Weekly Notes from Paul Resnik, CFA: Jan 25, 2016

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

Overview

Stocks staged a powerful rally on Friday and managed to finish the week higher with gains of 105.43 points (0.66%) for the Dow Jones Industrial Average, 26.57 points (1.41%) for the S&P 500 Index, and 102.76 points (2.29%) for the Nasdaq Composite. Equities started weak as the International Monetary Fund downgraded its outlook for the world economy to 3.4% growth from 3.6% in October, on weakness in developing nations. It also lowered its forecast for U.S. growth this year, to 2.6% from 2.8%. The averages had been down about 4% before a recovery driven by oil prices which hit a low Wednesday but finished up 9% on the week at $32.16 per barrel, up 21% from lows. Short-covering was widely cited. In addition to the oil rally, equities also were boosted by comments by European Central Bank President Mario Draghi who suggested that its governing council may provide more stimulus at its March meeting, as the inflation outlook had weakened “significantly,” on fresh declines in oil. He said there are “no limits” on tools the ECB can use to achieve steady inflation just below 2%.

In the News

American Express reported adjusted fourth quarter EPS of $1.23, up from $1.12 in the year-earlier period and $0.10 above the consensus estimate. In addition, the Company forecast 2016 EPS in a range $5.40 and $5.70 versus $5.38 in 2015. However, as the 2016 estimate includes a $1 billion gain on the sale of the Costco Wholesale portfolio it actually indicated weaker operating results. The prior average analyst estimate was $5.41. Importantly, AmEx indicated that EPS for 2017 would only be "at least $5.60," a figure dramatically below the prior $7.99 consensus. While the Company has an undeniably strong brand it faces competitive challenges to replace lost business (it has lost its Costco Wholesale, Fidelity Investments, and JetBlue relationships and there is potential to lose other business, notably the Starwood cobrand); there has been pressure on its discount fee revenue from competition, business mix, and regulation; and its announced effort to cut $1 billion from costs by the end of 2017 raises concerns as to whether such aggressive expense management may hamper operations. AmEx shares fell 12% on Friday in response to management's new guidance.

Rouse Properties on Tuesday, January 19th announced that on Saturday, January 16 the Company’s board of directors received a written, unsolicited, non-binding proposal from Brookfield Asset Management to acquire all the outstanding shares of the Company’s common stock, other than those shares currently held by Brookfield Property Partners and its affiliates, together the beneficial owners of approximately 33% of the Company's outstanding common stock, for a purchase price of $17.00 per share in cash, which stated that the proposal is not subject to any financing contingencies and is not subject to any due diligence on the Company. In response, Rouse set up a special committee with the power and authority to "evaluate, accept, reject and/or negotiate the proposal," and "explore and solicit other proposals and/or explore, evaluate and effect alternatives to the Brookfield proposal," all as may be determined by the Special Committee in its sole discretion. Although the offer was 26% above the previous closing price, a number of law firms have announced that they are investigating the proposed deal as the price is below the 52-week high of $20.02.

The Week Ahead

The economics data releases scheduled for this include the advanced estimate of 4Q GDP which is expected to show a slowdown from the previous quarter. There will be a deluge of earnings reports (only a sampling of which is provided below). The Federal Open Market Committee is expected to leave interest rates unchanged after their regularly scheduled meeting ends on Wednesday. The Treasury auctions scheduled for this week are on: Monday: $34 billion three-month bills and $26 billion six-month bills; Tuesday: $26 billion two-year notes; Wednesday: $35 billion five-year notes; and Thursday: $29 billion seven-year notes. Interestingly, the when-issued yields on the bills were higher and on the notes were lower than for the last auctions.