Look at Earnings in Context Before Betting on Equities

Includes: DIA, QQQ, SPY
by: Rakesh Saxena

The bulls are back in full force on the networks during the weekend. “As more third quarter results are scrutinized this week, we are going to go well past 10,000 (Dow), this time decisively,” a prominent CNBC contributor insisted. And, quite clearly, the overwhelming majority of Wall Street analysts are convinced that the worst is behind us.

But what is being scrutinized is corporate performance in the midst of an environment which is heavily loaded with government intervention. In fact, what is behind us is the first round of stimulus plans, bailouts and rescue packages. What the future holds is the continuation of this massive trial-and-error programme targeting the elimination of systemic risk in the financial, housing and consumer sectors, in no particular order. The International Monetary Fund is predicting that governments will begin unwinding intervention-related commitments by mid-2010; the fundamentals, however, point unequivocally in a contrary direction.

One reason why the billions and trillions of taxpayer dollars are failing to create any genuine growth is the fact that the global capital accumulation process, set in motion during the colonial period of history, has come to a grinding halt. More specifically, the political and military realities which facilitated the transfer of wealth from the underdeveloped world to the rich nations have changed so dramatically that it is difficult to visualize how American businesses can hope to access cheap commodities, abundant labour pools, booming middle-class-driven consumer markets and public sector (including military) orders on favourable terms.

Most western economists have resisted recognizing the dynamics governing the post-1850 global capital accumulation process, since both writers who pioneered a critical examination of the rich-poor economic nexus - Rosa Luxemburg (The Accumulation of Capital, 1913) and Vladimir Lenin (Imperialism, The Highest Stage of Capitalism, 1916) – were condemned as Marxist theoreticians. But it was Ms. Luxemburg who repeatedly warned German trade unionists prior to World War I that seminal historical events like the “Scramble for Africa” (1885-1895) had radically enhanced the ability of Europe’s industrialists to accumulate unprecedented wealth and to improve wages and working conditions.

So did the end of the Cold War start the decline of four decades of solid Washington dominance on the world’s political and economic scene? And, as of today, almost two decades after the fall of the Berlin Wall, is the global capital accumulation process inherently incapable of powering growth in America? These may appear, at first glance, to be questions of an ideological nature. But embedded in these questions are (a) answers to America’s phenomenal post-World War II rise as a superpower and (b) explanations for the unprecedented expansion of the U.S. economy in the second half of the 20th century.

Government intervention in the economy will certainly help in cushioning the negative impact of the existing capital accumulation framework. And the extension of such intervention may give the impression that an economic turnaround is only a few months away. But sustainable growth from this juncture can only be a consequence of real wealth creation.

Despite the constraints on wealth creation, ongoing stimulus legislation will ensure that there is no substantial drop in the major equity indexes. At the same time, upside is limited. Backed by an abundance of bullish opinions on the networks and in the print media, forthcoming earnings reports will, in all probability, push the Dow well past 10,000. The risk lies in the fact that the foundations for such earnings do not establish any credible forecasting parameters whatsoever when one looks beyond the end of this year.

Rosa Luxemburg was the rarest of all rare phenomena – a Marxist critical of Karl Marx. During a Stuttgart session of the International Socialist Congress in 1907, she emphasized that a country-specific analysis of the crisis of capitalism (Karl Marx in The Communist Manifesto, 1848) was no longer relevant, given that international trade was generating huge transfers of wealth to the industrialized nations. “If we talk of a crisis, we must talk about the day when profits on capital can no longer be derived from wealth transfers,” Ms. Luxemburg told a group of delegates from her native Poland.

Without speculating on the end result, are we confronting such a crisis?

Disclosure: No position in DIA, QQQQ and SPY