The Overnight Report: Earnings, Election Or Both?

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By Greg Peel

The Dow fell 243 points, or 1.8% while the S&P lost 1.4% to 1413 and the Nasdaq dropped 0.9%.

Most of the action in the US last night happened before the opening bell.

Firstly, Obama was given a narrow points decision in the third and final candidates' debate. Wall Street wants Romney to win – not just because capitalists prefer Republicans, but because there is little to no chance of the Democrats winning Congress as well as the Administration, and that implies at least another two years of policy deadlock. That puts the fiscal cliff clearly in view. Many are concerned a Republican/Republican victory will still imply ill-timed budget cuts, but history shows Wall Street performs best when the president rules with a majority in Congress, no matter what the policies.

This was food for thought when the first earnings reports of the day hit the wires early in the morning. And it was Dow component disaster. DuPont missed on earnings and announced it would cut costs by cutting 1500 workers. 3M hit the mark, but reduced its full-year guidance. United Technologies missed on the top line and lowered full-year revenue forecasts. DuPont shares fell 9%, 3M's 4% and UT's 1%.

The Dow opened down over 200 points.

If we compare the moves of the three indices we note an unusual occurrence. The worst move came from the big cap Dow, while the Nasdaq fell by only half the magnitude allowing the S&P to split the difference. The unusual part stems from the fact Apple closed down over 3%. Typically, if Apple falls the Nasdaq falls further than the Dow and drags down the S&P. Apple shares tanked mid-session when the retail price of the new iPad Mini was announced as US$329 and not US$299 as expected. Apple also announced a new iPad4 regular size, which came as a shock given the iPad3 was only released about five minutes ago. How much will Apple cannibalise itself?

The Dow bungled along for the rest of the session, but never really looked like staging another comeback as was the case on Monday. The bulls, nevertheless, found reason to take heart. The stocks that were sold down the most on the day were the stocks that had run the hardest up to the peak. The stocks which were left behind in the rally were mostly up on the session. United Parcel Service reported earnings in line with forecasts after an earlier warning, but then lifted fourth quarter guidance beyond analyst estimates. Its shares were up 3%. The reason the Nasdaq did not reflect Apple's fall was because a lot of tech stocks were already beaten down from last week's poor sector results, and need not be sold off any further.

Out of interest, Faceplant posted a beat after the closing bell and its shares are up 8% in the aftermarket.

More disappointment was waiting on the economic front, nevertheless, with the Richmond Fed manufacturing index falling to minus 7 this month from plus 4 last month. Economists had expected a fall only to plus 3. And speaking of economies, ratings agency Moody's held off last week on cutting Spain to junk, but has instead cut the ratings of five Spanish regions, including that of independence agitator Catalonia. However, an auction of Spanish bonds last night went off without incident, although the interminable wait for a Spanish bail-out does little to boost the mood.

In other markets it was all about risk-off once more, with the US dollar index rising 0.4% to 79.94 and gold dropping US$21.80 to US$1706.60/oz. The Aussie is down 0.5% to US$1.0261.

Base metals all posted further 1-2% falls, while Brent crude lost US$1.19 to US$108.25/bbl and West Texas fell US$1.99 to US$86.66/bbl. Iron ore is unchanged at US$117.50/t.

The SPI Overnight fell 40 points or 0.9%.

The Dow is not Wall Street's preferred indicator (S&P), but it is now sitting right on its 100-day moving average. A breach tonight could imply a more serious correction.

It's inflation day today in Australia with the release of the September quarter CPI result, and thereafter the flashers emerge. We'll see HSBC's flash estimate of China's October manufacturing PMI today followed by equivalents for the eurozone and US tonight. The Fed will also release its latest policy statement tonight, which at this stage is not expected to provide anything new.

On the local stock front, there'll be plenty more AGMs, Alacer Gold ((AQG)) and Santa Barbara Mining ((SBM)) will release quarterly production reports and WorleyParsons ((WOR)) will hold an investor day.

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