Does the Correction Begin this Week?
We are certainly getting an interesting start to the week. Steve Jobs is taking a health-related leave of absence from Apple (Nasdaq:AAPL) and the shares are down around 5%. Apple stock traded down 8% yesterday in Europe, so there may be some more downside. Apple sold off around15% the last time Jobs took a leave of absence, so we may see Apple trade down to $300 a share.
Of course, Jobs' absence is unlikely to affect Apple's earnings, revenues and innovative products.
*****Citigroup (NYSE:C) reported a $1.3 billion profit in the fourth quarter. That works out to $0.04 a share, but estimates were for $0.08. That's a pretty big miss. Revenues were light as well.
We get IBM (NYSE:IBM) and Apple (Nasdaq:AAPL) after the close today.
*****The explanation for the earnings miss at Citi was largely due to a $1.1 billion charge related to the value of Citi bonds and tightening credit spreads. Readers should recall that one of the accounting rules that was changed to help banks related to how banks account for their bond liabilities.
If a bank's bonds are trading lower that what they were sold for, the bank can count that as a profit, under the assumption that it could buy them back for less than the original selling price.
The accounting rule change was solely designed to improve banks balance sheets, as no bank has the cash to buy back bonds. Now we are seeing the flipside of this accounting rule. Citi bonds have rallied, and so the company has to take the hit.
But that wasn't the only problem. Citi also suffered from lower fixed income revenue and lower revenue from fixed income and securities.
The one bright spot was that Citi was able to lower loan loss reserves by $2.3 billion. But we should also note that even without the accounting charge, Citi would have been essentially break even with the improvement in loan loss reserves. Yes I know, Citi and other banks suffered as they had to put more money aside to cover losses from their loans, but still, I'd like to see Citi operate at a profit from operations.
*****We've been watching the financials and oil stocks as the leaders of this rally. The financials are clearly taking a hit today after Citi's disappointing results. But oil stocks are doing fine.
The International Energy Agency (IEA) just raised its demand number for 2011 again for the fourth month running. I don't put much stock in the IEA's estimates as this group is notorious for underestimating the effect of declining production in non-OPEC oil regions.
Still, the IEA has the basic idea right: economic growth is leading to higher demand and higher prices.
*****I told you I would keep you up to date on what my Wyatt Investment Research Jason Cimpl is doing at TradeMaster Daily Stock Alerts. If you don't know, Jason is our resident technical analyst. He leads his TradeMaster Daily Stock Alerts to short-term profits form the market's direction.
His readers have made some excellent gains during this rally, including 40% and 17% from China MediaExpress (Nasdaq:CCME), 21% on LDK Solar (NYSE:LDK), 19% on Covenant Transportation (Nasdaq:CVTI) and 17% on Gannett (NYSE:GCI). One of his open positions is up 54%.
Jason's market forecast has been relentlessly bullish since late August, and his readers have done very well. But on Friday, Jason initiated his first bearish trade in months.
The stock market will correct at some point. And Jason notes that a correction began during January options expiration week last year...
And, yes, this is January options expiration week. We'll see if Jason can continue his remarkable run of profitable trades.
*****As always, send your questions and comments to dailyprofit@wyattresearch.com.
