Market's Problems: Financials, Steel, Homebuilders

The problems today:

1) Financials. For a view of why traders are now very worried about Q4 earnings for financials, look no farther than KeyCorp . Q3 earnings and Q4 guidance were both below expectations; there were strains from fixed income markets particularly in commercial real estate, and rising problems with residential construction loans.

Wells Fargo also saw an increase in nonaccruing loans (usually those more than 60 days past due that are not accruing interest) in residential mortgages and real estate construction.

Put simply, the problem here is that credit quality continues to deteriorate, and this does not appear to be a one-time issue. Losses from mortgages and commercial real estate for many banks may now be higher in Q4 than expected, and we could have more losses into 2008.

This scenario was not baked into the markets.

2) Steel weakness. South Korean steel giant Posco cut its full year forecast, partly on lower stainless steel prices. The bull argument has been that global steel will be strong, supported by the building boom in China and the Middle East; generally steel prices have held up well.

3) Home builders weak as DR Horton said that new orders plunged 39% last quarter and expected weakness to continue

4) Tech and telecom weak across the board on Ericcson's warning. Ericcson, the largest company in Sweden, down 24%. One Swedish journalist said, "the country is in an uproar."

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