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Earnings Worries Weigh On The Markets

Two specific sectors are showing weakness today (financials and materials) but for the same reason: earnings concerns.

1) Commodity stocks are having a tough time moving up because the underlying commodities are barely off their bottoms. Most commodity stocks have very close relationships to the underlying price of the principal commodities they manufacture.

Look at these commodities since June:

  • Oil down 71 percent
  • Copper down 65 percent
  • Coal down 62 percent
  • Milk down 50 percent
  • Aluminum down 50 percent

The good news is that commodities have shown some signs of stabilizing since December; the bad news is that they are showing very little inclination to rise significantly from their bottoms. Sideways movement will do nothing for commodity stock prices.

Many analysts are concluding that it might be difficult to make significant moves in commodity prices for months, inflation hawks notwithstanding, which is putting pressure on earnings estimates. Alcoa , for example, drastically lowered its estimate for aluminum prices a week ago; that's what was behind Deutsche Bank's downgrade of Alcoa on Friday.

2) Financials are weakening. The Bank Index is down about 15 percent since topping out last Tuesday, down 4 days in a row. Big names like US Bancorp , M&T Bank , Comerica , and Fifth Third are now set to close below their November lows.

What's up? Estimates for earnings continue to come down for 2009. Remember, many analysts have financials and discretionary stocks leading an earnings turnaround in the second half of the year.

But there's a growing realization that these companies will be earnings constrained for much longer, and estimates will be coming down for the back half of the year soon.

The midday letter from Lawrence Summers, indicating that the federal government would seek to eliminate dividends and would seek to restrict mergers, has also not helped

As always, the Street is leading the analysts.

Citi is emblematic of the problem. Call it a joint venture, call it whatever you want: the Street has been unhappy about the Smith Barney-Morgan Stanley talk since the minute CNBC broke the story late on Friday.

At the time, Citi was trading at about $6.95, it closed Friday at $6.75 and is now at $5.72. That is an 18 percent drop in the stock in two trading days!

What's the problem? It's not hard to figure out: it's believed, since Morgan Stanley would reportedly have an option to purchase the entire "joint venture," that Citi is selling one of its most valuable assets under duress because they are desperate to raise more capital.

This indicates that: 1) there will be more losses and more need to shore up capital at Citi and elsewhere, and 2) the government is likely pushing Citi to shore up capital early by selling something of value.

    • Citi's Move to Shed Broker Fails to Stem Cash Worries

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