MarketView for November 5

Summary 

No longer distracted by the presidential election, Wall Street was forced to face squarely the current state of the economy and it appears that most investors did not like what they saw, although that was no fault of our newly elected president. Nonetheless, the result was that stock prices were pasted once again. The decline in the market was Wall Street's largest loss ever on the day after a presidential election, coming immediately on the heels of its biggest Election Day rally on record in the previous session.

Selling was across the board, with shares of the large manufacturers, including Boeing, as well as banks, technology companies, home builders, retailers and energy companies all taking hits. Now for the really bad news, Thursday could be even worse because Cisco Systems after the close of regular trading said that fallout from the United States had now spread to key markets abroad and its revenue could fall as much as 10 percent in the current quarter.

Adding to the grim economic news was a report that showed deep cuts in employment by private employers during the month of October and data that showed the vast service sector contracted sharply last month as the worst financial crisis in 80 years roiled the world's largest economy.

Boeing sank 6.9 percent to close at $49.55, the second-heaviest drag on the Dow and ranking only behind Exxon Mobil, whose shares fell 4.9 percent to $73.69, while Chevron was down 4.2 percent to $74.88.

The slide in energy shares was also precipitated by a sharp drop in oil prices on fears that an economic downturn will hurt energy demand. December crude settled down $5.23, or 7.42 percent, per barrel at $65.30 on the New York Mercantile Exchange.

On the NASDAQ, Apple was the top drag, down almost 7 percent at $103.30. Shares of Cisco, whose equipment forms the backbone of corporate technology networks, fell 5.1 percent to $17.39. After the bell, the stock slid to $16.25.

Financials weighed on the S&P 500, with shares of Morgan Stanley ending down almost 10 percent at $17.06, while Bank of America closed down more than 11 percent at $21.75. Nucor Corp and U.S. Steel Corp fell after Arcelor-Mittal, the world's largest steelmaker, forecast a weaker fourth quarter, slashed output and froze growth plans. Nucor ended the day down 10.5 percent to $35.50, while U.S. Steel fell 8.3 percent to $37.75..

Among home builders, Toll Brothers ended the day down 10 percent to $20.73, while Wal-Mart Stores, a Dow component, fell 3.6 percent to $54.13. All 30 Dow components ended in the red.

The ISM reported that the service sector contracted sharply in October.

Cisco Reports Disturbs Wall Street

Cisco Systems warned that its revenue could fall as much as 10 percent in the current quarter as the economic downturn spreads to Europe and Asia. The world's largest manufacturer of network equipment, often seen as a bellwether in the technology sector, said on Wednesday its revenue could fall 5 to 10 percent in the fiscal second-quarter from the year-ago period.

"We do believe that the challenges that initially affected the U.S. have spread to other countries around the world," Cisco Chief Executive John Chambers said on a conference call, citing weakness in Europe, emerging markets and Asia. Chambers also said that because of the dramatic changes in the market in the last two months it was difficult to be sure that the company would hit second-quarter revenue estimates.

"It's probably the second most difficult time in my career in terms of my comfort level with the forecast," he said.

The company reiterated its long-term revenue growth projection of 12 to 17 percent but said that would depend on the global economy returning to normal. However, for its fiscal first quarter Cisco reported a higher-than-expected quarterly profit as phone companies and businesses bought more routers and switches to cope with growing Internet traffic, despite a weaker global economy.

Net profit for Cisco's fiscal first quarter ended October 24 was $2.2 billion, or 37 cents a share, compared with $2.2 billion, or 35 cents a share, in the year-ago quarter. Excluding items, profit rose to 42 cents a share from 40 cents, it said. Revenue rose 8 percent to $10.3 billion, which was in line with its own forecast and matched Wall Street expectations, suggesting that Cisco managed to keep a good handle on costs.

Chambers said the results showed it delivered solid growth "in what is clearly a very challenging global economy." The results came amid signs of a U.S. recession and a year after Chambers spooked the market by revealing that it was hit by "dramatic decreases" in orders from U.S. banks.

Cisco has been aiming for long-term revenue growth of 12 to 17 percent a year, but it has recently fallen below that pace. It reiterated the target on Wednesday, saying that assumed the global economy returned to normal growth rates. Cisco has said that U.S. financial institutions account for only around 3 to 4 percent of its business. In September, it said events in the financial sector, including the collapse of Lehman Brothers would be "manageable."

But analysts have said banks' reluctance to spend could dent corporate spending on network equipment -- especially on big ticket items like Cisco's core routers. Cisco's CRS-1, for example, costs around $500,000 to $1 million each.

Crude Falls Again

The price of crude oil futures was down again on Wednesday, dropping 7 percent to below $66 per barrel on Wednesday after a government report indicated that fuel stockpiles were growing as demand in the world's top consumer slowed further. Domestic sweet crude for December delivery settled down $5.23 per barrel at $65.30, while London Brent crude settled down $4.57 per barrel at $61.87. Gasoline stocks were up 1.1 million barrels last week, against, as demand for the fuel fell 2.3 percent over four-week period to October 31, the Energy Information Administration said.

Crude prices are down by about half from a record high of $147.27 per barrel in July as the global credit crisis hit the wider economy, damping fuel demand in major consumer nations. Crude supplies fell as worries about the weakening global economy returned to the fore, a day after the U.S. presidential election.

The EIA said it expected OPEC production to be cut by 1.1 million barrels per day by January, representing about 70 percent of the planned 1.5 million barrel per day cut agreed by OPEC last month. In its weekly review of the oil market, the EIA said this would be higher than the usual 50 percent compliance with previous cuts. OPEC member Angola said on Wednesday it had implemented its share of the supply curbs.

Total oil product demand in the past four weeks fell 6.7 percent from a year ago to 19.10 million barrels per day, the EIA reported. Domestic crude inventories were unchanged. However, crude stocks rose by a hefty 1.8 million barrels at Cushing, Oklahoma, the delivery point for U.S. crude futures, while distillate inventories rose by 1.2 million barrels.

Early pressure on crude came after Obama's victory in the U.S. presidential election boosted the U.S. dollar. The dollar later fell against the yen but retained gains against the euro. A firmer dollar makes oil more expensive for holders of other currencies and tends to pressure the crude price lower.

Our New President Will Have His Hands Full

The private sector jobs market deteriorated rapidly in October while the service sector contracted sharply as the worst financial crisis in 80 years hammered the world's largest economy.

According to data released on Wednesday, economic challenges now face Barack Obama a day after he won the race for the White House and foreshadowed weakness in the government's labor market report due out on Friday. Private employers made their deepest job cuts in six years last month and companies' planned layoffs surged to their highest in nearly five years. A key gauge of the service sector fell to the lowest since the index was launched in 1997.

The service sector accounts for about 80 percent of U.S. economic activity. The Institute for Supply Management said its non-manufacturing index came in at 44.4 versus 50.2 in September, below the level of 50 that separates expansion from contraction and worse than economists' expectations for 47.5. The report displayed weakness all around, with employment falling to its lowest on record and new orders tumbling.

The lone outlier of good news in the ISM report was that inflation pressures also fell sharply, which should allow the Federal Reserve more leeway in its efforts to stimulate the moribund economy with low interest rates and measures to support the credit markets. In fact, the ISM said its price gauge fell to its lowest since July 2003 and recorded its largest one-month decline since the index was first reported in 1997.