a choice of following President Trump or engaging with the Islamic Republic in violation of American sanctions. Iran will also begin to build up its stockpiles of low enriched uranium and heavy water and threatened to resume construction of the Arak nuclear reactor.

Largely drowned out by all the geopolitical noise, earnings season continued on course, with the projected decline of composite earnings shrinking to 0.5% from 0.9% the week earlier thanks to positive surprises from the Financial and Communication  sectors. Companies with more global exposure are suffering as a result of the strong dollar and trade tensions. In fact, companies that generate more than 50% of sales inside the U.S. are generating a blended earnings growth rate is 6.2%, while companies that generate less than 50% of sales inside the U.S. are experiencing a blended earnings decline of -12.8%.

The much-anticipated Uber IPO did not provide a ‘lyft’ to the market, as the shares were priced at $45 and closed down 7.62% to $41.57.

This Week:

Our previous blog was titled “Be Attentive when others are Complacent”. What a difference a week makes, as investors’ comfortable complacency cocoon was disrupted. It is likely that the trade and other geopolitical issues are going to dominate the narrative in the near-term. The tariff strategy will cause a global economic slowdown, reduce corporate earnings, increase inflation, and lower equity prices. We saw this movie in the fall of 2018 and it was quite unsettling, and the preview of the sequel to “Tariff Man” clearly has the audiences’ attention as indicated by the spike in volatility this past week:

The good news is that the tone of the dialogue can change with a tweet-tweet-tweet as we saw on Friday afternoon.

Earnings season will wind down with only 9 S&P 500 companies reporting results. The economic calendar is light, with April Housing Starts on Thursday and May Consumer Sentiment on Friday both expected to show modest improvement.

Stocks on the Move:

Collectors Universe, Inc. (CLCT) +10.0%:  Collectors Universe provides authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs and historical and sports memorabilia. The Company’s shares continued to rally after posting record revenues and operating income on May 1. During their quarterly conference call, CEO Joe Orlando highlighted the launch of Set Registry “gamification”, where participants can earn points, digital rewards and be recognized for their accomplishments as they build and improve their collections. CLCT is a 4.19% holding in the North Star Dividend Fund and a 3.46% holding in the North Star Micro Cap Fund.

Flexsteel Industries, Inc. (FLXS) -12.65%: Flexsteel manufactures, imports and markets residential and commercial upholstered wooden furniture products. The Company’s shares continued to decline following disappointing earnings results reported on April 29, which highlighted a botched implementation of an ERP system resulting in a $17.9 million write-off. FLXS is a 1.41% holding in the North Star Dividend Fund and a 2.26% holding in the North Star Micro Cap Fund.

Napco Security Technologies, Inc. (NSSC) +10.62%: NAPCO manufactures security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products. The Company reported a 71% increase in net income on a 13% rise in revenue for their fiscal third quarter. Richard Soloway, Chairman and President said, “We are encouraged by NAPCO’s ability to continue its strong sales growth trajectory and take it as confirmation that our strategies of entering new market segments which provide incremental, fertile avenues for sales and recurring revenue growth, well-position our Company for the future. Our Q3 sales growth of +13% represents our 19th consecutive quarter of record sales and reflects our laser focus on marketing primarily commercial products, in rapidly growing market categories, such as school security solutions, wireless fire and intrusion alarm communicators, fire alarm control panels, enterprise-class access systems, electronic access control locks and architectural locking products.” NSSC is a 2.79% holding in the North Star Micro Cap Fund.

Portfolio holdings are subject to change and should not be considered investment advice.

North Star Investment Management Corp. is the Advisor for the North Star Family Mutual Funds.

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.