Weekly Notes from Paul Resnik, CFA: Feb 09, 2016

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

Overview

Concerns about the economy weighed on stocks this week. The Dow Jones Industrial Average was down 261.33 points (1.59%); the S&P 500 Index declined 60.19 points (3.10%); and the Nasdaq Composite tumbled 250.81 points (5.44%). While the Institute of Supply Management service sector survey reading remained above 50.0% in December (indicating growth), it declined from 55.8% to 53.5%. With the manufacturing survey already below 50.0%, service sector growth is being counted on to keep the economy out of recession. Friday's January employment report was mixed with nonfarm payrolls up a disappointing 151,000 (versus an average of 279,000 in the prior three months) but the unemployment rate down to 4.9% from 5.0% and the average hourly wage rate up a strong 0.5% month-over-month (now up 2.5% on a yearly basis). Crude oil dropped over 6% to $31.00/barrel and there has been a noticeable tendency in recent months for overall stock prices to mirror crude prices.

In the News

LinkedIn, social networking site and enterprise software purveyor, reported fourth quarter adjusted EPS of $0.94, up from $0.61, and well above the consensus estimate of $0.78. Revenue came in at $862 million as compared to $643 million in the year-earlier period and expectations of $857 million. The Company cited growth in “cumulative members” to 414 million, and a 17% rise in page views per unique visiting member as factors in the strong quarter. Mobile grew 3 times faster than overall member activity, and now represents 57% of all traffic to LinkedIn. However, for the current quarter, the Company sees revenue of “approximately $820 million,” which is well below consensus of $868 million. Moreover, for all of 2016, LinkedIn sees revenue of $3.6 billion to $3.65 billion, below consensus of $3.908 billion. The Company's strategy in 2016 will "increasingly focus on a narrower set of high value, high impact initiatives" with the goal of strengthening and driving leverage across its entire portfolio of businesses with "greater emphasis on simplicity, prioritization, and ultimate ROI and investment impact." While management was upbeat about its plans, investors focused on the disappointing revenue forecast and the stock fell 44% on Friday.

ConocoPhillips reported a loss of loss of $3.45 billion, or $2.78 per share, for the fourth quarter versus a loss of $39 million, or $0.03 per share, a year earlier. Losses, adjusted for one-time gains and costs, came to $0.90 per share as compared with average analyst estimate of a loss of $0.64 per share. Given recent crude prices the size of the loss was not a huge surprise. However, ConocoPhillips also said it is lowering its dividend to $0.25 per share from $0.74. The Company also reduced its 2016 capital expenditures outlook and operating cost guidance. Management stated that "While we don't know how far commodity prices will fall, or the duration of the downturn, we believe it's prudent to plan for lower prices for a longer period of time." ConocoPhillips' dividend had been its top priority, and it raised the quarterly rate a penny last July. However, it now appears the dividend has been superseded by a focus on ensuring that its financial condition doesn't deteriorate during the downturn. Investors were not pleased and the stock fell 7% on Friday.

The Week Ahead

While the economic data releases scheduled for this week should generally portray continuing, if unimpressive, growth, we expect commentators will be paying greater attention to the weekly jobless claim number as the four-week moving average has been creeping higher over the past couple of months. The earnings calendar will include the major media/entertainment companies which are expected to report mixed results. In other news, New Hampshire holds its primary on Tuesday the same day President Obama releases his fiscal year 2017 budget and Federal Reserve Chair Janet Yellen testifies before the Senate Banking Committee regarding monetary policy an d the economy on Thursday. The Treasury auctions scheduled for this week are on: Monday: $37 billion three-month bills and $30 billion six-month bills; Tuesday: $24 billion three-year notes; Wednesday: $23 billion 10-year notes; and Thursday: $15 billion 30-year bonds. The when-issued yields on the notes and bonds as of Friday afternoon were decidedly lower than for the last auctions.