Weekly Notes from Paul Resnik, CFA: Jan 19, 2016
Paul Resnik operates Resnik Asset Management Co. (RAMCO), a registered investment advisor.
The usual suspects were blamed for last week's sharp decline for stocks...concerns about a slowing Chinese economy (the Shanghai index was down 9% for the week with Chinese GDP and industrial production figures scheduled to be released the following Monday evening U.S. time) and a weak energy sector (oil prices slid below $30 a barrel). The Dow Jones Industrial Average fell 358.37 points (2.19%); the S&P 500 Index declined 41.70 points (2.17%); and the Nasdaq Composite slid 155.21 points (3.34%). The market's behavior was in sharp contrast with the picture painted by President Obama's State of the Union address in which he highlighted the progress that the U.S. economy had made during his presidency. While the President was also upbeat about the current anti-terrorist efforts, Islamic State attacks left dead in Indonesia and Turkey. In the meantime, Iran's quick release of ten sailors whose boat's had entered Iranian waters enabled the lifting of sanctions on Iran over this past weekend as scheduled. In return for significantly scaling back its nuclear program (according to United Nations monitors) Iran will receive tens of billions of dollars in frozen oil money and will have world markets opened to hundreds of thousands of barrels of its oil (while expected, this may have been a factor in last week's oil price decline).
In the NewsMetLife, Inc. (MET-43.08) Too Big to Succeed
MetLife, the largest U.S. life insurer, plans to separate a substantial portion of its U.S. retail business from the core company, citing the current regulatory environment. The Company is considering various approaches for splitting off the retail business, including an initial public offering, a spinoff or a sale. The business sells life insurance and other financial products across the United States, generating at least one fifth of MetLife earnings and has about $240 billion in total assets. MetLife is currently in a legal tangle over federal regulators designating it a "systemically important financial institution," or SIFI, in 2014. That label, created after the massive financial crisis that started in 2007, means regulators deem the Company too big to fail and triggers a requirement for MetLife to hold higher levels of capital. MetLife stated on Tuesday that the lagging retail section "risks higher capital requirements that could put it at a significant competitive disadvantage" and that "even though we are appealing our SIFI designation in court and do not believe any part of MetLife is systemic, this risk of increased capital requirements contributed to our decision." Management believes that "an independent company would benefit from greater focus, more flexibility in products and operations, and a reduced capital and compliance burden." MetLife shares managed to grind out a 2.5% advance in last week's down market.General Electric (GE-28.49) Cleaning Up the Appliance Division
Haier Group, a Chinese company, said it would buy General Electric's appliance business for $5.4 billion. Haier, which made an abortive attempt in 2008 to buy the business, has a negligible presence in the U.S. white goods market, dominated by Whirlpool Corp, Sweden's Electrolux AB and GE. In just the past month GE terminated a deal to sell the business to Electrolux for $3.3 billion, following months of opposition from U.S. antitrust regulators. GE said the deal values the appliance business at 10 times last 12 months earnings before interest, taxes, depreciation, and amortization (Whirlpool is valued at 7.7 times). The business makes refrigerators, freezers, clothes washers and dryers under brands such as Monogram, Café, Profile and Artistry. GE stock inched up 0.1% last week.
The Week Ahead
The economics data releases scheduled for this holiday-shortened week include the December consumer price index which, weighed down by weak energy prices, will likely show no change as it did in November. The increasingly busy earnings calendar should be characterized by negative comparisons in the energy sector and flat results elsewhere. However, the big news is the Chinese economic data released Monday night. China's economy grew by 6.8% in the fourth quarter of 2014, slipping by 0.1% from the third quarter's 6.9% growth. This was in line with the consensus estimate. Full-year growth came in at 6.9%, down from 2014's 7.3%, and the slowest pace of economic expansion since 1990. With China figures no worse than expected, the U.S. stock market is set for a strong opening for the week. The Treasury auctions scheduled for this week are on: Tuesday: $31 billion three-month bills and $26 billion six-month bills; and Thursday: $15 billion 10-year TIPS.