Tuesday, January 27, 2009

Why the Market and Unemployment Jump at the Same Time

On Monday of this week over 70,000 jobs disappeared from some of America's largest businesses. Today, Boeing announced they were laying off 10,000 more. What was Wall Street's response? The first upward trend for the Market since Barack Obama came to office.

There is a clear divide between the short term interests of the public and business in general and an even bigger gap between the average person and Wall Street. The latter is all about profits and bottom lines. They could not be happier about the Draconian steps being taken by businesses this week for several reasons:

  • When economic environments get to this point, there is nothing that Wall Street desires more than action. Often "retreat" (cutting costs and employees) is one of the most attractive actions in the eyes of investors.

  • There is no quicker way to cut costs than to cut employees. Employees are one of the most expensive aspects of doing business and so Wall Street is particularly excited by such cuts. The more harsh, the better.

  • Wall Street has been waiting for the market to capitulate. They have been waiting to see investors hit bottom (the DJA is now roughly half of what it was a year ago) and another indicator that the decline has plateaued is when you start to see massive layoffs. Such job losses are horrific for the recipient of the pink slip, but is great news for those who are investing in those businesses.

The job cutting is far from over. Virtually every publicly owned company is going to seek ways to increase investor confidence in their companies. There is no quicker way to achieve that following a decline in profits than through layoffs. Those who have not cut yet are watching the Market's response favorably and you can expect many more to jump on board. In fact, even as I write this, Fox News is reporting that Best Buy and Target are adding to the jobless numbers. Furthermore, many of the companies that have had layoffs also have vendor relationships that are dependent on them. As we see these companies lay people off, expect many more businesses that are dependent on them to do the same thing.

I know it looks a little dark, but these layoffs could very well be the beginning of the "light at the end of the tunnel." This hope becoming a reality depends heavily on the policy choices of Barack Obama.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

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