It's Down To This: Liquidity, Global Economy, Earnings

The major indices rose in the last half hour as financials rallied in anticipation that some kind of relief plan would be passed this weekend in Congress. Regardless, the markets are facing three serious problems right now.

NUMBER ONE WORRY is LIQUIDITY: it is drying up in stocks (no one is trading) and more importantly in the credit markets. We have spoken about credit issues in meat companies, restaurants, and even lower demand for fertilizers based on concerns about credit for farmers.

The SECOND WORRY is the GLOBAL ECONOMIC SLOWDOWN. We are again today seeing selling in commodities and commodity stocks, as well as industrials, with new lows in bellwethers like Caterpillar, Deere, U.S. Steel, Eaton, and Ingersoll Rand.

FINALLY, earnings continue coming down in financials, retail, autos, and energy.

Who cares about earnings? Ha! Earnings will become a major issue as soon as the Congress passes a bill. Consider that every sector has had its estimates reduced since the third quarter began on July 1. Same with the fourth quarter: estimates coming down in financials, autos, retailers, energy, and even techs.

Finally, here's a bizarre note: getting rid of financial stocks helps the earnings of the S&P 500!

Consider that just before Lehman came out of the S&P 500, third quarter earnings for the entire index were down 1 percent from the same period a year ago. When Lehman was removed, earnings for the entire index immediately became plus 0.3 percent!

The lesson is clear: if we can just get rid of enough financials, the S&P earnings prospects would improve.

Let's see: there's 85 financials left in the S&P 500, if we get rid of 2 a, make it 3...we could have massively positive earnings in 6 months!

For the week: Dow down 2.2 percent, S&P down 3.3 percent, NASDAQ down 4.0 percent, Russell 2000 down 6.5 percent.

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