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Today's Drop, Why We Saw It Coming

Traders may be disappointed by today's declines, but there is no way they could be surprised.

Not when you have companies like Black and Decker and Illinois Tool Works giving first quarter guidance well below expectations. Not when you have Oshkosh declining to give ANY guidance.

Not when the November durable goods figure is revised downward MORE THAN 100 PERCENT, from a drop of 1.5 percent to 3.7 percent. Not when November new home sales for November also get revised downward dramatically, or when December new home sales came in at 331,000, when the Street was expecting sales of close to 400,000.

These kinds of numbers are NOT priced into the market, so little surprise that home builders, for example, were down 10 percent today.

Banks weaken. Elsewhere, bank stocks, which had been weak all day, moved down late in the day on tough talk from President Obama, describing Wall Street bonuses as "shameful."

Insurance stocks got hit badly today on Allstate's earnings report. Allstate down 20 percent, as they reported a loss far greater than expected. Put simply, they were hurt by:

1) Lower investment income due to holding of lower-yielding Treasuries (as it tries to de-risk its investment portfolio);

2) Lower underwriting income (though the underlying insurance business was not bad)

3) Large holdings of risk assets (mortgages like Alt-A, and CMBS)

4) Annuity-sales costs: some of their annuities guarantee a certain return, so they have to make up the difference when there are losses.

What's the bottom line?

Book value has declined 25 percent. The Street is worried that Allstate (and other insurers) may need to:

1) Raise more capital, and

2) Could be in even worse shape if there is a sudden large loss (due to a hurricanes, for example) on top of a weak capital base.

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