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.

Don't Jump Into Every Market Ripple

So today we had a nice rally of 200 points in the Dow Jones, thanks to a strong performance by bank stocks. But that doesn't mean anything. Tomorrow we could see a 300 point drop because someone reported bad earnings. The bank stocks got a lift from news that the Fed will keep rates at almost 0% all year long and the Obama Administration is moving quickly to buy up more toxic assets from banks. Additionally, House Democrats leaders announced today that the Stimulus Bill is expected to pass the House. 

While this is all good news for banks, don't be fooled by this market ripple. Today Starbucks and others announced even more layoffs. As companies continue to release earnings, they keep announcing massive layoffs to help cut costs. Don't overlook this. As more layoffs occur, companies based on consumer spending will continue to see their earnings deteriorate. The job losses from this week alone are really adding up. 

Lastly, the Stimulus Bill is supposed to pass the House, but that does not mean it will pass the Senate. Democrats do not have enough votes to bypass a filibuster, and right now Republicans seem to hold strong opinions against the excessive spending of the bill and a lack of tax cuts. The market is expecting the bill to pass, but it will probably find resistance in the Senate. And if it doesn't pass the Senate, do not expect the market to take it well. Having said that, I don't think the bill will never pass, I just don't think it will pass right away. Republicans and Democrats both agree that some kind of stimulus package needs to be passed, but not on how it should take shape. And I have faith that President Obama will be able to stretch across the aisle and bring both sides together. If the bill doesn't pass the first time, it will present a great buying opportunity as the market will likely push down prices.  

Keep following how strong Senate Republican opposition is to the bill is so you can predict if the bill will get passed or not. And amongst all the news of stimulus and banks, do not lose sight of unemployment.

Unemployment Update

As promised, I want to keep you guys updated with new layoffs and where they are occurring.

Job Cuts Announced Today:

• Caterpillar announced today it is going to lay off 20,000 workers.
  
  
• Sprint Nextel is laying off 8,000 employees.
  
  
• Home Depot is laying off 7,000 workers.
  
  
• The new Pfizer Wyeth deal is expected to cut 8,000 jobs.


• General Motors is laying off 2,000 workers
  
  
• Texas Instruments is laying off 3,400 people
  
  
• Deere & Co. is laying off 200 employees in America, 500 in Brazil

From CNBC

A Surprising Gain

Housing posted a surprising gain in December. Today existing home sales figures came out and they posted a 6.5% gain from November to December. Housing sales were up because prices of houses have been slashed so much that people are going out to get them at bargains. Is this a sign that housing has bottomed?

Maybe. But be aware, that this does not mean the housing crisis is definitely over. Unemployment numbers are still rising. As unemployment continues to increase, people will become more frightened of losing their jobs. When people are scared that they might lose their job, they are not going to go out and make big purchases, such as buying a new house. So we may see a drop when January home sale figures are released.

I'm not saying that it will drop for sure, just be aware that this trend may not continue.

A Reminder of Job Cuts

Today Harley Davidson announced its profit dropped 58% for the quarter. To offset losses, Harley Davidson is laying off 1,100 people and closing down three factories. Harley Davidson is an unfortunate reminder that the unemployment scene is getting worse. Do not invest thinking that unemployment has bottomed or will improve anytime soon. Unemployment should bottom around 9-10%. I will be updating which companies are making layoffs so you can get a better picture of just how bad unemployment is going to get, and adjust your investments accordingly.

Even Microsoft Is In Trouble

Microsoft was slammed today. Its shares fell 12% today after the company announced it missed analyst's estimates. Microsoft's profit was down to 4.17 billion dollars, from 4.71 billion dollars a year ago. Microsoft also recorded revenues of $16.63 billion vs. expectations of $17.08 billion. Microsoft also announced it will not give revenue estimates for 2009, a sign of management's lack of confidence in their business outlook. On top of that, the company announced it will cut 5,000 jobs. Software engineers were once considered to be in high demand, but the fact that unemployment has started to spread into the software industry is a sign that unemployment is going to continue to rise. Microsoft's weak earnings reiterates my earlier post of waiting to make investments until the bulk of companies have released their earning report. I know Google posted better than expected earnings today, however they are a rare case and should not be a sign to dive into the market yet.

Housing Has Bottomed? Doubtful

I said in an earlier post that the economy is not getting better anytime soon. There have been many people saying housing has bottomed, the economy has bottomed, and that the credit markets have improved as banks have started lending again. I do not want to seem like a pessimist, but it is important for investors and those whose jobs are at risk to know the health of the economy.

A recent post at nakedcapitalism blog provided a few articles showing how banks have now stopped lending to home builders. This is important for you to be aware of because if banks have just now stopped lending, clearly housing has not bottomed. Also, the credit markets have not thawed yet, there are still shutting down lending. With credit markets still frozen, the economy will not be growing anytime soon because no business can get the money they need in order to grow. With home builders now unable to get loans, you should see a large wave of bankruptcies.

If you are looking to invest in companies tied into home building because you think the housing sector has bottomed, steer away. These companies will only see their problems amplified, not only can they not sell homes, they cannot get the funds to keep themselves alive. This will also, without a doubt, increase unemployment numbers as builders look to layoffs in order to cut costs. There is still a lot of time before housing picks up.

Its All About Jobs

Do not let anyone fool you into thinking economy is getting better anytime soon. The single most important thing in the economy is JOBS. And they are not picking up. Many people do not fully understand just how bad job cuts are getting, and they are only going to get worse. CNBC recently published an article showing the amount of job cuts and which companies are cutting them. Jobs that once seemed secure are no longer secure. It is important to know what sectors are losing jobs in order to see if you are in risk of losing your job or not.

From CNBC.com: Layoffs Picking Up Speed-Is Your Firm On the list