Trader Talk

Markets Are Down And Here's Why


Why we are down today and here's some of the explanation: energy and industrial companies are emphasizing the slowdown in the U.S., while noting growth overseas. This is causing traders to question earnings assumptions for Q4 and 2008.

1) Oil service firms down big today on Schlumberger's earnings. Schlumberger down 8%.
Traders noting two problems in oil service:
a) that earnings were OK for Schlumberger but for the first time in a LONG time it looks like estimates are not likely to move up.
b) the big name oil services co's have had huge price runups this year: Schlumberger up 62%,

Cameron up 87%, Smith International up 63%, Halliburton lagging, up only 25%....with multiple expansion in question, prices are understandably coming down.

The issues are largely in the U.S. Schlumberger gets 35% of revenues from North America...but production of natural gas has been strong, there is too much capacity in that area, and that is hurting pressure pumping and other services that Schlumberger specialize in.

The irony is that with oil at $90 a barrel, Q4 estimates for earnings in the energy sector are moving's now 14%...was 13% last week. That increase is for production-weighted oil companies,. It's not much, but expect further upward revisions. Energy stocks will be out next week and the week after....

2) There are similar problems with the big industrial companies that reported this morning: Caterpillar, Honeywell, and MMM.

a) All noted U.S. softer, international stronger.
b) all have had strong price runups this year (Caterpillar up 22%,Honeywell up 31%, MMM up 16%), and with the U.S. slowdown, there have been questions raised about the ability of the company's to expand their P/E ratio.

3) The other issue is that credit issues have again reared their head this week. With banks reporting large hits from losses on collateralized debt obligations (among other losses), bears have argued that the rest of the community that owns these must have similar hits. One trader wrote to me, "How do the big banks lose billions and their clients leveraged 5-20 times,  have not. The banks were the ones selling the stuff. Most of what they got hit on was left over inventory."

Questions?  Comments?