Weekly Notes from Paul Resnik, CFA
Resnik details another flat week in the broader markets and explores the challenges businesses face when responding to seismic industry shifts.
Stocks turned in another flat performance last week...the Dow Jones Industrial Average rising 49 points (0.28%), the S&P 500 Index inching up 2 points (0.08%), and the Nasdaq Composite gaining 15 points (0.29%). While this finish may imply nothing was going on, the market actually dropped sharply on Thursday when the European Central Bank's announcement of a rate cut and more bond buying disappointed expectations of even more aggressive easing. European stocks fell sharply and the action spilled over to U.S equities as investors who were short the euro against the dollar raced to cover. Stocks managed to move back to the plus side on Friday following the release U.S. Labor Department data that said the economy had added a solid 211,000 jobs last month. Oil prices dipped below $40/barrel last week caused by the 10th straight week of rising U.S. inventories. Energy stocks finished the week down 4.5%. OPEC's meeting ended Friday without an agreement to cut output. In other news, The IMF said it would add the yuan to its basket of reserve currencies. This was a long-anticipated step that China had vigorously sought. The hope is that this move will put pressure on China to let the yuan trade more freely and open up its financial markets. Time will tell.
In the NewsAvon Products (AVP-4.22) Buyers Calling
Avon Products' shares rallied 22% last week as media reports on Thursday said the Company is considering selling its North American business to private equity firm Cerberus Capital Management. At the same time, private equity investors led by Barington Capital (which collectively own more than 3% of Avon) have proposed a restructuring of Avon. They believe the Company is "significantly undervalued" and warn against the sale of its North American arm to Cerberus. In an open letter sent on Thursday to Avon Chairman Douglas Conant, the Barington group said they had lost confidence in Avon's leadership, citing its rejection of a takeover offer by Coty Inc and a poor choice of CEO as the primary reasons for its poor share market performance stating "We believe it is critical that Avon promptly add new independent directors who are focused on improving long-term shareholder value, ensuring that shareholder interests are protected, and recruiting a new senior management team that is capable of executing a comprehensive strategy to improve Avon's performance." In 2012, smaller rival Coty Inc offered to buy Avon for $10 billion, but the board rejected the bid as too low and "opportunistic". Avon's market capitalization as of Friday's close of trading was $1.8 billion.Barnes & Noble (BKS-10.04) The Market Turns a Page
Barnes & Noble reported a fiscal second-quarter loss of $39.2 million, or $0.52 share, after earning $12.3 million, or $0.12, a year ago. The consensus estimate was for a loss of $0.31 per share. Losses, adjusted to account for discontinued operations and severance costs related to the spinoff of its college bookstore division, were $0.28 per share. The bookseller posted revenue of $894.7 million in the period, down 4.5% year over year. Sales in stores open at least a year declined 1.0%. Nook e-reader sales slid 32% to $43.5 million on lower content sales. For the holiday season, Barnes & Noble reported that third-quarter sales at established stores through the Black Friday weekend and excluding Nook products are up 1.1%. For the whole fiscal year, the company said it still expects sales at established stores to be flat with the prior year. The stock was down 24% for the week and now trades 47% below its July 2015 high and 67% below its March 2005 peak.
The Week Ahead
This week's economic reports include the November Producer Price Index and Retail Sales on Friday. These figures are unlikely to shift expectations of a Fed rate hike mid-month. The earnings schedule includes a number of reports by retailers. Pharmaceutical company investors will likely be following Wednesday's Senate Special Committee on Aging hearing that will be looking into dramatic price hikes for certain off-patent pharmaceuticals. The United Nations Framework Convention on Climate Change meeting in Paris with 195 countries participating agreed this past Saturday on a blueprint deal aimed at reducing global carbon emissions and limiting global warming. The document addresses such issues as deforestation, food security, and poverty, discusses what developed countries can do to reduce carbon dioxide emissions by a yet to be determined level by 2050. Officials will now work through this week to craft a complete, final agreement. The Treasury auctions scheduled for this week are on: Monday: $28 billion three-month bills and $26 billion six-month bills; Tuesday: $14 billion one-year notes and $24 billion three-year notes; Wednesday: $21 billion nine-tear, 11-month notes; and Thursday: $13 billion 29-year, 11-month bonds. Interestingly, as of Friday, the when-issued yields on the six-month and one-year issues are slightly higher than in the last auctions while the yields on the longer maturities are slightly lower than in the last auctions...perhaps reflecting expectations of a hike in the federal funds rate but the continued absence of inflationary pressures.
Resnik Asset Management Co., Inc. 69 Fairfield Road, Yonkers, New York 10705 (914-423-5733)