Weekly Notes from Paul Resnik, CFA: Feb 16, 2016

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

Overview

During the first four days of last week falling oil prices and growing concerns that minimal or even negative interest rates will not resuscitate struggling economies around the world weighed heavily on stocks. The market did manage to regain much of its lost ground on Friday after energy prices rallied when the United Arab Emirates energy minister said that OPEC was ready to cooperate on production cuts (crude prices rallied 12% on Friday to $29.44 per barrel but were still down 5% for the week) and a 0.2% increase was reported for January retail sales (December's figure was revised from -0.1% to +0.2%). Excluding the effect of falling gas prices, January's increase would have been 0.4%. For the week, the Dow Jones Industrial Average was down 231.13 points (1.43%), the S&P 500 Index fell 15.27 points (0.81%), and the Nasdaq Composite declined 25.63 points (0.59%). Although the early stages of a presidential race can often be viewed as noise, the fact that the two leading candidates support policies viewed as an anathema to investors (i.e. Sanders' huge spending programs paid for by taxes on the rich and Trump's massive tariff increases) may be causing concerns. While it may not be a current focus of the financial markets, it should be pointed out that Venezuela, where the people are suffering from food, electricity and medicine shortages, will likely go bankrupt later this year.

In the News

Shares of JPMorgan Chase rallied 8.3% on Friday after CEO Jamie Dimon bought $26.6 million worth of the bank’s stock. The purchase, disclosed in a company filing, added 500,000 shares of JPMorgan Chase to Jamie Dimon’s portfolio. Bank stocks have been weak in recent months as sluggish economic numbers have raised doubts about the Federal Reserve's plans to raise interest rates (a move that would improve bank margins) and as declining crude oil prices have increased concerns about the potential for bad debts in the energy sector.

Solar City, a leading residential and commercial solar panel installer, reported a December quarter adjusted loss of $2.37 per share, much wider than the year-earlier loss of $1.33 but somewhat better than the consensus estimate of a loss of $2.59. Revenue rose 61% to $115.5 million, which beat the consensus estimate of $105.6 million. The Company installed 272 megawatt (MW) of solar panels in the quarter, increasing 54% year over year, but falling short of the guided range of 280–300 MW largely due to 15 MW of projects that were not completed by 2015 end. due to challenges with terrain conditions. All of these projects are under construction and are expected to be installed in the first quarter of 2016. Nonetheless, SolarCity now expects installations to grow only 18% year over year in the first quarter, deceasing 34% sequentially, to 180 MW. The sequential decline is mainly due to a higher-than-usual seasonal slowdown as well as the impact of its decision to end Nevada operations in December 2015 after energy regulators decided to change the way solar customers are charged for utility service. The Company said it expected a loss of $2.55-$2.65 per share for the current quarter. Analysts on average were expecting a loss of $2.36 per share. The stock responded to the disappointing first quarter guidance by plummeting 41% last week. SolarCity, which is backed by Tesla Motors Inc. founder Elon Musk, has now declined 72% from its May 15, 2015 high due to concerns that tumbling oil prices will erode demand for renewable energy.

The Week Ahead

This week's economic data should show some improvement from recent figures but portray an economy struggling to maintain momentum. Inflation, as measured both by the producer and consumer price indices, is believed to have again been non-existent in January. Earnings reports are expected to remain mixed. Investors will be looking for clues to the Fed's possible action at the March meeting to be found in the minutes of the January meeting to be released Wednesday. Interestingly, while U.S. markets was closed for President's Day on Monday, Chinese markets which were closed last week for Asian New Year, reopened and rallied over 3% on Sunday evening. The Treasury auctions scheduled for this week are on: Monday: $37 billion three-month bills and $30 billion six-month bills; and Thursday: $7.0 30-year TIPS.