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Kuby’s Commentary

Volatility, Uncertainty, Complexity, Ambiguity

Feb 28, 2022

Volatility Persists

The disconnect on Thursday and Friday between the heartbreaking geopolitical developments and the euphoric reaction on Wall Street was startling. At the close of trading Friday, with bloody battles raging in Ukraine, the major indexes had rallied feverishly to post weekly gains with the S&P 500 +0.82%, the Nasdaq +1.08%, and the Russell 2000 +1.57%. Those gains were in sharp contrast to the declines suffered through Thursday morning, with the Nasdaq in bear market territory down 20% from its peak, and the S&P in its first 10% correction in almost two years. The most frequently cited explanation for the amazing comeback was that there was optimism that the conflict might have only a minimal impact on the U.S. economy. An alternative theory is that the uncertainty of a war in Europe could discourage the Federal Reserve from being aggressive about hiking interest rates. A third theory is that the nearly universal condemnation by western governments, along with widespread international support for sanctioning Russia’s government and oligarchs, could bring the conflict to an end result of a Russian withdrawal. In terms of timing, the turnaround came after President Biden issued targeted sanctions Thursday afternoon that did not affect Russia’s oil and gas exports or block Russia’s access to the SWIFT financial system.

The economic releases showed a mixed picture in January with a nice uptick in consumer spending, rising 2.1%, and strength in manufacturer’s orders for durable goods, up 1.6%. Meanwhile inflation ran very hot with the Fed’s favorite indicator, the personal consumption expenditures (PCE) index hitting a 38-year high. Many of the publicly traded companies we speak to have explained that they are currently in the thick of negotiating for price increases with vendors and customers, and therefore we expect further above-historical-trend inflation reports throughout at least most of 2022.  Perhaps some inflation slowing could happen in late 2022 as supply chain disruptions ease, but we will need to hear updates from companies reporting 1Q22 results in April and May to incorporate such optimism into our investment processes.

Corporate earnings for the fourth quarter of 2021 remained on target to post a 31.5% year-over-year increase with 95% of S&P companies having reported results. That increase in earnings combined with the decline in share prices in 2022 has resulted in a contraction in the forward P/E on the market from 21.4 to 18.8. That valuation seems reasonable given interest rates which, although rising, remain very low. The yield on the 10-Year Treasury ticked up 6 basis points during the week, while the 2-Year rate moved up 7 basis points to 1.54%. Those interest rate levels are less than half of their long-term averages, while the current P/E is approximately 15% higher than its historical average.  Speaking of interest rates, the annual Berkshire Hathaway shareholder letter from Warren Buffett emphasized one of our core North Star principles, which is that the value of equity securities (stocks) is always eventually tied to the cash flows of companies, discounted by some interest rate relative to the risk-free rate reflected in U.S. Treasury securities. Buffett’s always-anticipated letter was released last week and regarding his stock-selection process, he wrote that Berkshire Hathaway buys:

“…non-controlling part-interests in the many good or great businesses that are publicly traded. From time to time, such possibilities are both numerous and blatantly attractive. . .  That’s largely because of a truism: Long-term interest rates that are low push the prices of all productive investments upward, whether these are stocks, apartments, farms, oil wells, whatever. Other factors influence valuations as well, but interest rates will always be important.”


There was a slight uptick in the dollar during the week, while gold and oil both spiked higher and then retreated to finish essentially unchanged. During these periods of extreme volatility, most of the price movement in all markets is dictated by very sophisticated trading firms that capitalize on the short-term imbalances between buy orders and sell orders, reaping enormous profits from the rapid price changes. We believe long-term investors benefit from sticking to their discipline rather than jumping into the trading game in which the trading firms have a substantial advantage. We also find it rewarding to have a “wish list” of investments that one would like to establish or add to during the steep selloffs. In the North Star Funds, 10 of our “wish list” stocks that we have been viewing as bargains in 2022 have been Boot Barn Holdings Inc (BOOT), Inc (PRTS) , Madison Square Garden Entertainment Corp (MSGE), Turtle Beach Corp (HEAR), The Walt Disney Co (DIS), Paramount Global (PARA), BGSF Inc (BGSF), Callaway Golf Co (ELY), Sprott Inc (SII), and Compass Diversified Holdings (CODI). We are always available to discuss our research methodology upon request.

Whip Out the Wish List

More volatility is certain as investors analyze the impact of the war in Ukraine on global markets, energy prices and commodities. Stock prices were lower and commodity prices higher Monday morning following the escalation of tensions as President Putin ordered Russian nuclear forces to be put on high alert (although the stock market losses were reversed by the time this blog was posted). The ruble tumbled 30% and trading in the Russian stock market was halted as the global economic sanctions began to take a severe toll on its economy. Representatives from Russia and Ukraine met on the Belarusian border to negotiate, although expectations are low that any substantial agreement can be reached.

Fed Chairman Jerome Powell will be giving testimony on Capitol Hill on Wednesday. When Jerome Powell talks, people listen (sorry E.F. Hutton). Any hints that a 50-basis-point rate increase is likely at the March meeting will likely trigger short-term selling pressure. When combined with the geopolitical generated volatility, it might be a good time to have your “wish list” updated.

Another  wildcard of the week will be the decision on Wednesday by OPEC+ on production boosts given the recent spike in oil prices. Energy costs are one of the drivers of the current elevated level of inflation, and probably the input that can come down the fastest simply by tapping the abundant supply.

The economic calendar includes the ISM Manufacturing Purchasing Managers Index on Tuesday, which is expected to show the 20th consecutive month of growth with a reading of 57.8. On Friday, the Labor Department will release the jobs report for February, with a consensus estimate of an increase in employment of 385,000. Last month there was a big positive surprise, following a series of reports that have widely missed estimates. Another unexpectedly strong number could influence the Fed to be more aggressive with its interest rate hike next month.

The North Star Research Team is putting the final touches on the next white paper and podcast in the Small Cap Bootcamp series. If you have a question related to the Utilities or Energy Sectors, please send an email to your designated advisor or

Stocks on the Move

+9.1% SP Plus Corporation (SP) provides vehicle parking solutions. The Company offers professional parking management, ground transportation, remote baggage check-in and handling, facility maintenance, security, event logistics, and other technology-driven mobility solutions. SP Plus serves the aviation, commercial, hospitality, healthcare, and government markets. SP reported solid fourth quarter 2021 earnings per share of $0.51 and revenue of $343.2M. The company is expecting profitability to improve with increased leisure and travel activities, as well as due to improved terms in leased and managed contracts. SP is also attributing new assignment awards to its Sphere technology solutions.

SP is a 3.8% position in the North Star Micro Cap Fund.

+12.6% Turtle Beach Corporation (HEAR) operates as a sound technology company. The Company designs and markets audio peripherals for video game consoles, personal computers, and mobile devices. There was no significant company news last week.

HEAR is a 4.7% position in the North Star Micro Cap Fund and a 2.2% position in the North Star Opportunity Fund.

-13.2% Sono Group N.V. (SEV) manufactures and sells electric cars with integrated solar cells and panels. In addition, the Company monetizes its variable battery technology for integration in numerous types of vehicles, including buses, trucks, camper vans, trains, and boats, as it aims to reduce carbon emissions and provide clean and affordable transportation for the masses. There was no significant company news last week, although electric vehicle stock trading was mixed and low-revenue startups such as Sono Group took the hardest hits.

SEV is a 0.4% position in the North Star Opportunity Fund.

Other Stocks Mentioned

BOOT is a 3.9% position in the North Star Micro Cap Fund and a 1.0% position in the North Star Opportunity Fund.

PRTS is a 2.4% position in the North Star Micro Cap Fund and a 1.8% position in the North S tar Opportunity Fund.

MSGE is a 1.9% position in the North Star Opportunity Fund.

DIS is a 1.0% position in the North Star Opportunity Fund.

PARA is a 1.3% position in the North Star Opportunity Fund.

BGSF is a 3.4% position in the North Star Dividend Fund and a 1.5% position in the North Star Opportunity Fund.

ELY is a 1.0% position in the North Star Opportunity Fund.

SII is a 2.2% position in the North Star Dividend Fund.

CODI is a 2.2% position in the North Star Dividend Fund.

The stocks mentioned above may be holdings in our mutual funds. For more information, visit

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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