Weekly Notes from Paul Resnik, CFA

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

Overview

After two relatively flat weeks, the market succumbed to concerns regarding weak energy prices (crude oil dropped from $39.97 to $35.62/barrel) and a sell-off in high-yield bonds (aka junk bonds, a large portion of which are issued by small energy companies). The Dow Jones Industrial Average fell 582.42 points (3.26%) last week; the S&P 500 Index declined 79.32 points (3.79%); and the Nasdaq Composite dropped 208.81 points (4.06%). Both the Dow and the S&P are now down year-to-date; 3.13% and 2.26%, respectively. The market weakness occurred in the face of continuing record levels of merger and acquisition activity, highlighted last week by the proposed private equity acquisition of Keurig Green Mountain and the merger agreement by DuPont and Dow Chemical. It was not all positive news on the M&A front as, in response to government opposition, General Electric broke off the sale of its appliance division to Electrolux and the Federal Trade Commission sued to stop Staples' planned acquisition of Office Depot. The political fall-out from terrorist attacks grew...in France, the anti-immigration Front National led in the first round of regional elections (although opposition parties joined forces to beat the Front National in this past weekend's run-off elections) and Donald Trump's poll numbers rose as he proposed barring Muslims from entering the United States.

In the News

It is widely known that many prospective shale oil wells would lose money with oil at current depressed prices. SEC rules require that in order to be reported as reserves undrilled wells must be profitable at a price determined by an SEC formula, and they must be drilled within five years. Analysts now report that the rule is about to wipe out billions of barrels of shale drillers’ reserves as companies report 2015 figures early next year. In the case of Chesapeake Energy it is estimated that the equivalent of 1.1 billion barrels of oil will be erased from its books cutting its inventory by 45% before some offsetting discoveries and expansions. Some of the wells may return to inventories if prices rise. However, this week with the price of oil remaining under pressure, investors are become increasingly nervous. Chesapeake shares dropped 9% this week and are now trading at 81% below their 52-week high and 93% below their peak in May 2008.

On Friday, ITG Market Research analyst Joseph Fersedi said sales trends for Whole Foods Market are better than analysts expected this quarter and trending above the Company's guidance. While acknowledging that the Company faces tough challenges, including rising competition and an investigation for alleged price manipulation, he noted that expectations are low for the Company, and that comparisons become easier sequentially every quarter through fiscal year-end next September. ITG estimates Whole Foods' current quarter revenue at $4.842 billion to $4.888 billion (down 1.7% to 0.7%), as compared to the consensus estimate of $4.820 billion (down 2.2%). On September 30, Whole Foods said it would cut about 1,500 jobs, 1.6% of its workforce, over a two-month period, lower sticker prices and invest in new technologies to boost sales. The stock finished the week up 15%.

The Week Ahead

This week's economic reports continue to reflect moderate economic growth and low inflation. While the earnings calendar will be light, investors will be watching FedEx's results for indications of retail sector health. It was reported over the weekend that a draft agreement has been reached at the Paris Climate Summit. The result, including pledges to expend billions of dollars in funding to ease the shift to low-carbon fuels and to help developing nations cope with impacts of climate change ranging from floods to heat waves, is likely to be praised by many as a major step forward to address climate change, and criticized by others as inadequate. The big news this week will be the upshot from the December 15-16 Federal Open Market Committee meeting. The market expects that the FOMC will choose to raise the federal funds rate for the first time in several years. In addition, the Fed will issue its projections for economic growth, prices and employment. The Treasury auctions scheduled for this week are on: Monday: $28 billion three-month bills and $26 billion six-month bills; and Thursday: $16 billion four-year, four-month TIPS.

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