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Varchild2008 (84.38)

Unemployment Rates shouldn't impact the Stock Market

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July 28, 2008 – Comments (3) | RELATED TICKERS: DPS

Call me crazy but I don't believe unemployment numbers should impact the stock market any.  Certainly, they do impact it a lot.  Stock market rallies on surprisingly good numbers and drops on bad ones.

But, my point is a point on legitamacy.  Investors and analysts can't know just from these numbers, if unemployment rate jumps, that businesses are cutting jobs and doing hiring freezes because they can't sell and make as big a profit as before.

There are other explanations for an increase in the unemployment rate.  You could have a quarter of the year in which businesses are transistioning from one product line to another.  Sorta like our auto industry cutting jobs while they transition from trucks to clausterphobic-o-biles (small cars).

A business could be shutting down a manufacturing facility, cutting 300 jobs, in order to help manage the cost of building a BIGGER facility elsewhere that will hire 1000.

Maybe I am wrong though and investors and analysts actually look into this stuff at this kind of detail.  But, I doubt it.  I've never seen a stock market rally on poor employment numbers with an optimistic outlook. 

While the "futures market" is seen as a "futures market" I have to disagree.  As far as I can tell investors are lemmings that flock like geese.  When it's time to buy, everyone buys.... When it's time to sell.... everyone sells.  When it's time to panic over the employment situation, everyone panics.

Thing is... Being an investor gives you plenty of information on when and how businesses you invest in are going to expand and open up new employment.  Just from a limited time (5 months) of being a first time investor, I've seen lots of companies that are set to provide hundreds of jobs each from expansion projects.

Yet.. From Dr. Pepper Snapple to an OTC company: Southwall Technologies....  (both are investments of mine) what I see is that the expansion is for 2010... Not for Christmas of 2008.

One would hope the "Futures Market" would send the stock market ever so slightly higher from week to week as we get to what will be a tremendously positive employment outlook 2 years from now.   Yet, this "futures market" can't even predict what the weather will be like tomorrow.

3 Comments – Post Your Own

#1) On July 28, 2008 at 3:26 PM, StockSpreadsheet (69.11) wrote:

Varchild2008,

I have to disagree with you on some of your points.

1) In the case of transitions from one product line to another, like in the auto industry, most of these are cyclical and known about in advance.  (For instance, each fall a lot of refineries shut down temporarily to remix their fuel for the winter.  Detroit tends to retool a lot of its lines periodically, so some of it happens each time each year and the rest of the time the retooling is usually spread out during the year for the rest of the plants, so they don't all retool at once, (causing wild swings in the unemployment numbers).  Some of this is also taken into account by the BLS.  Each June, a lot of high school kids look for jobs and each August or September a lot of those kids quit their summer jobs.  The BLS had hedge numbers that they use so that these kids don't cause wild swings in the unemployment numbers.  The BLS also has fudge numbers for other industries, (refineries retooling for the winter gasoline formula, etc.).  


2) Another thing, if the people are laid off while the factory retools, (if they were getting paid during the retooling process they would not show up in the unemployment numbers), then that means that they don't have money coming in during that time.  That will lower their purchasing power, which will impact sales of many companies.  Also, since most employers have 401k's, that means that there is less money flowing into the stock market, since during the layoff they won't be making contributions to their 401k's and the employers won't be contributing the employer match.   Less money flowing into the stock market means less demand for stocks.  Supply and demand states that stocks therefore should fall.


3) It is true that a lot of investors, individual and institutional alike, do behave like lemmings.  The lemming behavior is what helped lead to the Tech Bubble leading up to the crash in 2000/2001.  The lemming behavior is also what exacerbated the crash in 2000 - 2002 and in 1987.  But if you are talking about the "futures market", then the "futures market" can be forward looking.  Now when you say "futures market" I'm assuming you mean the stock futures traded on the CBOT or elsewhere.  They often are future-looking, and will start bidding up stocks before an economic recovery is apparent and sell them off before the downturn is widespread.  If you are talking about the regular NYSE or NASDAQ as being future-looking, then yes and no.  A lot of stocks are evaluated by using the Discount Cash Flow Model (DCF).  In the DCF model, you have to make assumptions of future growth and profitability and then regress them into the present to come up with a current value for that stock.  In that case, the stock market would be future looking, as they are looking at future cash flows to base a valuation on today.  However, if the assumptions of future cash flows are shown to be erroneous, (when the company files its 10K or 10Q or gives earnings guidance), then a lot of those forward assumptions can collapse and then, apparently like lemmings, it can be "Katy bar the door" as the investors all rush to sell the stock at the same time, since their new assumptions can have the stock valued at less than current value and so they want out while they can still make a profit, (or to minimize their loss).  As Benjamin Graham has said, (and has been repeated in several MF articles), the market suffers from bipolar disorder.  When things are good, they are considered very, very good and all the lemmings rush in to push up stock prices.  When things are bad, they are often considered very, very bad, and everyone rushes to get out of the market, causing prices to fall sharply.  Things are rarely as good or as bad as the market thinks.  That is where you can take advantage of the market, buying overly-beaten down stocks when the market is pessimistic and selling them when the market gets over-euphoric, (or if you have a longer-term investing horizon, just holding on through the euphoria and ignoring the mood swings of the market).  


4) If you have an investing time horizon to where you can look at expected growth in 2010 and be willing to own the stock now and wait for the growth, you have a longer time horizon than a lot of the market.  You have to remember that companies have to report quarterly on their earnings, and mutual funds need to report at least quarterly usually and annually by mandate.  This leads to a very short-term focus by companies and mutual funds.  You have probably heard about the "window dressing" that many funds go through in December, selling some of their losers and buying stocks that had been hot that year, (even though they bought them too late to profit from the gains of those stocks), just so when they send out their earnings report they can show what great companies they own.  This is stupidly short-sighted and often very unprofitable, but it is the way that the market and the media that reports on the market has evolved.  It is to get away from this short-sighted focus that a lot of companies have stopped giving earnings guidance, (much to the dismay of Wall Street reporters since it means they now have to work for a living if they are assigned to cover those companies).  By not pandering to the short-sighted focus of a lot of Wall Street reporting, they can take a longer-term view and not be distracted by short-term news and reports.  A lot of companies elsewhere, (Japan being a common example), have 5-year and/or 10-year plans.  It is through these longer-term plans that the Japanese were able to dominate the VCR market and have helped them greatly in the car market.  GM had an electric car long ago, but they didn't see it as profitable in the next quarter or two so they shut down production, (probably accepting a bribe or two from some international oil companies to sweeten the decision).  A lot of the Japanese car companies continued with their designs and testing, which is why now almost all of the hybrid cars are Japanese.  Initially, sales of the cars would have been unprofitable, but they kept with it and now they can't make them fast enough.  This longer-term view gives a lot of foreign companies a competitive advantage over their American rivals with their short-term, quarter-by-quarter focus.

Good luck in your investing.  May all your picks be winners.

Craig 

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#2) On July 29, 2008 at 10:17 PM, Varchild2008 (84.38) wrote:

Excellent explanation, definitely.  Thanks.

The point of my article still stands though.  Unemployment numbers are meaningless.  They do not deserve the type of reaction that they get.

I assure you that when the bulls rush in on good economic numbers or when the bears rush out the door on bad economic numbers, no one really cares about the "future."

The market is forward thinking only to an extent because it's forward thinking on flawed information.

A company gets its stock sold off and then a few weeks later explains away the poor earnings report such that a massive rally occurs... But ultimately, the "press release" doesn't reveal anything a small amount of research couldn't have revealed.

For example.... Fannie and Freddie are in a bull market but I don't think they should be based on the fact that not much of anything has changed on their status. 

Investors I guess think that inspite of a Record Federal Deficit America can just sit there funneling cash to Fannie and Freddie and we can all go and ignore the housing/credit issues with the 2 entities.

No one's pricing in what would happen to Fannie and Freddie based on a whole host of issues and if I can find some time I will do a detailed article this weekend.  But, I don't think we've seen the end of Fannie and Freddie's issues yet.

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#3) On July 29, 2008 at 10:23 PM, Varchild2008 (84.38) wrote:

Look at the STEEL SECTOR.

I assure you that U.S. STEEL is setting the tone for the rest of the commodity group in the STEEL sector.

Up almost $20 in a day?  That kind of record setting performance never happens if investors were more focused on earnings of individual companies rather than obsessing over "statistics."

Problem with Unemployment figures is ultimately they are just "Statistics."  Meaningless at best. 

If a majority of companies in America this year are churning out earnings reports that meet or exceed expectations and GDP is going up.... Why doesn't any of that get factored into the Unemployment rate?

I think it should.  It paints a picture of Forward Employment Trends and Employment Expectations.    I think it would enhance these ridiculous reports.

If unemployment figures have to be seasonally adjusted for every single report released then what is the point of releasing the report to begin with?

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