Why Stocks Are Surging as Jobs Disappear (Dow is up, Jobs are down, what gives ?)

US NEWS AND WORLD REPORT ^ | 10/16/2009 | Rick Newman

[SeekAndFind]

Stocks are up. Jobs are down. So if you're an investor you're enjoying a vibrant recovery and if you're a worker it still feels like a grinding recession.

Since bottoming out in March, the stock market has soared by about 60 percent, one of the most awesome rallies in market history. The Dow Jones Industrial Average cracking 10,000 may not be strategically significant, but it's a psychological breakthrough that's worth cheering after the demoralizing crash that preceded it.

While the Dow has been racing upward, however, the unemployment rate has also skyrocketed, from 8.5 percent in March to 9.8 percent now. The economy has lost 7.2 million jobs since the recession began at the end of 2007, and the trend is still going the wrong way. The unemployment rate will almost certainly hit 10 percent and hover near there for awhile in 2010, before gradually declining.

So are job losses good for the stock market? Actually, yes. At least for awhile. Stocks are rising because many companies are earning more money than analysts have expected. But earnings aren't up because companies are selling more stuff; most companies are still selling less stuff and grappling with falling revenue. Instead, earnings are rising because companies have cut their costs more than revenues have fallen. And "costs" are often the same as "jobs." Consider these snippets from some recent earnings reports:

Johnson & Johnson. Third-quarter revenue was down 5.3 percent but net earnings rose 1.1 percent.

Domino's Pizza. Third-quarter revenue down 6 percent; net earnings up 77 percent.

Abbott Labs. Third-quarter revenue up 3.5 percent; net earnings up 36.5 percent.

Pepsi. Third-quarter revenue down 1.5 percent; net earnings up 9.5 percent.

Alcoa. Third-quarter revenue up 9 percent, compared with the second quarter; net earnings swung from a $459 million loss to a $124 million profit.

All of those companies have laid off workers over the last two years, probably necessary to keep the company healthy. And it's worth keeping in mind that when earnings outperform revenue, it's a sign that the company is well-run (assuming there's no Enron-style hocus-pocus). But CEOs also know that you can't grow a company or keep juicing the stock price by cutting costs and slashing jobs. Real growth only comes from new customers, new business, and increased revenue. And on that measure, the outlook is murky for the stock and job markets both.

The same workers who have been getting laid off, improving the cost profile for many companies, are also consumers running out of money to spend. Some are going bankrupt, defaulting on bank loans, and losing their homes. That's a major risk to corporate profits—and stock prices—down the road.

Some companies will be able to coast for awhile. The weak dollar and relatively strong economies in Asia and parts of Europe and South America, for example, are good news for U.S. exporters, since it helps them offset weak U.S. sales with stronger business overseas. And more-efficient companies can withstand lean times longer. But most American companies still rely on American consumers to keep business humming. Sooner or later, the U.S. job and stock markets need to go in the same direction.

The question is whether the job market will hitch onto the coattails of the stock market, with companies starting to hire as their fortunes improve—or stocks will turn south as the ranks of the unemployed swell. Good thing workers and investors both have become familiar with uncertainty.

[JudyinCanada]

Employees are an expense to a business. They are an expense a business cannot do without, as they generate income.

An employee who does not contribute significantly to a business, however, is an expense that should be eliminated.

It seems to me that many businesses have used this financial downturn to lay off or fire the people that were not top notch workers. Many found out that the best job security was to do a good job and make yourself a valued employee.

An efficient, streamlined workforce increases profit.

[KC_Conspirator]

They also like government bailouts.

[SeekAndFind]

Many found out that the best job security was to do a good job and make yourself a valued employee.

If this is true, then this country is in deep doo doo. Ten percent of our workforce ( actually more if you use U6 as a measure, it will be 17% ) are NOT doing good at their jobs.

Apparently, Indians and Filipinos do the jobs better than Americans.

[nina0113]

You mean people don't think of employees as CONTRIBUTORS to a company's profit anymore ? They're now a mere EXPENSE ?

Depends on which employees you're talking about. In good times, companies carry the doofus nice guy because they CAN. Whether they should or not is another question, but everybody likes him and he doesn't do any harm. That one's an expense, not a contributor. In BAD times, DNG's out the door.

[Night Hides Not]

Ageism is rampant in this country.

I was told yesterday that my resume is "too strong". That must be the new euphemism for "overqualified".

There is no way in hell that unemployment rates for accountants are under 5%.

[nina0113]

Or, worse, "why bother".

[walford]

These short-term gains in profit are only that. As we are given more of the poison that got us here in the first place [higher taxes, more regulations, bigger government], the long-term effects will be felt.

The Obama administration and its sycophants in the media can try to spin this and hope that hope will keep it going, but the current stock upsurge is unsustainable. Certainly it will not last when the mid-term elections come next year.

[slowhandluke]

You mean people don't think of employees as CONTRIBUTORS to a company's profit anymore ? They're now a mere EXPENSE ?

Yes. More customers means more profits. More employees mean less profits.

There is a tradeoff of course, if you are getting lots more customers, you might need more employees to serve the demand.

But without customers, employees are obviously just an expense. And the situation for all these companies with lowered revenues is that customers aren't coming in the door. In that case, having employess sitting on their thumbs waiting for customers is just an expense.

[TheThirdRuffian]

1. Large corporations do fine under national socialism. Lots of big companies made lots of money under the Nazis. It’s the start ups and small companies that cannot prosper.

2. Stocks are not going up; the dollar is going down.

[Repealthe17thAmendment]

I think the dirty little secret of business is that many large companies, and even a few small ones, had gotten a bit bloated.

The dramatic increase in productivity that computers have brought have allowed people to do more work in a shorter period of time, particularly in accounting, shipping and warehousing, and marketing.

The layoffs have been a sort of correction in the workforce, which is good news in a way. On the other, if your not skilled in computers and don't have an aptitude for multitasking, you're going to have a harder time finding and keeping a position in an office environment.

[zeebee]

Also bank CD’s are coming due and the renewal rate is less than 1%. People see the stock market as a better return so they foolishly invest, driving up the market.

[cydcharisse]

Yes they’re an expense if the company isn’t selling enough product to cover the employees wages. By keeping a larger than needed work force, they’re going down the path General Motors took. How did that work out?

[UCFRoadWarrior]

This jump in the Dow will be short lived. There are too many indicators that the economy is in bad shape

Of course, Business Socialism, thru bailouts and other programs, have only temporarily helped stocks. They will go down again, and it will be ugly

When over 2/3 of the economy is consumer-spending, and 10% of consumers have no income....the thing will collapse.

Main Street is hurting, regardless of what the liberals on Wall Street, and their syncophants, think

[Cicero]

Stocks are rising because a lot of people are gambling, hoping to make back some of the money they’ve lost since the Dow went south from 14,000.

People who have been in the market for the past few months have done well. But, trankly, the market looks pretty toppish to me right now.

http://stockcharts.com/h-sc/ui?s=QQQQ&p=D&yr=0&mn=4&dy=0&id=p24903662436

[Cyclone59]

On the income statement, yes they are considered expenses. Why do you think all that outsourcing happened? We can all thank Jack Welsh for coming up with that idea. All be it, they are dead wrong with that thought process, but that is the way today’s execs think.

[thulldud]

People see the stock market as a better return so they foolishly invest, driving up the market.

I learned a new term recently: "sucker boom".

[glorgau]

This is the “sucker’s rally” that is designed to pull in money from the little guys so that the big guys can take it off the table.

[Canadian Outrage]

You are right. The economy has already collapsed but it has been papered over by a massive amount of useless paper backed by nothing. The G20 has just approved the replacement of the greenback by the euro and the yen. This is a complete cover up of what has gone on behind the scenes. CO

[Roses0508]

The post immediately following this one is: “Consumer confidence pulls back sharply in October”.

No jobs, no spending, the stock market will be going down cause companies will not be able to sustain the earnings.

[Son House]

Financial Illiteracy Quiz:

After what legislation was there the largest spike up in the Real GDP?
a. February 17, 2009: American Recovery and Reinvestment Act = 111th United States Congress
b. October 3, 2008 — Emergency Economic Stabilization Act of 2008 = 110th United States Congress
c. February 13, 2008 — Economic Stimulus Act of 2008 = 110th United States Congress
d. May 28, 2003 — Jobs and Growth Tax Relief Reconciliation Act of 2003 = 108th United States Congress

( Ignore the green forecast, it was wishful thinking)


Failure Qualifies all Participants
to be an Economic Advisor to the Obama Administration
Correct Answer is: d.
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