Mr. Market's Mental Breakdown

NEW YORK (TheStreet) -- The market has lost its mind. It does that at times.

I'm not trying to describe a market that drops massively, where the cause of it only becomes apparent in retrospect. While the great crash was happening in 2008, few analysts were able to gauge the massive negative contagion of housing and leveraged securitizations of mortgages at the time and fewer were willing to advise investors to get out.

This time, we are all painfully aware of the European issues plaguing this market and the likely outcomes. We're even pretty well aware of the possible contagion effects of a disorderly Greek default, or even a series of sovereign debt problems coming to a head all at once. For once, we're prepared to pull up a chair, sit back and watch the wheels come off this carriage. No market strategist in the media anywhere wants to be on the bullish side of the fence when this meltdown comes, as many were in '08. Oh, no. It's bad and they want you to know it.

But can it really be that bad?
oil

As deep as the problems are in Europe, this market is pricing stocks as if we've never seen a sovereign debt problem before. In fact, we've seen dozens. And in spite of the risks, the global economy does not look even remotely like 2008, when leverage inside the banks was a systemic problem and credit markets were virtually seized.

Even with slow-to-zero growth in the U.S. and Europe, emerging markets will guarantee that global GDP will increase at least 4% in 2011, and about that much in 2012, give or take a half percent or so. That doesn't sound like a replay of 2008 to me, and implies that quite a lot more would seem to have to go wrong before we see a true double-dip recession. Even ISM figures for September, released Oct. 2, reflected an economy clearly not falling off a cliff. And yet the stock market continued its relentless drop.

That's what happens when the market loses its mind.

My problem is I continue to try to gauge the value of stocks as if the market was going to behave rationally. Silly me.

Oil Service Stocks

Let's take oil service stocks, the drillers and technology providers of oil and gas production. Here's what we know: We know that demand for oil and gas, while not increasing as rapidly as some analysts thought, is still going to be higher at year-end 2011 than at the start of it. We know that this likely will also be the case in 2012. We also know that procurement of oil and gas from conventional sources continue to get more challenging, as the easiest wells run dry and the world requires new more complex drill operations, both at new and old wells. We know that oil prices are not cratering, not nearly in the way they did in 2008, and that high oil prices spur high drilling profits. We know that EPS for these big drillers has been excellent in the second quarter, and likely to report equally well in the third.

All of this points to not just a value opportunity in big-cap mega drillers like Schlumberger ( SLB), Halliburton ( HAL) and Baker Hughes ( BHI), trading at prices only marginally above their crash bottoms in 2008, but likely a rare and fleeting one.

Instead, these names just continue to get cheaper, chase out more investors and caution any fresh ones from buying these shares. Can we hope that Mr. Market will again reflect honest value at some point, as it always has done in the past? Investors can't be sure; they've been burned before and are more than cautious about being burned again. And the markets continue to hemorrhage lower.

That's what happens when a market loses its mind.

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