Earnings misses and news Steve Jobs is still sick failed to push the market lower. The bad news bulls are alive and well.

Market Statistics

The big news for the day was the medical leave announcement by Apple CEO Steve Jobs. Steve survived pancreatic cancer a couple years ago and the board was very bad about not disclosing any material information at the time. Jobs had an operation and a liver transplant and returned in what was claimed was good health but he remained thin and gaunt and the rumors of a continued illness followed him and the company. He eventually took some time off for a "hormone imbalance" and the shares rebounded again when he returned. This time the announcement came out before the rumor mill had a chance to really ramp up although there were some who believed his health was declining again.

His announcement this weekend claimed he was taking an indefinite leave of absence to focus on his health. No medical condition was specified leaving investors to speculate his pancreatic cancer had returned. Over 39,000 people in the U.S. contract pancreatic cancer every year and 37,000 die from the disease. Since Jobs has already had this and had a portion of his pancreas removed, most would not give him a very good chance of beating it a second time. This would be a prime example that all the money in the world won't help when your number is called.

Apple shares fell -$22 at the open to $326 but that was still better than the -10% dip overseas on Monday. Shares rebounded to close at $341 ahead of earnings. After the bell Apple crushed earnings and guided higher. Earnings were $6.43 per share compared to the $5.37 analyst estimate. Revenue rose +71% to $26.74 billion and more than $2 billion over estimates. Apple sold 16.24 million iPhones an 86% increase. They sold 7.33 million iPads, 19.45 million iPods and 4.13 million Macs. The company said there was still a significant backlog of orders for the iPhone 4 and they could not fill the demand. With the iPhone 5 due out in June they are about to run into production problems where they will have to quit making 4 so they can tool up for 5.

On the conference call the COO Tin Cook said Asia was critical to Apple's future sales. For the last quarter China, Hong Kong and Taiwan generated $2.6 billion in revenue a 400% gain over the same quarter in 2009. Cook said 80% of the Fortune 100 companies are testing iPads in the enterprise space or have already begin integration of the devices. (My son's company just provided iPads to all its upper level employees.)

Apple is predicting a profit of $4.22 in Q1. That is down sequentially because Q4 is always Apple's biggest quarter for sales thanks to holiday shoppers. Apple said it finished the quarter with $60 billion in cash and investments. After the earnings shares traded as low as $327 and as high as $357 before closing at $345 and only $4 higher than the regular close.

Apple is a strong company with a great future but this has been built on the amazing business decisions made by Steve Jobs. With the company not disclosing the nature of his illness everyone will assume the worst. The SEC even launched a probe into Apple during the prior illness for lack of adequate disclosure. I would be worried that the lack of disclosure again will weaken the stock again now that the lure of earnings is not there to provide support.

Apple Chart

Also after the close IBM posted earnings of $4.24 per share and beating analyst estimates of $4.08 per share. Earnings were $5.26 billion and revenue was a billion over expectations. Order backlogs rose +$5 billion to $142 billion. Sales of mainframe computers jumped +69% led by sales of the new System Z. That system has 96 cores running at 5.2 Gigahertz and is billed as the fastest corporate mainframe you can buy.

An increase in service contracts suggests the corporate world is starting to spend money again. IBM signed contracts worth $22 billion in the quarter for an 18% increase. IBM's sales are a good indicator of the health of the corporate world. Companies don't commit to millions in new hardware and consulting services unless they are confident about the future.

IBM said it was taking business away from Hewlett Packard thanks to its broader package of hardware and services. However, analysts claim Accenture is winning service business from IBM so who really knows for sure.

IBM Chart

Not all the earnings news was good. CREE reported a +47% rise in profits but sales, profits and guidance fell short of expectations. Earnings were 55-cents compares to analyst estimates of 58-cents. Cree is a large manufacturer of LED lights and sales overseas have been falling thanks to increased competition from China resulting from huge subsidies to Chinese companies. Cree lowered expectations for the current quarter to 38-45 cents and analysts had been expecting 58-cents. Cree shares fell -$11 after the earnings report. This is a prime example of why you should not hold an option position over earnings.

CREE Chart

Citigroup lost ground after it reported earnings of 4-cents compared to analyst estimates for 8-cents. Citi blamed the lower earnings on lower than expected trading in bonds and higher expenses. Citi also blamed it on the rising cost of its debt. Stock trading also took a hit with the equity proprietary trading desk seeing a -24% decline in revenues. Citigroup shares fell -6% on the news and helped to keep most banking sector shares in negative territory. The NYSE volume was 5.6 billion shares and 1.81 billion of those were Citigroup shares. Volume was very heavy in Citi. The stock just moved over $5 last week and back into the realm where all mutual funds could buy it. That illusive goal evaporated today with a close at $4.80.

Citigroup Chart

Meredith Whitney issued a buy rating on a big bank today. Yes, you read that correctly. The banking bear is losing her fur coat. Whitney upgraded JP Morgan to a buy from outperform based on improving economic conditions and improving credit quality. This was her first upgrade since Goldman in 2009. She said there was an "abundance of evidence that earnings had stabilized" at JPM. The only other financial stocks she rates a buy are MasterCard and Visa.

Ameritrade profits rose +6.5% to $145 million or 25-cents per share and inline with estimates. Revenue rose +5.1%. The key point from the Ameritrade earnings was the return of the retail investor. Daily customer trades in Q4 averaged 370,000 and that was +50,000 above the volume in Q3. Even better the CEO said that volume has risen to 439,000 in Q1 and a gain of another 70,000 trades per day. He said the retail investor was putting money back into equities and the trend was very strong. 40% of the money flows were in to U.S. equities and out of bonds.

Ameritrade Chart

Charles Schwab Corp (SCHW) also reported earnings but theirs fell -27% due to a charge for the settlement of a court case on its YieldPlus Fund. Earnings were $119 million or 10-cents compared to $164 million and 14-cents in the year ago quarter. Schwab said client trades had risen only 2% compared to the +11% gains by Ameritrade. Schwab reported a gain of 225,000 new accounts for the quarter compared to 164,000 new accounts at Ameritrade.

Schwab Chart

AIG announced the bankers the government had chosen to handle the $20 billion secondary offering. Goldman, Bank America, Deutsche Bank and JP Morgan will all co-host the underwriting. In an unusual move they will be all be book-runners and the fee is rumored to be in the 50-75 basis point range. That is very low but given the size of the offering it is still a lot of money. However they slice it up the amount of money involved in the offering is going to be a significant hit for the market. Take out $20 plus billion out of circulation and put it into a single stock and the rest of the market will take the hit.

AIG Chart

Cargill announced it was going to spin off its 64%, $24 billion stake in Mosaic (MOS). Cargill is a private company. By spinning off Mosaic they are trying to diversify their investments and maintain that private status. The shares of Mosaic will be distributed to Cargill shareholders, the family trusts, and to Cargill debt holders. They will also be exchanged for Cargill shares and for debt. The plan then allows the shares to be traded on the secondary market over a period of time.

Analysts believe this provides an opportunity for someone to make a run at Mosaic. The potential suitors always include BHP Billiton and Rio Tinto. Mosaic CEO also said on a conference call there was a provision in the deal to allow Mosaic to be sold before the two-year window had expired. However, any potential deal would have to be high enough to compensate for the tax impact on the private shareholders. This is seen as putting a floor under the price for Mosaic with only positive moves ahead. BHP tried to acquire Potash for $39 billion and failed. Mosaic was seen as unavailable given the 64% ownership by Cargill.

Mosaic Chart

Bonds took a serious hit around 9:15 this morning when a $6 billion sale of long dated maturities hit the market. Analysts initially believed it was a fat finger trade but the exchange said no, it was a real trade. Yields spiked sharply with the spread between the 30-year yield and 2-year yield hitting a record wide. After the exchange said it was a valid trade analysts then focused on a possible rate lock scenario. With up to $25 billion in corporate securities coming to market this week it could have been a bank selling treasuries to lock in the rate. This is called "rate locking" and it is a common practice in big offerings. Strange I did not read a single analyst that claimed it was an investor moving out of bonds in favor of equities.

Yield Chart on 30-year Treasury

The economics today were mixed but positive. The January NY Empire Manufacturing Survey came in better than expected at 11.9, up from 10.6 in December. New orders rose by a whopping 10 points to 12.4 and the employment index rose from -3.4 to +8.4.

The NAHB Housing Market Index was level in January for the third consecutive month. Compared to the risk of a decline given the negative impact of winter weather this was mildly bullish. Buyer traffic actually increased but only slightly.

The market had every chance to sell off today. Citigroup missed estimates by 50%. Apple's CEO has disappeared onto another medical mystery tour. Cree blew their earnings and knocked the Intel bloom off the chip sector. The bad news was there and if the market was as fragile as the bears would have you believe this was a perfect opportunity for a decline.

Instead the indexes, including the Apple weighted Nasdaq, posted gains with the exception of the Russell, which lost 0.01 point. Apple's opening decline did penalize the Nasdaq for a 15-yard loss but it recovered.

The Dow, S&P and Nasdaq all closed at a new two-year high. The bad news bulls are alive and well at least for the time being. If that $6 B sale in bonds is any indication the trend is accelerating towards equities and away from bonds. That means the long-term future of equities is growing brighter. Short term is still questionable due to the lack of a meaningful bout of profit taking but long term is very positive.

The S&P closed at 1295 and very close to round number resistance at 1300. I can visualize the bears poised with their finger on the sell button for Wednesday when IBM pushes the Dow and S&P higher. Support is now 1275.

S&P-500 Chart

The Dow ended with a +50 point gain but that was not the real story. The Dow slammed into an invisible wall at 11850 and was unable to penetrate it all day. I don't know why this level suddenly appeared as intraday resistance but it was rock solid. I could have seen this occurring at 11900 and the converging resistance but somebody was sitting on it well in advance of that level.

Dow Chart - 15 min

Dow Chart - 90 Min

The Nasdaq survived the early decline of Apple and the big drop in F5 Networks and Cree. This was the real world equivalent of dodging a bullet. Unfortunately in the case of Apple that bullet may come around again now that the earnings are behind us. Great earnings but now there is a cloud over Steve Jobs health once again and there is nothing to keep investors motivated. Any day now we could get a rumor that his cancer has returned and it is terminal. That would be a very bad day for Apple. Since the company has decided not to disclose any more info the worst will be assumed. There was also no announcement of a stock split as some had expected. I would not be surprised to see Apple retest support at $300 over the coming weeks.

Resistance on the Nasdaq is 2775-2800 and support well back at 2725. That is plenty of room for some volatility without disrupting the longer-term trend.

Nasdaq Chart

In summary I think we were lucky today. We could have sold off on various events but the bad news bulls persevered and we moved higher. The IBM and Apple earnings after the close undoubtedly had a lot to do with keeping investors motivated. How that plays out for the rest of the week is a mystery that will slowly unfold. Having the bulls win today was good for overall market sentiment and could be a factor in drawing some more money out of bonds and into equities. If we do see a dip in the near future I would see it as a buying opportunity.

Jim Brown

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