Unemployment Tops 10%

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On Friday, I told you that I'd dig into the unemployment numbers that hit the wire and discuss their impact on small-cap stocks.  Well, the big news was that the U.S. unemployment rate leapfrogged the 10% level, jumping 0.4% to reach 10.2%.  This is the highest it has been in the last 26 years.

This official rate, classified by the Labor Department as the 'U-3' unemployment rate, measures people who don't have jobs but are available and have been actively looking for work for the previous four weeks.

The 'U-6' unemployment rate is more comprehensive.  It takes the official 10.2% rate and adds people who say they want a job, but have essentially given up because they can't find one.  Add in those who have compromised and found part-time work - and we get to 17.5%.
 
Not only is unemployment rising, but people are staying unemployed longer.

We see that in the fact that U-6 rate is climbing faster then the official U-3 rate. People are losing jobs, and those that have lost them can't find another one. Some are giving up hope for an immediate solution.
 
That's why President Obama has extended federal jobless benefits by 20 weeks -- people need help.  The U.S. government's Trade Adjustment Assistance Program is getting swamped with applications.  This program pays benefits to people whose jobs have been shipped overseas or wiped out due to foreign competition.

Ironically, we will probably see the official rate of unemployment, the U-3 rise before unemployment improves. At some point, the U-6'ers will pick up the search again. That will move them back into the U-3 tally. Then hopefully they will get a job, and the official rate will decline.

So what does this mean for small-cap stocks? A couple things…

One, the increase in Trade Adjustment Assistance Program applications tells us that some emerging markets are benefiting as we send jobs overseas.   I like oversea small-caps because of their strong growth potential.  This should come as no surprise to readers who know I have been bullish on emerging market economies like China for some time.  I hold a number of Chinese stocks that are growing market share in my SmallCapInvestor PRO portfolio.  You can find out more about these stocks HERE.

 
Second, the fact that all companies, both large and small, are not hiring means that they are making do with fewer resources.  Hence last week's numbers that show a 9% increase in productivity.  Small-caps, especially, will be able to find efficiency gains easier than large caps since they are typically more nimble to begin with.  This will translate into improving profit margins in the coming quarter.

 
Of course, the other downside to unemployment is decreased consumer spending.  No company, large or small, will survive without buyers for products. 

 
Eventually, small and large companies will use those higher profit margins to invest in more manpower, and that means positive growth.  Again, small-caps will benefit more from this growth than large caps, and we have seen this play out in the past as small-caps tend to outperform large-caps as economies expand.
 

In the meantime, focus on sectors where demand remains, even if unemployment is high. Like oil and natural gas.  For example, today Ram Energy Resources (Nasdaq:RAME) is up 10%.  The company reported last Thursday and cited solid production volumes and strong operating cash flow, despite small capital expenditures.  This performance exemplifies the 'doing more with less' model that will be the norm for several quarters to come.
 

Agriculture is another sector that should outperform since people need to eat weather they have jobs or not.  In my SmallCapInvestor PRO portfolio I hold two agriculture stocks, not to mention one water stock – another resource that people will always need.  These three stocks also happen to be located in emerging markets to benefit from that growth opportunity.