MidSouth Week in Review:
January 16, 2018

Weekly Update from Fund Manager Buzz Heidtke, MidSouth Investment Fund

The Dow and S&P continued to hit all-time highs and closed up 2% and 1.56%, respectfully, for the week.  The small-cap Russell 2000 value index (IWM) has lagged the overall market’s performance, but this week the index outperformed the market and returned 2.3%.  Interest rates have been increasing on the prospect that the Federal Reserve will end their easy money policies.  Rising interest rates should help the profitability of banks.  Oil prices have continued to grind higher.  U.S. crude futures have risen approximately 20% over the past 12 months.  Citigroup thinks oil can hit $80 per barrel this year as demand is outpacing the supply of oil in the market.  

Camera and film maker Eastman Kodak’s (KODK) stock rose from a Tuesday low of $3.05 to a Wednesday high of $13.28 on news the company would start its own cryptocurrency called Kodak Coin.  The coin will be used to make licensing payments to photographers.  Fundamentally the company has a negative tangible book value of $5.67 and has struggled with profitability since coming out of bankruptcy.  Wild Week…

The markets will be closed on Monday as we observe Martin Luther King Jr. Day.  Have a great weekend!

BuzzBits

Value Stocks – For roughly the past decade, growth stocks have outperformed their value counterparts by a wide margin.  During the 2007-2017 period, the Russell 1000 Growth Index rose 139% vs. a 49% return for the Russell 1000 Value Index, but the value side of the market may be about to seize the leadership baton.  In the year ahead, the combination of economic strength, firming prices, and a less dovish Fed is likely produce higher interest rates across the curve.  Theory implies and history shows that during periods of rising interest rates, value stocks tend to outperform growth – McAlinden Research Partners ….. Value stocks typically sport lower price-to-earnings (PE) valuations, tend to be more staid or out-of-favor industries and often lag during outsized stocks rallies, which is what happened in 2017 – Reuters …. Over the past two days the Russell 2000 Value Index has risen 2% vs. 1.2% for the S & P 500 - Buzz

From the Donald – “After a successful tough fight to pass legislation to reduce taxes and successfully eliminating global warming, I think I have earned myself some R & R for the rest of the month”.

Meal-Kit Start-ups – are losing their sizzle.  Blue Apron (APRN) went public in June at $10 a share before declining to below $3.  The problem is that 70% of its customers stop buying after six months.  Now many are questioning the viability of meal-kit start-ups, given logistical hurdles, the high cost of attracting and retaining customers and the arrival of higher rivals such as Wal-Mart, Kroger and PeaPod – Wall Street Journal

Annual Gift Tax Exclusion – has been raised to $15,000 in 2018 from $14,000 in 2017 – IRS

Used Cars – prices are dropping in value and look to get cheaper.  The market is inundated with cars coming off three-year leases .  The gap between new and three-year vehicle prices was $14,200 last year vs. $10,500 in 2016.  With 12% more vehicles coming off leases in 2018 vs. 2017, this variance will only get wider – Wall Street Journal

Electronic Devices – Teens who spend 3 hours+ on electronic devices are 35% more likely to have a risk factor for suicide.  At 5 hours+, it goes up to 71%.  Research shows that 8^th graders who are heavy users of social media have a 27% higher risk of depression – Center on Media and Child Health

Regulatory Actions – by the federal government fell to a 17-year low in 2017, down 40% from their peak years – U.S. Chamber of Commerce

Lottery Tickets – are primarily bought by men, African-Americans, native Americans and those from disadvantaged neighborhoods.  Those in the lowest fifth of income (61%) had the highest level of gambling.  Of 4,865 winning tickets in 2015, 3685 individuals (76%) had received state benefits over the past 5 years – Journal of Gambling Studies

Beer Sales Decline – Why?  A recent study at the University of Connecticut and Georgia State found that 47% of beer drinkers say they have already substituted pot for beer or would do so if the drug was legalized in their state.  One industry expert says the beer industry stands to lose 7.1% of its overall sales, if the rest of the country gets on board with legalization – Crain’s Chicago Business

A Good Bet – might be to take the Titans and 13 points in Saturday’s game against the Pats.  Tom Brady has thrown five interceptions over the final five games and his passer rating has declined 30 points to 81.6 over the period.  Also, it’s been rumored there has been dissention recently between Brady and the owner and the coach.  This being probably the season-ending game for the Titans, QB Mariota will probably be given free rains to run the ball, which should free up their running and passing game - Buzz

Bank Stocks

The group looks to have improved earnings in 2018.  A couple of weeks ago a study said that rates charged to borrowers have recently risen 1% vs. only a 0.15% rise that is paid to depositors.  Low interest rates have hurt bank margins, but recent rises in bond yields should help profit margins.  Banks pay high tax rates, especially the smaller ones, so the recently reduced corporate tax rate from 35% to 21% should go straight to the bottom line.  Lastly, the economy is improving which should be the catalyst to improve commercial and industrial loan growth.  Since 11-28, the S & P Regional Bank Index (KRE) has risen 11.6% and is up 6.4% year-to-date - Buzz

buzz@msifund.com

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