The Half-Full Tipped-Over Stock Market Glass

All three major large cap stock market indexes closed at all-time highs Friday as Congress appeared to make progress toward passing a COVID-19 stimulus bill. A weaker than expected rise in November non-farm payrolls had the bad-news-is-good-news effect on equities as investors concluded that the weak numbers will lead to compromise on a near-term relief package. One has to start to question this “glass is half full” mentality in the face of facts that suggest that the glass has probably tipped over.

The dissonance is deafening between the voracious appetite for risky stocks on the one hand and the surge in COVID-19 cases and deaths and accompanying sagging corporate earnings and elevated unemployment on the other hand. Long-term interest rates rose, pushing the 10-year Treasury yield up 13 basis points to 0.97%. The rally was broad based with the S&P 500 up 1.7%, the Nasdaq + 2.1% and the Russell 2000 +2.0%. The Dollar continued its slow and steady decline (we think a warning sign) and Gold jumped 3%. That brings to mind a song:

There’s a lady who’s sure all that glitters is gold
And she’s buying every story on CNBC
Everyone is shopping on Amazon, and the stores are all closed
With the word “stimulus” the market will rally

It seems likely that the economy will recover in the second half of 2021, but damage has been done with the ballooning of the national debt and the millions of jobs that have been permanently lost. Some caution seems warranted that is not reflected in a 30% monthly decline in the VIX (The Volatility Index). It has been very comfortable and profitable to flock to the high-profile names in the S&P 500 during these uncertain times, but that index now stands at 3699, that is 37.2x trailing 12-month earnings of $99. It is also 26.5x the record earnings set in 2019, versus a long-term average P/E multiple of closer to 16x. There are many high-quality companies that are not named Apple, Amazon, Microsoft, Alphabet, Facebook, or Tesla, that are trading at more reasonable multiples and offer nice dividend yields. Investors should consider diversifying into those companies. We also believe that Gold and TIPs provide a nice hedge to a declining Dollar and the possible resurgence of inflation.

Speaking of declining, the Chicago Bears lost their sixth game in a row. I would like to thank fellow North Star team member June Popio for sending me the JuJu Smith-Schuster Pittsburgh Steelers tee-shirt.

This Week:

COVID-19 cases, deaths, vaccines, and therapeutics will remain the most important storylines. Any progress on a stimulus package will stoke the animal spirits of stock market traders. There is optimism going into the week that a $908 billion package might pass. The economic calendar is light and devoid of any releases that would be likely to move markets.

There are two very large IPOs scheduled to be priced, DoorDash and Airbnb. Whereas Airbnb is a reopening play, which should see a surge in demand when consumer and business travel begins to revive, DoorDash has been a Covid-era winner that faces a more difficult business environment in normal times. Both are high-flyers being priced at generous multiple of revenues.

Stocks on the Move:

-11% Orion Energy Systems Inc (OESX) designs, manufactures, and implements energy management systems. The Company’s management system is comprised of high intensity fluorescent lighting, InteLite intelligent lighting controls, and Apollo Light Pipe. Orion Energy Systems offers energy savings and efficiency gains to commercial and industrial customers. There was no significant company news last week. OESX is a 5.92% holding in the North Star Opportunity Fund and a 5.52% holding in the North Star Micro Cap Fund.

+11.5% Global Water Resources Inc (GWRS) operates as a water resource management company. The Company owns and operates regulated water and wastewater utilities, as well as promotes water saving and usage practices in the State of Arizona. Last week, GWRS acquired two small Arizona-based water utility companies, Lyn-Lee Water Company and Tortolita Water Company; financial details have not been announced. This will be the Company’s third and fourth acquisitions for the year. GWRS is a 3.07% holding in the North Star Dividend Fund.

+14% Allied Motion Technologies Inc (AMOT) designs, manufactures, and sells motion control products into applications such as surgical tools, robotic systems, printers, wheelchairs, and many others. The Company supplies precision and specialty motion control components and systems to a range of customers throughout the world. There was no significant company news last week. AMOT is a 1.14% holding in the North Star Micro Cap Fund.

+11.9% Century Casinos Inc (CNTY) operates as an entertainment company. The Company owns casinos, hotels, resorts, and luxury cruise vessels. There was no significant news last week. CNTY +11.9%: CNTY is a 0.90% holding in the North Star Micro Cap Fund.

+14.9% Denny’s Corp (DENN) operates as a full-service family restaurant chain directly and through franchises. There was no significant news last week. DENN is a 1.62% holding in the North Star Micro Cap Fund.

Related: The Bears Hibernating as Animal Spirits Rise