The throw-in-the-kitchen sink mentality that prevailed among financials last week--when Citi, UBS, Merrill Lynch, Sovereign and others dramatically lowered earnings estimates, and traders drove the stocks up on the theory that this was the quarter they took the big losses and Q4 would see improvement -- is now becoming evident in commodity stocks as well.

We now have Alcoa coming in a tad light on earnings, and International Paper, Chevron, and Valero lowering estimates. In the wake of Chevron, other oil companies like Royal Dutch Shell (RDSA) are also down. The problem here is that while lower earnings were expected from banks and brokers, these lower earnings were NOT expected from commodity companies.

Alcoa noted that results were impacted by several factors, including lower metal prices, higher petroleum costs, and softness in the North American economy. They did announce a significant buyback program which may end up repurchasing 25% of the existing shares. On that alone, the stock is trading just below break-even pre-open.

International Paper said weak land sales would push earnings below estimates. IP has been trying to sell land and focus on its core paper and packaging business.

Chevron warned its earnings would be hurt because of weaker margins for refined products.  Refiner Valero did the same thing; Marathon Oil said the same thing Tuesday night (profit margins from refining would be half that of a year earlier). What's the problem? For refiners, it's simple: they take oil and they make gasoline (or other refined products like diesel or jet fuel).  However, when the price of oil is high, and gasoline prices do not go up commensurately, pure refiners are caught in a classic squeeze: they have to buy oil high, and sell gasoline at the same or only slightly higher price, which squeezes margins.

How much do traders think the Fed lowering rates will matter? A lot. According to Investors Intelligence, bullishness among financial newsletter writers rose to 60.2% from 56.55 last week. That's the highest levels of bullishness since Dec. 2005. Bears fell to 21.5 from 25 to the lowest since July 24.  Remember, this is a contrarian indicator; high levels of bullishness mean many investors are already heavily invested and hence the market has fewer participants to drive it higher. This bullishness exists despite the considerable anxiety about the U.S. economy and the now-zero earnings growth for the third quarter. What's happening? Traders believe the Fed is on their side.

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