MarketView for January 18

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MarketView for Tuesday, January 18  
 

 

 

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Tuesday, January 18, 2011

 

 

Dow Jones Industrial Average

11,837.93

p

+50.55

+0.43%

Dow Jones Transportation Average

5,221.65

q

-6.65

-0.13%

Dow Jones Utilities Average

411.78

p

+0.91

+0.22%

NASDAQ Composite

2,765.85

p

+10.55

+0.38%

S&P 500

1,295.02

p

+1.78

+0.14%

 

 

Summary

 

Wall Street started off a holiday shortened week with the major equity indexes in positive territory, despite the news released on Monday regarding the immediate medical leave of Apple Chief Executive Steve Jobs, along with some rather weak numbers out of Citigroup. Instead, the Street devoted its attention to higher projected share prices for Google, which reports later this week, and Dow component Caterpillar, whose earnings numbers will be released next week. Nonetheless, Apple ended the regular trading day down 2.3 percent to $340.65 ahead of its quarterly earnings announcement..

 

Shares of the bellwether technology company managed to repair some of the day’s losses and eased pressure on the major equity indexes. Apple has about a 21 percent weighting in the Nasdaq 100. Then, after the closing bell, Apple announced better-than-expected revenues; the result was due in part to excellent holiday sales numbers for the iPhone and iPad. The numbers sent Apple’s share price up 4.3 percent to $355.22 in after-hours trading.

 

During the regular session, the drop in price of Apple’s shares was offset by a gain in price of Google, up 2.5 percent at $639.63. Several brokerage houses raised their price target on the shares ahead of Google’s results for the quarter to be announced later this week.

 

The Dow Jones industrial average also benefited from a rise in the shares of Caterpillar whose stock price managed a 2.8 percent gain to close at $96.23 after Raymond James raised its price target to $116 from $95. Also aiding the Dow was Boeing, which gained 3.4 percent to close at $72.47 after the plane maker alleviated fears regarding the delivery schedule of its long-delayed 787 Dreamliner jet.

 

After the close, IBM chalked saw its share price tack on a 2.7 percent gain to $154.70 after the company announced better than expected quarterly earnings. In fact, the recent optimism with regard to earnings has helped send the major indexes higher, with the S&P 500 posting its seventh straight week of gains on Friday.

 

Throwing some cold water on Tuesday’s trading activity was Citigroup. The banking behemoth’s shares ended the day down 6.4 percent to close at $4.80 after the bank reported a serious decline in bond trading revenue that sent earnings well below expectations.

 

Earlier, the Dow traded at an intraday high of 11,858, a new 52-week high. The S&P 500 and the Nasdaq also climbed intraday and closed just slightly below their now most recent 52-week highs.

 

Times are Tough at Citigroup

 

A steep decline in bond trading revenue resulted in Citigroup's fourth-quarter earnings coming in well below expectations. It also cast some serious doubt over Chief Executive Vikram Pandit's statements of late that the Citigroup had "turned the corner."

 

Citigroup's fixed-income revenue fell 58 percent from the third quarter, as compared to a 7.9 percent drop at larger rival JPMorgan Chase, which reported its fourth-quarter earnings on Friday. The two banks' divergent trading results left the Street’s analysts uncertain of what to expect as other financial firms report earnings this week.

 

While the bank posted its first full-year positive earnings number since 2007, the sliding downward fixed income result left Pandit and other top executives facing myriad questions as to what had gone so wrong at a bank that only was able to continue to exist as a result of some serious taxpayer bailout money. The bottom line result -- 4 cents a share, or 50 percent less than what analysts were expecting -- stoked concern that the bank has yet to resolve the operational weaknesses that have plagued it for years.

 

Citigroup’s shares have done well during the past year as the Treasury Department gradually sold off its stake in the bank. They closed down 6.4 percent at $4.80 on Tuesday.

 

Trading revenues were hit in part by an accounting adjustment stemming from a market perception that Citi debt was less risky, but the results pointed to fundamental weaknesses as well.

 

"This was one of the weaker quarters for trading," Chief Financial Officer John Gerspach told reporters in a conference call, acknowledging Citi's investment bank has also struggled in other areas like the M&A league tables, where Citi fell to eighth place from fourth in Thomson Reuters' rankings.

 

However, Gerspach also said that trading results tend to ebb and flow, adding that "one quarter doesn't make a trend." Gerspach also forecast that "key hires" made in 2010 would boost securities and trading performance in 2011.

 

Fixed-income trading "is not the easiest business to run. Even Goldman has messed up in this space, it's not just 'ride the tide'," Gerspach said, adding that Citigroup "has lost a lot of people" over the past few years.

 

Citigroup reported net earnings of $1.3 billion, or 4 cents per share, for the fourth quarter. A year a ago the bank suffered a loss of $7.6 billion, or 33 cents per share. That loss was mostly caused by the costs associated with repaying the government under the Troubled Asset Relief Program.

 

Citigroup took a $1.1 billion before tax charge because of a credit value adjustment. That adjustment -- which Gerspach said accelerated after the government finished selling its Citi stake -- is due to the bond market's perception that Citi's credit quality improved during the quarter. Under accounting rules, that improvement forces the bank to take charges because its liabilities are worth more in theory.

 

Pandit has sold assets, cut staff and tried to focus Citigroup on its main businesses, including investment banking and retail banking for affluent customers globally. However, it is obvious that it is still very much a work in progress. Yet, In a memo to employees, Pandit predicted that 2010 would be remembered as "the year Citi turned the corner."

 

Citigroup released about $2.3 billion in reserves for bad loans, mainly due to an improvement in the store credit cards business it has put up for sale. However, a decline in Citigroup's securities and trading unit hurt revenues, which fell 6 percent on a managed basis from the third quarter to $18.4 billion.

 

It remained unclear why Citigroup's trading revenues were so poor. Despite repeated questions from reporters during two conference calls on Tuesday, Gerspach and Pandit provided little additional explanation, though Pandit said that bonds constitute a larger portion of its trading business than at some other banks because Citi has smaller equity and commodities businesses.

 

Gerspach said that excluding the "credit value adjustment" related to narrowing spreads, he was not sure the bank falls "outside the band" of the rest of the industry or that the bank's trading was more volatile than other banks'.

 

There was "no indication that there is anything systemic" in the trading results, he added.

 

The Street Freaks over Job’s Health Issues

 

Tremendous sales of the iPad and iPhone powered better-than-expected quarterly results and forecasts from Apple, assuaging to some degree the fears resulting from CEO Steve Jobs' abrupt decision to take medical leave. All key product lines exceeded expectations. The company sold 16.2 million iPhones in the quarter, up 86 percent. It also had strong sales of 7.33 million iPads, and Mac sales rose 23 percent on a unit basis to 4.1 million units.

 

Shares in Apple were up about 4 percent after hours following a brief trading suspension. It later backtracked to stand about 2 percent higher, making up the majority of the losses incurred after Jobs' surprise announcement. An across-the-board show of strength came as Wall Street displayed increasing confidence in the management team surrounding Jobs, who seeks medical treatment for an unspecified condition for an indefinite time.

 

Apple, known for its conservative forecasts, issued on Tuesday an outlook above Street expectations. It expects earnings for the March quarter of $4.90 a share on revenue of $22 billion.

 

The world's largest technology company by market capitalization said on Monday that Job was taking a medical leave of absence without specifying a return date or detailing his condition. At the same time, the company is entering 2011 on a roll, a cash-generating machine with rising sales across its product lines. In coming months, the company's iPhone will go on Verizon Wireless' network, further accelerating sales of the smartphone.

 

And at more than 7 million sold versus the roughly 6 million expected, Apple's iPad has not only virtually created the tablet market, but has become a significant slice of Apple’s business.

 

Apple reported earnings for the fiscal first quarter ended December 25 of $6 billion, or 6.43 cents a share, up 78 percent from a year-ago net profit of $3.4 billion, or $3.67 a share. Revenues increased 71 percent to $26.7 billion.