The Great Dying

I like the article below because it does not mince any words about the current state of the economy. As the title indicates, now that the shopping season is over the earnings season is upon us and there is a lot of bad news to come, which will lead to the period of a "Great Die-Off" of companies. The author seems to think that when oil prices get low enough that equity markets will stage a large rally, but I don't buy that. I suspect that by late spring/early summer investors and the public will begin to understand how serious the economic situation is and the market will move to a state of "capitulation". Text in bold is my emphasis. From Market Watch:

Everybody should have known that the holidays would only delay it. The freight train of job cuts, plunging earnings and massive spending cutbacks set to hit the economy was, thankfully, pushed back a few weeks while stunned investors and workers across the globe caught their breath after the worst fourth quarter in decades.

But now the great dying has begun, and I'm not talking about German billionaires throwing themselves in front of trains or French aristocrats slitting their wrists, as alarming as these incidents have been. No, earnings season -- the time for companies to 'fess up just how bad it's been for them in the last three months -- is here.

Alcoa Inc. kicked it off late Tuesday, announcing 13,500 job cuts. Intel Corp. came in early Wednesday with its statement that fourth-quarter sales had plunged 23%. Few sectors were safe, as the carnage on the first awful day of the year for the stock market spread across the retail, energy, media and banking industries.

The Dow Jones Industrial Average's decline of 245 points, or almost 3%, was the first evidence of 2009 that we are about to finally arrive at that time when the worst, all along, had been yet to come. A rally since late November in the markets gave hope that equity investors, a forward-looking indicator, may see the bottom for the economy in the first half of this year.

That may still be true, but we have to get there. And the next few weeks of earnings warnings and then actual earnings, along with outlooks for the next three months, are expected to be littered with bad news. It's not just layoffs and plant closings, which are bad enough on hard-working folks and the surrounding economy. And it's not just bank failures, or collapsing investment banks and hedge funds.

Companies will start going completely out of business, including retail firms, biotech companies and many, many mom-and-pops out there in everything from auto parts to bars and restaurants. Much of it will be tied to a pulling in of horns among consumers. They were willing to buy the Christmas tree or the holiday trip to grandma's house. But now that we're in January, getting more exercise is no longer on the top of the annual resolutions list.

Investors won't be safe, either, especially with time bombs like Wednesday's fraud at India's Satyam Computer Services, causing its shares to fall almost 80%, going off with alarming frequency. This is the time in the cycle where all the frauds come out -- Enron, WorldCom, Madoff. They're all exposed when the tide goes out.

What will signal a turning point? Could it come during the worst of earnings season? Perhaps. But I expect it will come afterward, and that it will be tied to oil prices.

You think Ken Lay isn't chuckling on some cloud somewhere about all this? Is it a coincidence that Jeff Skilling was back in the news this week? Already somebody is calling Satyam "India's Enron." There will be more to come. So what will signal a turning point? Could it come during the worst of earnings season? Perhaps. But I expect it will come afterward, and that it will be tied to oil prices.

The collapse of the oil bubble was stunning in its ferocity, equally if not more stunning than the rapid inflation of the bubble itself. Likewise, crude is now oversold, and, while it looks set to fall below $40 a barrel and maybe well into the $30s, investors will flock back to it at the first sign of an economic rebound. That will in turn spark energy stocks, and probably financial stocks, and we'll be off to the races again. (We'll see, I am not buying it.)

Obama's inauguration and the swift passage of his economic stimulus package will provide some gauze for the wounded markets, but there is still too much to work through to think a passing of the torch can be the catalyst.

In the meantime, financial advisers will continue to recommend the old saw that the best position for investors is indeed the fetal one, and asset managers sitting on cash and low-yielding bonds will be awaiting any sort of signal that the worst of the actual economic pain is over. When the economy does get ready to turn, the markets will react quickly. (Sorry, I not buying into this point.)

But it isn't there yet.