The Overnight Report: Hey Pancho!

This story features MYER HOLDINGS LIMITED. For more info SHARE ANALYSIS: MYR

By Greg Peel

The Dow fell 73 points or 0.7% while the S&P fell 0.4% to 1213 and the Nasdaq dropped 0.9%.

Late after bell in Wednesday's trade on Wall Street, internet protocol leader Cisco Systems announced a quarterly result which missed on the revenue line and provided disappointing ongoing guidance. A lot of hope had been held for a company the shares of which had rallied 22% since the August low. Cisco shares fell 16% last night – their biggest one-day fall in sixteen years.

It was a kick in the guts for Wall Street given the level of faith being placed in the technology sector and its export potential aided by a weakening US dollar. The US no longer dominates in manufactured goods such as autos, and its natural resources are mostly consumed domestically. But in technology – computer hardware, software, search engines, databases, wireless devices and related internet protocol – the US leads the world. One need only look at America's second biggest company after Exxon – Apple – which has so rapidly dominated its field that it still isn't even in the Dow Jones Industrial Average.

What was most disturbing about the Cisco result was not that the company was failing to capitalise on a weaker greenback, but that opportunities in one particular customer sector had greatly diminished. Cisco sells 22% of its products to government departments across the globe, and many government departments across the globe are currently taking a razor to their spending budgets. Sexy new IP systems might be on the wish list, but will not be lashed out on this year, and probably not the next.

It was a result which may well have similar ramifications for other US tech exporters, further concentrating likely tech sector success down to just search engines and devices which are, or compete with, i-Things. These are private sector discretionary products.

Cisco's result sent the Nasdaq into downside outperformance (even Apple, which is now 20% of the Nasdaq 100, fell 0.5%) and all of Wall Street struggled with a still-rising US dollar. The greenback is now up 3% since the day after QE2.

Ireland is starting to have the smell of Lehman about it. The government has been forced to cut its budget so dramatically that the economic ramifications are forcing Irish sovereign bondholders to wonder where the money will come from to service those bonds. Each day Ireland's credit spread blows out further, which means when it is time to rollover financing Ireland will be looking at a very steep interest cost. This will only exacerbate the situation and from there, as ex-Lehmanites would tell you, it's a slippery slope.

The world should not be overly concerned given there is an EU-IMF emergency fund sitting untouched but ready for when the alarm goes off. However, the fact that the fund has been untouched has been instrumental in the euro's climb back to US$1.40 and above as Fed easing has sunk the US dollar. The fund might be there, but the world would rather it was not called into action. Ireland might be a small economy in the scheme of things, but there's still Greece, Portugal and maybe even Spain that are lined up like potential dominoes. European banks are loaded up with sovereign loans, and if one small economy falls through the crevice, the fear is all the small distressed economies are actually tethered one to the other, if you pardon my mixing metaphors.

The euro sunk another 1% last night to US$1.365 pushing the US dollar index up 0.7% to 78.17. The dollar's recent bounce has as good as matched the euro's fall. A “victim” of the stronger dollar is the Aussie, which held its ground following the weaker unemployment numbers yesterday but could not hold parity last night offshore. The Aussie is currently US$0.9986.

While the usual response to a stronger greenback is for commodity prices to fall, last night commodity traders ignored the esoteric world of debt and currencies and simply responded to the big surge in Chinese inflation as announced yesterday. Among the Chinese data it was noted that Chinese oil refining has jumped 12% in twelve months, which allowed crude to hold its ground against the dollar last night closing flat at US$87.81/bbl.

Base metals were not as shy, seeing Chinese inflation as linked to rising demand for materials in general. Copper jumped 1% and sparked technical buying as it once again took the US$4 mark for the first time since May 2008, settling at US$4.01/lb. Aluminium was also up close to 1%.

It was announced last night that the London Metals Exchange will early next year launch new “mini” futures contracts on copper, aluminium and zinc with Australia's new friend the Singapore Exchange. More surprisingly, given the recent increase in Comex silver contract margins, margins on base metals traded on the LME will be cut as of next week. For a 25t copper contract the margin will be cut from US$15,000 to US$13,250.

LME traders were already worrying that speculative trading was getting out of hand in base metals.

The US bond market was closed last night for the Veteran's Day holiday.

The SPI Overnight closed down 8 points or 0.2%.

Myer ((MYR)) will report its quarterly sales result today as we head into the Christmas frenzy (or not) while tonight a wobbly Europe will learn the first estimate of EU third quarter GDP.

Oh and the perfunctory response to the title of today's report, as those of a certain age would know, is Hey Cisco! 

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