Kodak Reinvents Itself (Again)

This week was consumed by earnings announcements, politics, the release of second quarter gross domestic product (GDP), and the expiration of the extended federal unemployment benefit.  If you’ve been following the news, you’re probably as exhausted as I am.  For the most part, earnings announcements took center stage as they should when we talk about the stock market.  And to be fair, many companies reporting earnings are meeting the lowered analyst expectations.  However, there are enough distractions these days that it is hard to know what to focus on while simultaneously trying not to miss the stories that aren’t being widely reported.  I’ll do my best to give you a brief rundown of the week.

Let’s start with GDP which was reported to have fallen by almost 33% in the second quarter. In case you were wondering, a recession was officially reported to have begun in February. Depending on the news source, this was either the largest decline since the Great Depression, or the worst decline ever. Either way, the number shouldn’t come as a surprise since it represents the economic shutdown we just lived through. The good news is the stock market is forward looking and by all accounts the third quarter should be much better than the second. While the big decline made for sensational headlines, it is already old news at this point. Keep your focus on what lies ahead. After all, that’s what investors are doing.

In other news, the extended unemployment benefit will expire for millions of people currently unemployed. While there are genuine arguments for and against renewing this additional benefit, it is worth watching as it has the potential to negatively impact the stock market in several ways. If not renewed, you could see a spike in mortgage delinquencies leading to foreclosures. This would be bad for the financial sector, particularly the banks. Additionally, if people don’t have money they can’t consume, which accounts for two-thirds of GDP. While no one wants to see our national debt rise exponentially, the economy at this moment, is surviving on stimulus spending. Take that away and the consequences will be unpleasant. Furthermore, we are months away from a presidential election, and both parties want to appear magnanimous to attract votes. If I were a betting man, I’d say a deal on the next stimulus package will be reached sooner rather than later. Perhaps even as soon as next week.

One last thing to keep in mind:  while the economy is struggling to recover, that does not mean there aren’t pockets of strength. For example, the U.S. homeownership rate reached its highest level since the financial crisis of 2008. Companies like Home Depot and Lowes are doing very well as new homeowners and those working from home spend money to spruce up their homes. Another area that has done very well this year is technology. The shift to working from home has meant hundreds of millions spent on new computers and laptops, cloud apps like Microsoft’s 365, tablets and smartphones as demonstrated by Apple’s earnings announcement this week, and online meeting services like Zoom Video which allow for remote offices to stay connected. And while not all retailers are doing well, you know a couple that are? Amazon and Walmart have benefited greatly from those not able or willing to go out during this pandemic. While we’re on that subject have you looked at Procter & Gamble, Church & Dwight, or something as simple as the spice company McCormick lately? They have all recently made new all-time highs as their products, deemed essential to most, are flying off shelves. That is to say, yes these are difficult times, but if you look in the right spots you can find companies not only doing well but doing great.

In closing I turn to a company that is 132 years old and that has tried to remake itself more times than I can count.  As an avid photographer, I’ve followed the slow demise of Eastman Kodak over the years.  As recently as 1997 it dominated its market and boasted a market cap of nearly $30 billion.  After many divestitures and the recent fad back to film photography, I was shocked to hear Eastman Kodak will now venture into generic drug production.  More interestingly, the company’s stock surged 1,900% in just two days, after securing a $765 million government loan under the Defense Production Act.  While I hope this proves to be lucrative for this oldest of companies, I still long for the past when Kodak was synonymous with photography.  Now you know.

Bruce J. Mason, MBA