Weekly Notes from Paul Resnik, CFA: Dec 21, 2015
Paul Resnik operates Resnik Asset Management Co. (RAMCO), a registered investment advisor.
Investors anticipated the Federal Reserve's announcement on Wednesday of a 25-basis point rate hike, and rose early in the week as investors welcomed both the end of the "when will the Fed hike rates?" uncertainty and the implication that the economy was strong enough to deal with higher borrowing costs. However, while Fed Chair Janet Yellen's statement that rates would increase gradually, the Fed's year-end 2016 fed funds rate forecast of 1.25%-1.50% was more aggressive than generally hoped for. The concern that the Fed may raise rates too rapidly given current economic conditions was cited (along with weak oil prices) as the market fell sharply on Thursday and Friday. The Wednesday release of a 0.6% decline in U.S. industrial production in November, the biggest monthly decline in over three years, may have magnified this concern. For the week, the Dow Jones Industrial Average was down 136.66 points (0.79%), the S&P 500 Index fell 6.82 points (0.34%), and the Nasdaq Composite declined 10.38 points (0.21%). On the plus side, FedEx said it is enjoying its biggest season ever as holiday e-commerce business has been consistently high. In other news, Martin Shrekli, the 32-year old Turing Pharmaceuticals CEO who sparked outrage with the dramatic price increase of an old but hard-to-get drug (from $13.50 to $750 per pill), was arrested by the FBI on Thursday on charges of defrauding investors of Retrophin, a drug company he was fired from as CEO, and two hedge funds he ran. While these activities occurred before he joined Turing, Shrekli resigned from Turing on Friday. Shrekli is also CEO of KalBios Pharmaceuticals where his involvement generated a massive short squeeze driving the stock from $2 to $45. Trading in KalBios, which closed at $23.59 on Wednesday, was halted on Thursday and Friday.
In the NewsSolarCity (SCTY-56.91) The Government Sun Shines on Solar Industry
Shares Solar City and other solar energy companies rallied last week s a result of the announced budget plan by the U.S. Congress that extends tax breaks for some renewable energy sources. The extension of the investment tax credit for solar was viewed as game-changing news for that industry, and SolarCity shares up 42%. That said SolarCity is not expected to be profitable any time soon and the yield of its bonds exceeds the 7% pre-overhead return of capital on its residential installations. Nonetheless, Bernstein upgraded its rating on shares of SolarCity from Market-Perform to Outperform and boosted its price target from $36 to $69.BlackBerry Limited (BBRY-8.61)
BlackBerry reported a loss of $89 million, or $0.17 per share, in its fiscal (Nov.) third quarter, compared with a loss of $148 million, or $0.24 per share, in the same quarter a year ago. However, losses, adjusted for non-recurring costs and amortization costs, came to just $0.03 per share as compared to the average estimate of a loss of $0.15 per share. Revenue fell 31% from a year ago to $548 million in the period, beating the consensus estimate of $485.2 million. The Company said BlackBerry's latest device, the Priv, has been "well received" since it went on sale last month and that more carriers are expected to offer the phone around the world in the next several quarters. This smartphone is the Company's first to run on the Android operating system. BlackBerry shares rose 10.4% on Friday but remain about 32% off their 52-week high. Pending possible revisions in analyst forecasts, BlackBerry is expected to report losses for the February 2016 and 2017 fiscal years.
The Week Ahead
This week's economic reports continue to reflect moderate economic growth that the Federal Reserve cited in its decision to hike the funds rate last week. The earnings calendar in this holiday-shortened week will be extremely light. I will want to make time during the holiday season to see The Big Short, the positively-reviewed comedy about the financial crisis of 2008. Barron's did note a couple of shortfalls in the movie; it's failure to include the federal government's role in creating the conditions that led to the massive issuance of subpar loans and the complicity of many borrowers in this fraud. Those greedy bankers could not have done it without these accomplices. Still, sounds like a lot of fun! The Treasury auctions scheduled for this week are on: Monday: $28 billion three-month bills and $26 billion six-month bills; and Wednesday: $13 billion one-year, ten-month floating rate notes.
Resnik Asset Management Co., Inc. 69 Fairfield Road, Yonkers, New York 10705 (914-423-5733)