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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Tuesday, January 18, 2011
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.
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MarketView for January 18
MarketView for Tuesday, January 18