I’ve been giving some thought to the divergence between the small and large caps and how it may or may not relate to whether the economy is or is not improving. Here are my thoughts…
The economy is NOT improving, but the large cap companies, which control the major indexes which are reported by the major media sources, have the ability to outsource jobs to cheaper regions of the world and all of them do significant enough business overseas, they benefit greatly from a falling dollar. Small caps cannot tap these avenues to the same degree. This is why the large caps can move up and give the appearance things are improving while the small caps lag (the small caps have a higher percentage of their workforce here in the States and a higher percentage of their revenue comes from here too, so they’re probably a better indication of the state of our economy).
In fact some companies (Hewlett-Packard is an obvious one) make no attempt to hide their intentions to move every job possible out of the country. What if they accomplished this, or at least came close? The company would do great; earnings would be stellar, margins would continue to rise, the stock market (the Dow in particular) would give the appearance business is on the up-and-up, but in reality the benefit to the good ol’ US of A would be nonexistent.
Is this the direction we’re going? Will most large caps companies do great because of cheap overseas labor and a favorable exchange rate while the real economy, the smaller caps that do most of their business here at home, tell a different story?
And if this is the direction we’re going, it goes without saying the unemployment rate can continue to rise at the same time the Dow keeps chugging along. The stock market would suggest things are getting better, but in reality they’re only getting better for the large caps which are tapping cheap labor sources and benefitting from a weak dollar, and less and less of the benefit is being keep home.
Typically the stock market is a good barometer for the health of the economy – offset by 6-9 months. If the market trends up today, 6-9 months down the line the economy will follow. At least this is how it’s always been. But if my theory is partially true, then it’s possible for a company to be headquartered here in the States and trade on the NYSE or Nasdaq and give the impression that things are great when in fact the only money flowing back to the States is bonuses to high level execs. Otherwise the money stays overseas. Business may in fact be great, but America sees none of the benefit.
What’s the difference between a company headquartered in China that sells products here in the States and a company headquartered here, but has most of their employees overseas that sells products here in the States. I see very little, if any, difference.
The internet and advanced communication networks somewhat level the playing field. No longer do you have to be in a certain location. The downside is that large companies don’t have to be where you think they are either.
What are the long term ramifications? Will the Dow keep going up and up while the unemployment and underemployment rates hit 20%. The media, which is owned by the large corporations will report the great progress of the market averages while Main Street deteriorates.
If I’m partially right, should anything be done? Or should the everything be left alone and whatever happens, happens.
Your thoughts?
Jason Leavitt
20 thoughts on “Small Caps, Large Caps, Unemployment”
Leave a Reply
You must be logged in to post a comment.
Jason: Would you please explain exactly how large cap companies benefit from a weak dollar? Can you give an example? Thanks
Dan
Other reasons the large caps benefit from a weaker dollar compared to smaller caps.
Large caps often are multi-national and market their products all over the world. One contributor is that a weaker dollar helps with export volume.
However a larger contributor can be with companies which produce and sell products overseas, which price the transactions in local currencies. If the dollar slips 10% relative to the local currency, the reported numbers from that country/region go up 10% in relative dollar terms.
I believe the economy runs 70% off the us consumer, so if these large cap companies see less of the american consumer buying hp products it would make sense that even though their margins are less, their sales are much less. Its also truly amazing to see the minds of the masses slowly (or sometimes quickly) shifting to a more conservative approach. Many millionaires that I know are acting like they dont have any money because they have seen their wealth go down in the stock market, real estate, their businesses are making less money, etc. Whether the margins are 10% or 20@ if you sell half the product you make less money either way. The only people I know that are doing better this year than they have in the last few are companies related to the foreclosure market.
Jason,
Those were some very interesting thoughts. However, if someone made me guess, I’d guess that the large cap indexes are going up because of liquidity. Liquidity is a euphemism for money printing. The market usually goes up when rates are low and money supply is growing. It is big institutions that access this printed money and they generally buy larger cap stocks because they aren’t thinly traded.
I read a quote the other day on Karl Denninger’s web site that said, “You can’t fix what’s broken by breaking it again.” We broke our economy because of leverage and now we’re leveraging up again at the government level and wherever else they can encourage people to do so. This is a time bomb, but getting out of the market too early has cost people dearly. Getting out too late may cost people more. Do you think the people selling at 6,500 are the same ones buying back lately? I’ll bet some are.
I’m afraid there is a “new normal.” What you suggest will contribute to it.
This is how the present adminastration has planed it to go. Why has the Obama stach not be spent on all the shovel ready project: they claimed where there. He need a major desaster to blame on wall street or bush to stay in power. Jobs solve the problem. I do not believe that is the plan.
One person wrote this a time bomb. I believe he is correct. Housing has aways been the tip of the javelin. that is not happening a lot of smoke but no fire. the banks hold the housing marke it the palm of the hand. The adminastration hold the houseing market in the hand of the fed. A little squeezeeeee and housing goes down with banks, the dollar, the economy.
However, if the US dollar is falling, will not the cost of outsourcing become higher???
Jason,
Thank you for educating the public. Workers are too busy working 2-3 jobs to know what is going on and unfortunately the “Have to Muchers” don’t really care about this country.
They would and have sold this country down the river. Bush leading the Charge.
Obama may be trying to change things but I am afraid the Rich have gotten to him.
It is a shame to see the good old USA going down this Greedy Path.
Sincerely,
Eileen Cordano
Jason,
Very interesting point. I definitely think it has some validity. If/when we actually see a real recovery – one without government and Fed money – it will be a jobless one. This crash will likely change the way business does business and if your theory proves true, it could be worse than I originally anticipated. This along with large caps benefitting from the falling dollar because they get a much larger % of profits from overseas when compared to small caps is helping thier EPS.
Finally the liquidity from large caps will allow the big boys to get out a bit easier when this liquidity bubble bursts…and it will. It just may last a while. It appears, yoy comparisons for companies and economic data will be fairly easy to beat through May, 2010. If the consumer doesn’t step in an start spending then and if the Fed starts pulling money out of the system, then we could head south again in a hurry.
It is so sad how politicans only really care about themselves. When will they finally get to the point of serving for the greater good of our nation instead of themselves? This health care bill is loaded with pork from Democrats (I am Libertarian so not basing the Dems). All they care about is getting re-elected.It is time for them to evolve from me-centric memes, to country centric. If they don’t do it soon, it may be too late…
<>
The current political leadership combined with the Fed, the PPT, etc., can take the market up or down whenever they feel like it. If there’s any significant correction due to a lack of top line earnings growth, it’ll happen when politicos feel it’ll cost them the least and benefit them the most.
They won’t let the market crash going into the November 2010 mid-term elections; it would guarantee the current leadership would lose a lot of power when the public goes to the polls.
I’m guessing that if politicos feel they can’t keep the market levitating through the elections, that they’ll take it down early enough so that they can pass Stimulus II and take other actions so that the momentum is trending up going into November.
I picture the country as being a very sickly sheep with both the Republican and Democratic parties fighting to see which of them can shear the last remaining wool before the dollar collapses.
Eileen Obama is a Millionaire! he is one of them and Bush didn’t sell us to no one. Study the charts back in history this has all happened before just in a different way, we are at war everyone keeps forgetting that fact that is one reason the deficit is so high, wars cost money and resources, that is why oil has gone up and some commodities and the dollar has fallen, it has happened before. look at charts when we have had past wars. in the 70’s Vietnam, gold up, dollar down, oil up, commodities up. some of us remember this, look at WW2 and WW1 you will see also when the dollar goes down the Dow usually goes up. also I believe that the Banks and Insurance companies are the biggest reasons for the disconnect between the small caps and large caps they are the largest investors in the markets and they want to keep the money going to the businesses that make them the most money and small caps do not do that for them in this kind of an economy. and large caps are also more liquid as someone pointed out, so if they need to raise cash again like last year, it will be easier for them. Last point, if the Pope would have been our President after 9-11, we still would have went to war with someone. people can blame it on Bush all they want but the fact is we would still have been at war, even if he had not been the President. See ya Kevin
I live overseas (China) and the economy is booming!!
We’ve been saying this for years. Nice to hear it from you, Jason. There is also the problem of insourcing – bringing in foreigners to do the work qualified but unemployed Americans want to do, but can’t – because Americans are being discriminated against at home. The economy won’t turn around until the politicians in Washington end the bad trade deals and stop the cheap labor policies that are destroying our country. See these links:
http://www.programmersguild.org
http://www.cs.ucdavis.edu/~matloff/itaa.real.html
this only works to a point right. Breaking point is where imported oil starts getting to the unemployed america consumer.
Kevin, we had to go into Afganastan, Not Iraq. Bush sold the country to the oil companies when he took the country into Iraq on lies. I have no alligance to any political party. Just hate to see the Greedy Rich buying politians (and they will buy anyone) for their own benefit. This country desperately needs campaign reform.
I don’t understand why anyone would buy MSFT or HP products
if they have any alternative.
To a certain point, a lower value for the dollar will, for a while
improve the import/export balances by making it more
expensive to buy things from over-seas than it is to buy
domestically manufactured goods. This will improve
domestic manufacturing employment, and, if it lasted,
would improve domestic engineering employment, and
if that lasted for long enough it would improve domestic
scientific employment. This would benefit a lot of
US citizen worker-bees, but the executives would
be at a comparative loss.
OTOH, it will also have a more general and indirect
effect of reducing trade, blocking free movement of
resources to their optimal uses, and thus reduce
overall incomes by a little bit.
Iraq, Afghanistan, Pakistan, Sudan, North Korea…
the USA has sufficient moral reason to have troops
(and spies and operatives) there, but no obligation
to do so. Once we’re in there, we should be there
to win, which means, to wipe out the terrorists and
their infrastructure. The radical leftists are the
ones creating VietNam boon-doggles by failing
to go full out for the win (and the Bushes are not
without fault in that regard). Once war begins,
you’re at war, not partially at war, not some-
what, kind of like being at war; the whole
country should be mobilized, production of
vehicles, munitions, supplies for the troops
should be cranked up as much as is possible.
Every school child should be part of the effort,
every teacher, every nurse, every doctor, every
farmer and construction laborer.
Should anything be done? Who has the power to change what the major corporations do? They are the main contributors to the political parties and the politicians make the laws so do you think many changes will be made?
The outsourcing of jobs and factories will create a hollow shell in the US. We already had a jobless recovery in 2001 and this one could be worse. There are 6 out of work people for every 1 new job. Are these people ever going back to work? And the population increases need 150,000 new jobs per month to keep up with population growth. That’s in addition to the unemployed people.
I see no hope on the horizon and no way to solve this.
Interesting article and comments from readers.
I think the large-cap ‘execs’ are just blindly going where their ‘profit-sniffing instincts’ tell them to go. They’re just cold-blooded Darwinian capitalists. The ‘strong’ (capitalists) survive, while the ‘weak’ (working class) gets weaker. Most of these capitalists don’t care what happens to the working-class in America — anymore than a hunter in the woods cares about the individual welfare of the game he/she is intent on killing (usually for ‘fun’ of it).
The irony is that the working-class ‘victims’ keep electing political leaders who continue to issue hunting-licenses to the greedy capitalists.
In summary, the history of human civilization keeps repeating itself. If the Soviet Union could suddenly fall apart when ‘hardly anybody was looking,’ why should the U.S. (and the world, for that matter) be exempt from a similar downfall from unintended consequences.
Buy I’m waxing more pessimistic than I really am. I’m just thinking about socio-economist Robert Precter’s prediction for 33% unemployment on the horizon for the U.S. If that happens, could the ‘second’ American Revolution be far behind? We’ll see.
— Felicia
Our country is in trouble!
Executives, politicians, and government/state/county administrators and employees will not correct any of these problems.
We have we brought all of these disasters below upon ourselves.
~ Executive compensation tied to short term financial performance
~ Consumers opt for low cost goods at the expense of domestic jobs
~ Inappropriate and misuse of tax dollars
~ Corrupt politicians and administrators
~ Foreign currencies pegged to our currency (i.e., China to US)
~ We have a puppet government controlled by Goldman Sachs
I foresee more hardship in the US.
~ Higher unemployment in the private sector as more jobs are outsourced
~ Reduced tax revenues at the fed, state, and county levels will result in more unemployment and reduced services
~ Inflation (eventually)
~ Increased crime
~ Potential civil unrest
China is in trouble as well.
~ Their financial success and high employment is tied to US consumption
~ Civil unrest if unemployment increases
~ They finance our debt and the value of our dollar has been decreasing
We will never live in a perfect world but we can live in a better world.
As for trading (keep it simple, don’t think, just react):
~ Long when over the 20 DMVA
~ Short when under the 20 DMVA
~ Set stops to minimize losses
~ Move stops to lock in profits