Net Effect

October 27, 2008

Earnings.

How unusual it felt to have a different culprit to blame for yet another shellacking on Wall Street. Last Wednesday's pullback, painful (and routine) as these sessions have become, lacked a distinct element of previous unravelings: there was no talk of convulsing credit markets. Instead, it was the more mundane issue of soft corporate earnings. Not a good sign, to be sure--earnings are and always will be the straw that stirs the stock-market drink--but at least declining profits are something we've dealt with in the past. TARP, we have not.

Now, at the end of the day it doesn't really matter how you got there; a 6% drop is a 6% drop. And, of course, the fiasco we've been dealing with for the past year-and-a-half is a major contributor to why corporate earnings may soon be falling off a cliff. But, as the TV tells us, we need change, so if the laser-like focus on every aspect of the credit storm is diminished a bit maybe that's a good thing.

The problem is that there's essentially zero chance of that happening. Indeed, it's this new-found focus on earnings that once again brings us back the insidious nature of our crisis.

Credit markets may be in the initial phase of re-opening, and Wachovia's $24 billion loss may have only looked so bad in preparation for its move into the Wells Fargo family, but plenty of reasonable folks think we're still closer to the beginning than the end of this storm.

In other words, the damage is done, but it's not done. One of the masterminds of our meltdown, Alan Greenspan, said late last week that it'll take many months and much higher unemployment to get out from under it, and while plenty of his assumptions made as Fed chief turned out to be wrong, he's probably right about this call.

There's so much energy spent lamenting the seizing-up of the credit markets that some out there may just be coming to grips with what awaits us even when the spigots of lending are flowing freely. But while that next portion of our recessionary journey isn't going to be pretty, either, it probably beats where we're coming from.