Reality Catching Up to Wall Street on Earnings Misses, Fears

Around June, this author told a particularly self-absorbed, furtive individual that there would be a market "event" shortly before the presidential election, designed to offer the impression that the economy, under president Obama, was failing in multitudinous ways, designed to usher in Mitt Romney as the next occupant of the White House.

Until today, that prediction seemed somewhat unreasonable, as stocks have risen sharply during the summer months, but, as third quarter earnings - in addition to various warnings from the likes of the IMF and World Bank - are proving, the US and global economies are far from what anyone would consider healthy.

Today's sharp sell-off was the product of many misses and warnings by huge multi-national companies that either missed earnings and/or revenue estimates or issued warnings for the months ahead.

Among those companies that fell short of Wall Street's lowered estimates after Thursday's close and prior to Friday's open were McDonald's (MCD), Microsoft (MSFT), Google (GOOG), high-flying Chipolte Mexican Grill (CMG), and General Electric (GE). The misses came behind similar poor showings from Intel (hit a 52-week low today) and IBM, earlier in the week and proved quite a few sell-side analysts correct in predicting that this quarter would be very rough from an earnings perspective.

Truth be told, even those companies beating earnings estimates are not beating by much, with some exceptions, and are generally hitting targets that are lower than the previous years numbers, which, as the market is a continuous-discounting mechanism, means stocks are going in reverse, with earnings falling, not growing.

That alone should explain today's deep, across-the-board, declines, but also brings into question the entire philosophy behind central bank easing and money printing on a global scale. Sure enough, easy money has propped up banks and companies and a multitude of stocks and indices, but the end result of funny fiat money always reverts to a point at which currencies become worthless and derivative instruments, such as stocks, and, further out, bonds, lose value and we could be nearing the conclusion of the failed stimulative experiment that's fixed nothing since the crash of 2008.

Speaking of crashes, today's drop pales by comparison to what occurred 25 years ago to the day, the well-known stock market crash of 1987, when the Dow Jones Industrial Average fell by 23%. It was a seminal market event that will probably (hopefully) never be repeated, as there are supposedly more safeguards and triggers - to say nothing of the PPT - to prevent such a disastrous one-day event.

That is not to say that markets, stocks and indices cannot fall hard over periods of time, though it is far too soon to call today's action the beginning of such a a downward spiral. However, with tech stocks and industrials feeling the heat from investors in an earnings season that has been short on enthusiasm and long on fear, the coming weeks, especially with the November elections as a backdrop, could produce some calamities such as have already been seen in individual stocks, many of which were grossly overvalued and highly speculative, Chipolte and Apple come immediately to mind.

Checking the charts, it's useful to point out that the Dow and S&P broke through their 50-day moving averages and closed just about right on them, a position last seen a week ago, before Monday and Tuesday's "savior" rallies pushed equities back to something of a triple top, which has now broken down in a dramatic reversal. Today's declines on the two indices were the worst since mid-June. Shortly thereafter, both indices progressed above their 50-day MA, but have now returned to the roost, setting up a very unsettling weekend and a potential breakdown on Monday or further on during the week.

As for the NASDAQ, today's worst percentage loser, that index has been screaming red for a month, having busted through its 50-day MA eight sessions ago. Any further deterioration in the beloved NAZ could trigger a serious correction, as it is already down 7% in the past month.

Looking ahead to next week, earnings reports are due out on some big names, such as Cattepillar (CAT), Las Vegas Sands (LVS), Yahoo (YHOO) and Texas Instruments (TXN) on Monday; 3M (MMM), Coach (COH), Facebook (FB) and United Parcel Service (UPS) on Tuesday; and, on Wednesday, Boeing (BA), Eli Lilly (LLY), General Dynamics (GD), Lockheed Martin (LMT) and O'Reilly Automotive (ORLY).

Those mentioned above are but a smattering of companies reporting, in what will be the busiest week of earnings season. CNBC and Bloomberg will be looking for rays of hope, while investors may have a more wary eye toward more companies missing on earnings and revenue.

One economic data point worth noting was existing home sales for September, falling 1.7% to an annual run rate of 4.75 million, well below most estimates.

Until then, the long weekend waiting game, and, on Monday night, the final presidential debate, followed on Wednesday another FOMC rate policy decision, which will probably be nothing more than a formality.

Naturally, there will be the usual can-kicking and posturing from Europe, which still cannot come up with plans for either Greece or Spain, which may or may not be part of the plan to hold off the bad news until after our elections. One can hardly wait.

That is all... for now.

Dow 13,343.51, -205.43 (1.52%)
NASDAQ 3,005.62, -67.25 (2.19%)
S&P 500 1,433.19, -24.15 (1.66%)
NYSE Composite 8,324.14, -118.68 (1.41%)
NASDAQ Volume 2,194,602,500.00
NYSE Volume 3,851,036,250
Combined NYSE & NASDAQ Advance - Decline: 1168-4339
Combined NYSE & NASDAQ New highs - New lows: 166-117
WTI crude oil: 90.05, -2.05
Gold: 1,724.00, -20.70
Silver: 32.10, -0.771