U.S. stocks finished solidly higher Tuesday as Wall Street celebrated the end of the U.S. presidential campaign. Traders focused on better than expected earnings from Mastercard (MA) and Archer-Daniels-Midland (ADM), which eclipsed a report that showed U.S. factory orders declining 2.5% in September. Investors also seemed to take remarks by Dallas Fed President Richard Fisher that the U.S. is "navigating the mother of all financial storms" in stride.
Market players were also encouraged by reports of a possible expansion of the government's Troubled Asset Relief Program, lower Libor rates, and the Australia Central Bank's decision to cut rates 75 basis points to 5.25%. The European Central Bank and Bank of England are expected to cut rates Thursday.
Wall Street, like the rest of the world, was awaiting the results of the U.S. elections, especially the presidential contest between Senators John McCain (R-Ariz.) and Barack Obama (D-Ill.). Polls say Democrats should score well on Election Day, notes S&P MarketScope.
On Tuesday, the Dow Jones industrial average jumped 305.45 points to end at 9,625.28. The broader S&P 500 index added 39.45 points to close at 1,005.75. The tech-heavy Nasdaq composite index gained 53.79 points to finish at 1,780.12.
On the New York Stock Exchange, 25 stocks were higher in price for every seven that declined. The ratio on the Nasdaq was 18-10 positive amid slow trading.
Bonds were higher Tuesday. The dollar index was lower. Gold futures were soaring. Crude oil futures and energy stocks were up on reports that Saudi Arabia and other OPEC members were actually cutting production.
European stocks rallied, with London stocks up 4.42%, Frankfurt higher by 5.00%, and Paris climbing 4.62%. Asian markets finished mixed, with Tokyo stocks soaring 6.27%, Hong Kong stocks edging higher by 0.28%, and Shanghai stocks falling 0.76%.
Doug Roberts, chief investment strategist at ChannelCapitalResearch.com in Shrewsbury, N.J., called the pre-election gains a relief rally that stemmed from much of the uncertainty around the next administration being lifted, as well as some short covering in sectors such as oil based on nervousness about new policies tat may be implemented.
"It's not so much who wins [although] it looks like right now Obama is going to win, but when you’re in a kind of crisis mode where everybody is wondering [now that] we’ve done TARP, we’ve done the commercial paper funding facility, we’ve done rates cuts, what’s next?" says Roberts. "The next president. So the market is breathing a sigh of relief that at least some of these problems will be addressed."
While he believes the rally could be sustained, it may also be undermined if Demnocrats win nine or more Senate seats, as that would give them a 60-seat majority and the power to enact laws even without a Democratic president's support, and certainly without the check and balances from the Republican minority.
In economic news Tuesday, U.S. factory orders plunged 2.5% in September. The reading was much weaker than the -1.8% expected, and comes after a revised 4.3% decline in August (-4.0% before). The 0.8% rise in durable goods orders for September was revised up to 0.9%. Transportation orders rebounded 6.5% after a 9.4% drop in August. Excluding transportation, orders fell 3.7% after falling 3.6% in August. Nondefense capital goods orders excluding aircraft fell 1.5% after a 2.3% decline. Shipments declined 2.8% and inventories were down 0.7%, pushing the inventory-shipment ratio up to 1.29.
The International Council of Shopping Centers and Goldman Sachs chain store index rose 0,6% in the week ended Nov. 1 after rising 0.5% the week before. On a year-over-year basis, sales grew by 0.9% after rising 1.3% the week before.
In a speech Tuesday, Dallas Federal Reserve president Richard Fisher said the Fed is facing the "mother of all financial storms". He suggested fiscal and regulatory changes were needed to help boost the economy. He also stated that inflation momentum has been frozen in its tracks by the slowdown in the economy.
The Treasury Dept. is considering using more of its $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers, after tentative signs of the program's success, according to people familiar with the matter cited in a Wall Street Journal report. In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric Co.'s (GE) GE Capital unit, CIT Group Inc. (CIT), and others, these people said. The possible expansion shows how much Treasury's rescue plan has morphed since it was first proposed in September.
Among companies reporting earnings, Mastercard reported a third-quarter loss of $1.49 a share (including special items), vs. a profit of $2.31 a share a year ago, despite 24% higher revenue. Excluding an after-tax charge related to an antitrust litigation settlement, the latest earnings were $2.47 a share, beating the Street's forecast of $2.25. Standard & Poor's Equity Research maintained its hold rating on the stock.
UBS AG (UBS) reported third quarter earnings per share (EPS) from continuing operations of 0.09 Swiss francs, vs. a 0.45 Swiss francs loss per share, despite a 14% drop in interest income. UBS expects conditions seen at beginning of the fourth quarter will continue to affect clients' assets, and therefore its fee-earning businesses. It also notes fourth-quarter results will be impacted by a possible reversal of its own credit gains, and loss on the equity in the fund to be controlled by the Swiss National Bank.
The Financial Times reports Bank of America (BAC), Bank of New York Mellon (BK), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), Merrill Lynch (MER), Morgan Stanley (MS), State Street (STT), and Wells Fargo (WFC) will pledge not to use the recent $125 billion cash infusion from the US government to pay bankers' bonuses in an effort to defuse the mounting political furor over compensation at battered financial groups.
In other U.S. markets Tuesday, the 10-year Treasury note was higher in price at 101-13/32 for a yield of 3.833%, while the 30-year bond was higher at 103-20/32 for a yield of 4.287%.
The dollar index was lower at 84.68 amid much speculation the Fed will follow lead of other central banks and lower rates soon to bolster the economy and help ease the financial crisis. The Australian dollar was up at 68.14 U.S cents although the Reserve Bank of Australia cut rate 75 basis points to 5.25% in a surprise move. The European Central Bank and the Bank of England are expected to cut their rates on Thursday. Reuters reported global currency movements were muted and liquidity was thin as traders awaited the outcome of the U.S. presidential vote.
December West Texas Intermediate crude oil futures settled $6.62 higher at $70.53 per barrel amid reports Saudi Arabia has cut crude supplies to some of its customers. Reuters said one industry source estimated Saudi Arabia had reduced exports, as opposed to production, by around 900,000 barrels per day from peak output in August. Producers are hopeful lower supply will boost prices, although a global economic slowdown is cutting down on demand. Some traders estimate the Saudis have cut shipments by around 900,000 barrels per day from the August peak, according to Reuters.
December gold futures settled up at $757.30 per ounce as the dollar index fell and oil futures rose. However, further gold price gains may be tempered ahead of potential interest rate cuts from the ECB and the BoE this week, according to Action Economics.
Joe Cusick, senior market analyst for optionsXpress in Chicago, says there may be some gains but he doesn't believe the exuberance can be sustained over the longer term.
"There’s too many challenges: we’ve seen dwindling bond yields, exploding dividend yields and shrinking [price-to-earnings] ratios. That isn’t the traditional recipe for a sustainable rally," he says. "You've got to keep your trading hats on."
Rather than buying stocks in any big quantities, he recommends gradually building up positions while paying attention to fundamental and technical factors and careful assessment of valuations.
Among other stocks in the news Tuesday, Archer-Daniels-Midland reported third-quarter earnings per share (EPS) of $1.63, vs. 68 cdents one year earlier, on a 65% sales rise.
Automatic Data Processing (ADP) reported third-quarter EPS of 54 cents, vs. 45 cents one year earlier, on 9.5% revenue growth. As a result of the worsening economic environment, the company anticipates total fiscal 2009 revenue growth of 2%-3% compared with its previous forecast of 7%-8%. However, ADP still thinks it can achieve its 10%-14% forecasted EPS from continuing operations growth, up from $2.18 in fiscal 2008 (excluding a gain).
Principal Financial Group (PFG) reported third-quarter operating EPS of 96 cents, vs. $1.18 one year earlier, on a 6.4% revenue decline. Wall Street was looking for about 92 cents.
Magna International (MGA) reported a third-quarter loss per share of $1.93, vs. $1.38 EPS one year earlier, on a 9% revenue drop. The company significantly reduced expectations for 2008 light vehicle production volumes in North America; it now sees light vehicle production volumes of about 12.8 million units in North America and about 14.9 million units in Europe. Magna expects consolidated sales to be between $23.2 billion-$24.3 billion for 2008. It sees 20908 complete vehicle assembly sales of $3.25 billion-$3.45 billion.
Marvel Entertainemnt (MVL) posted third-quarter EPS of 64 cents, vs. 45 cents one yera earlier, on a 48% sales rise. The company raised its $450 million-$480 million 2008 sales guidance to $640 million-$670 million and its $1.55-$1.75 EPS guidance to $2.45-$2.65 to reflect third-quarter recognition and expected fourth-quarter recognition of substantial box office and DVD revenues from Marvel's Iron Man feature film and modestly improved expectations for its licensing business. Marvel set 2009 guidance of $415 million-$460 million in sales and $1.00-$1.35 EPS. Wall Street is looking for $1.94.
Jacobs Engineering Group (JEC) reported fourth-quarter EPS of 92 cents, vs. 68 cents one year earlier, on 40% higher revenues. The company sees $3.55-$4.05 fiscal 2009 EPS.
Boeing Co. (BA) says world air cargo growth will expand at a 5.8% annual rate over the next two decades, with worldwide air freight traffic tripling through 2027, according to the company's World Air Cargo Forecast 2008/2009.