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We have been hovering around 10% unemployment nationally for a while now. That's about double what we experienced prior to the housing bubble burst and banking nightmare. In many places, unemployment is more severe, such as Detroit, where unemployment is more than twice the national average. Yet the stock market has been rising as if this doesn't matter at all.
Perhaps on some level it actually doesn't matter. What if it actually makes things better?
When we had a 4.5% unemployment rate, which is generally accepted as full employment, it no doubt led to business inefficiencies, since companies were forced to hire less and less qualified people. This inefficiency is further exaggerated in unionized businesses, where pay is commonly set by job title instead of talent and performance.
What got me thinking about this was a comparison to the deteriorating office rental market. The vacancy factors have been increasing to a detrimental level as the economy has been shrinking, but in a strong market, experienced building owners understand that an ideal vacancy factor is not zero. The ideal vacancy factor is 6% to 8%. This is because any building that sustains 100% occupancy is not charging enough rent.
When you have a 100% occupancy, the fair value has not been established. It isn't until the rents reach a level that your prospective tenants walk away that you can adjust to the market's fair value. Having some vacancies allows the owner to receive the maximum income for the property. It also means that there are still choices for tenants, and an impetus to develop new offices.
I shared this notion with a friend in the hotel business and he confirmed that the same holds true for him; 100% occupancy is a tell-tale sign that room rates are too low.
Getting back to business and the stock market, in the current market it is very easy for companies to let go the least productive or income producing. This in turn puts heavy pressure on wages, also controlling costs. Anything that increases efficiency and controls costs is bound to find its way to the bottom line and thus energize stock prices.
Full employment can only work in an environment that is growing and earning at such a high rate that the inequities and inefficiencies are absorbed or concealed by unsustainable profits and cash flow. In the past ten years, this was accomplished with artificially low interest rates and extreme leverage, until it blew up in our faces.
I suspect that, like the real estate industry, in a more rational business environment, corporate America will find equilibrium at a lower unemployment rate, but that rate is likely closer to 7%, not 5%. The stock market is reacting to future prospects for real sustainable earnings. It's very unfortunate that the rapid economic shocks of the past two years have devastated workers and their families. However, it should be no shock that the stock market is a leading indicator and is rising before employment rates improve. It would make no sense for businesses to begin hiring before that.
For stocks that are operating at increasing efficiency, see: Chasing Value: 10 Stock Picks for 2010. If you are looking for some good investment books, see Sunday Funnies: Predicting Nothing.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money.
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Reader Comments (Page 1 of 1)
1-18-2010 @ 3:13PM
rv said...
What you say makes sense, but it isn't good for those extra 2.5% who won't have jobs.
A little off topic, but I wonder what the unemployment rate of financial professionals around new york city/stamford/jersey city is.
1-18-2010 @ 3:41PM
Sheldon L said...
I would guess higher than the 10% average given all the bank closers, mergers and acquisitions, and closing of redundant departments and old fashion cost cutting relative to having less business.
1-18-2010 @ 5:20PM
LL Wilkinson said...
Are you a freaking idiot? If there is anyone incompetent here it is the writer of this particular bit of nonsense. You clearly do not understand economics and have a fanciful world view of things. Wall Street is a shell game. What is going on right now is for the benefit of the bankers not the investors. Anyone investing in this market will get exactly what they deserve when the bull trap springs.
It is better business to have people employed, than to have them be non-productive. Employed people spend money. What is going on in the stock market right now is a complete disconnect with reality and FUNDED BY TAXPAYER BAILOUTS AND STIMULUS. You know where that money comes from? Well geez, the EMPLOYED TAXPAYER. Lay off enough people and even Wall Street will crash because the joke will be over.
1-18-2010 @ 8:36PM
william lindblad said...
Sheldon, I can't agree with this one. J.C.! You are sounding like a page from Das Kapital. Idealism is wonderful, but it sure has it's drawbacks. The market is trading at 30+ earnings and it really should be at 15-18 levels. I don't expect you to agree, but my opinion is that it is currently overvalued and on it's merry way to another large dip. I really had expected some small corrections - perhaps in the 2-3 hundred point range, but these have not happened and at the current rate of progression it's nothing short of a volcano building to eruption. There is absolutely nothing economic to support the optimism.
Your version on occupancy is up there with string theory. If one does any kind of space rental, from hotels to office to apartments it is all based on a time frame contract, the bulk being year to year and few come with rate guarantees. Hence, it does not make a lot of sense. As a landlord, I would simply raise the rent. If one had a building with 100 units and 8 are unoccupied they will not make a profit. They also require maintenance are will always be part of the utility and tax structure. I just don't see any logic as it is tantamount with buying things that you know that you will never use.
1-18-2010 @ 9:46PM
HarleyDesigns said...
The first thing I notice is that the writer of this article is an "investment broker". He has a personal financial interest in suggesting people should buy into the stock market.
The second thing I notice is the rather shallow idea that high unemployment is good for stocks, because it's "good for business". I don't think so. Business doesn't need investors near as much as they need customers. Wealth trickles up, not down.
The more unemployed, (or underemployed) you have, the less potential customers your business has. While being able to pick the cream of the crop in employees and paying less for them makes sense short term, in the long term, you still end up with too few customers, and unsatisfied employees, who will leave you at the first sign of a better opportunity.
1-19-2010 @ 2:56PM
Sheldon L said...
Will, Thanks for taking the time.
The Market P/E is not 30, although high. That will fall quickly as earnings rise. My last buy, Sysco has a P/E of 15 and pays a 3.5% yield. The market may be over valued, but there are plenty of bargains. I am not buying the Market, I am cherry picking.
Regarding occupancy rates. Apartment buildings with less than 20 units would not follow the same standard I have laid out. Large buildings would, and if you raise rents and nobody moves out than it is clear that the rents are too low -- be they existing tenant renewals or new.
100% occupancy with under market rents/leases is less money than 95% occupancy full value rates.
Harley,
The first thing you noticed is not noticeable. I have a private investment company -- I am not a broker and do not make money unless I make the right investments. In addition, my primary investments are in real estate not the stock market.
1-19-2010 @ 6:47PM
william lindblad said...
Shell, I thought that you would answer and, as always, you do have a point. I still disagree and as Franklin said about Congress, I guess we can agree to disagree.
My view is more empirical and based on observation, not statistics, nor someone's opinion. I spent many years in the maintenance side of buildings and I know all of the hidden costs. Whatever you may wish to believe, it will cost more in the long run. There is also a second factor. Let's just use a condo complex in a desirable location. Building is 20 years old, fully occupied and a 2b2b is going for 300K. Someone decides to construct a new complex on a near site and is selling similar units at 275K, pre-completion. Do you think that they would sell? In this particular case I know that they did - to a approx. 68% occupancy rate - prior to the doors being opened. To the builder this was a great advantage as he did not have to use a lot of bank money and his cost savings were monumental. I don't have to go on as I know you can surmise an opposite scenario. No doubt, there are pros and cons to all approaches. Apply this to a commercial mall and it gets easy. The level of rent has to match the tenants ability to pay. In our current state a commercial owner with less debt is going to be the most flexible for sometimes, rents have to come down.
1-19-2010 @ 7:10PM
Sheldon L said...
Will,
Without realizing it I would contend you made my point. That developer starts with an empty project/building. Therefore, like a plane flight six months out, the price is lower because the airline and the developer are both trying to fill vacancies. I said 100% occupancy is not ideal, however you gave an example of 100% vacant and certainly that is worse.
The developer (like the airline) will continue to sell units and if the complex starts to fill and there is demand will raise the price as the available units become limited -- and he will get the maximum price for the last unit and will have established the market.
A condo project is unique in a few ways. When it is complete you have multiple owners, not one, and when they choose to sell they are better off having nothing available on the market so they do not have to compete.