RAMCO Weekly Jun. 2, 2015

Paul Resnik operates Resnik Asset Management Co. (RAMCO), a registered investment advisor. 

Overview

Stocks pulled back last week as concerns grew about Greece's ability (willingness?) to come to an agreement with the European Union in time to prevent a debt default and/or exit from the euro; Chinese stocks fell (the Shanghai Composite Index slid 6.5 percent on Thursday) amidst tightening margin requirements, and the change in first quarter U.S. Gross Domestic Product was revised down to a 0.7 percent decline as the trade deficit was wider than expected and inventory restocking was slower than expected. For the week, the Dow Jones Industrial Average fell 221.34 points (1.21 percent), the S&P 500 Index declined 18.67 points (0.88 percent), and the Nasdaq Composite was off 19.34 points (0.38 percent). Merger and acquisition activity remained high with Charter Communications agreeing to buy Time Warner Cable for $55 billion in stock and cash, and Avago Technologies agreeing to buy Broadcom for $37 billion. I was in attendance on Thursday when Richard Fuld Jr., the former head of Lehman Brothers, made it clear that his firm had substantial assets when it was "mandated into bankruptcy" in 2008, an event many identify as the start of a worldwide financial collapse. While I find it disingenuous to portray Lehman as an innocent victim, it occurs to me that U.S. government policies encouraging low lending standards and borrowers who borrowed unwisely and often fraudulently were at least as culpable as members of the investment community, who placed near-term profits above ethics, for the crisis. Looking overseas, Russia moved more heavy weapons into Eastern Ukraine while "rebel" forces violated the cease fire on a daily basis.

In the News

Michael Kors Holdings (KORS-46.50) Fashion Faux Pas

Michael Kors reported its slowest quarterly revenue growth, 17.8 percnet, since it went public in December 2011 as demand for its handbags and accessories weakened in North America, its biggest market. The range of revenue growth was 29.9-74.4 percent for the past 13 quarters. Same-store sales in North America fell 6.7 percent, a major disappointment relative to the consensus expectation of a 4.4 percent increase. Lower tourist traffic in U.S. Northeast and Southeast, weak sales in its watches business and shipping delays due to disruptions at West Coast ports hurt sales in North America according to the Company. Moreover, management said that watch sales were expected to fall further this year while its handbag sales are not expected to "wildly accelerate" in North America. Michael Kors' margins fell to 58.4 percent from 59.9 percent as the Company aggressively offered discounts to attract shoppers at a time rivals Coach Inc and Kate Spade & Co are cutting back on promotions. Many analysts believe that Michael Kors' rapid expansion both by opening its own stores and distributing to retailers has led to brand fatigue among shoppers. The Company forecast March 2016 fiscal year EPS of $4.50, up modestly from $4.28 in fiscal 2015, but below the prior average anayst estimate of $4.70. The stock was down 25 percent for the week.

Humana Corp. (HUM-214.65) Insurance Hike

According to the Wall Street Journal, Humana, a health insurer with 13.8 million members in medical benefit plans and 7.7 million members in specialty products, has hired Goldman Sachs to investigate a possible sale of the company. Rumored buyers included Cigna (which Barron's reports has approached Humana) or Aetna. The stock rallied 20 percent on Friday.

The Week Ahead

The big economic news this week will come on Friday when May nonfarm payrolls (another healthy gain is expected) and unemployment rate are scheduled to be reported. The earnings calendar is light; Joy Global, an equipment manufacturer, is scheduled to report on Friday and may provide some insight into the mining sector. Overseas, the Organization of Petroleum Exporting Countries (OPEC) begins its summit meeting on Wednesday and Greece faces a deadline to repay the International Monetary Fund (IMF) 300 million euros on Friday. The only Treasury auctions scheduled for this week are on: Monday: $24 billion three-month bills and $24 billion six-month bills.

Resnik Asset Management Co., Inc. 69 Fairfield Road, Yonkers, New York 10705 (914-423-5733)