Tuesday, February 3, 2009

Don't Forget About Underemployment!

You have heard me talk about the importance of unemployment over and over again. It is the single most important factor in the performance of firms you might want to invest in. Not to mention it might keep you up at night worrying about whether or not your job is safe.

If you are an investor, you keep a tight eye on unemployment because if it keeps rising, you can predict that the majority of firms are not going to grow their earnings since people won’t be spending as much money. Investors use unemployment as a way to tell what is a fair value to pay for shares of a corporation. For example, if the unemployment rate is going up, the value of shares of expensive retail stores is going to go down because unemployed people are not going to be wasting money on expensive clothes. More importantly, unemployment causes fear. Even though the rate is 7.2%, which may not seem like a lot, it causes fear in those who are employed that they will lose their job. This fear causes them to stop spending money because they need to save money in case they become unemployed.

But one thing that many people miss out on is underemployment. Underemployment is when people who are looking for full time work can only get part time jobs, the hours people are working a week are getting cut by employers, or when people who are qualified for high paying jobs are working for lower wages because they cannot find anything else. Underemployment hit 13.5% in December (Bureau of Labor Statistics), bringing the total unemployment and underemployment to over 20%.

Underemployment is just as bad as unemployment because people who are working for less money or have seen their hours cut down are penny pinching the same way unemployed people are. The underemployed are just squeaking by, they are still buying the same essentials that the unemployed are, the only difference is they do not have to tap into their savings. From a stand point of firms, underemployed Americans are just as bad as unemployed because both groups are ceasing to spend money.

The reason I want you to be aware of underemployment is when you are looking for what a fair value for a stock is, the price should not be only discounted for 7.2% unemployment, but also for the 13.5% underemployment. Remember, this Friday the numbers for unemployment/underemployment come out for the month of January.

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