Global Markets Take a Plunge

GOOD MORNING. Stocks in Asia closed lower today; U.S. futures are pointing to a mixed open.

Analysts have been saying for weeks that stocks are living on stimulus fumes and are due for a correction. And after yesterday’s 2% fall in the S&P 500—its fourth decline in a row—the markets are now halfway there, down 5% from their peak on October 19. But a rebound may be tough to achieve today; weak earnings reports out of Europe and Japan may spook U.S. traders, and stocks could be volatile ahead of the government’s first estimate of third quarter GDP, due out at 8:30 this morning.

The big drag across the pond: Royal Dutch Shell (RDS.A). Europe’s largest oil company reported a 62% drop in third- quarter earnings as net income fell to $3.25 billion from $8.45 billion a year earlier. Excluding one-time items and inventory charges, Shell beat forecasts with a profit of $2.62 billion, ahead of estimates for a $2.5 billion gain. The company has cut its operating costs by around $1 billion over the last year, and plans to slash 5,000 jobs. Still, chief executive Peter Voser issued a cautious statement, saying that although energy demand and pricing are improving “we are not expecting a quick recovery.” The stock is taking a beating in London today, down 3.6%.

In Japan, meanwhile, the Nikkei lost 1.8% to end at 9,891, its lowest close since October 8. Traders have been nervous that the strong yen is killing profits for Japanese exporters, and a weak earnings report out of Nintendo didn’t help. Despite cutting prices for its Wii console, the company reported that profits for the April-September period fell 52% to 69.49 billion yen ($772 million), down from 144.83 billion yen a year earlier. Nintendo’s own forecast had been for a 100 billion yen profit. And sales slid 34% to 548 billion yen. Adding to the bad news: NEC Electronics. The giant maker of consumer electronics reported a 15.5 billion yen quarterly loss and cut its outlook for chip sales.

Global stocks are selling off because a “dirty word”—risk—is reasserting itself, according to economist David Rosenberg of Gluskin Sheff. Traders are growing increasingly skeptical of markets that have roared ahead of economic fundamentals and are trading at lofty P/E levels, even adjusted for this stage in the economic cycle. Australia, for example, has one of the world’s healthiest economies, he points out, but the inflation rate has slowed to a 1.3% rate, suggesting that even “one of the strongest economies on the planet can’t seem to generate much in the way of any pricing power at the consumer level.” In the U.S., signs of weakness in the housing market have recently resurfaced, he adds. And that’s raising fears of a double-dip recession.

IN OTHER NEWS:

In the seesawing world of oil prices, Exxon (XOM ) is prey to the same trends affecting the energy sector at large. When the company reports earnings this morning, analysts are expecting earnings of $1.06 a share, down from $2.59 a year ago, but up sequentially from last quarter’s $1.02 per share. The company is expected to report revenue of $79.29 billion, down 42.4% from the same quarter a year ago.

Those are the same kinds of numbers Exxon’s competitors have been turning out. On Tuesday, BP (BP) reported earnings per share down 54% over the year-ago quarter, although the company’s results were better than analysts had expected. On Wednesday, ConocoPhillips (COP) reported earnings per share 71% below the year-ago quarter. Exxon’s earnings should be about 60% below the third quarter last year, in line with the industry average, says Fadel Gheit, an analyst with Oppenheimer & Co.

The picture should improve over the next year as oil prices rebound, says Sal Ilacqua, an oil analyst with Monness, Crespi, Hardt, & Co. Although there is a huge decline curve in global production—an especially challenging trend for Exxon and its worldwide operations-- “sooner or later there will be a recovery in demand,” Ilacqua adds.

Exxon’s bigger challenge is demonstrating potential for growth. “Investors are not buying value anymore, they are buying growth, and investors have concluded that Exxon is too big to grow,” Gheit says. Investors may be listening for management to comment on the company’s plans for the future on the conference call at 11 a.m.