Wall Street bets on jobs recovery

Employment stocks blast higher as traders anticipate hiring boom

By Anthony Mirhaydari Nov 9, 2009 5:30PM

MirhaydariBothered by the 10.2% unemployment rate? Don't be. An increasing number of professional money managers believe we're on the verge of a hiring spree: Money is pouring into employment services stocks like Paychex (PAYX), Manpower (MAN), and Korn/Ferry (KFY).


Credit Suisse analysts that cover the staffing industry note the group is up some 83% since the March low. Compare this to the 56% gain for the S&P 500. Clearly, those in the know don't believe a jobless recovery à la 2002-2004 is in the cards this time around.


The rationale: Corporations cut too many jobs given the decline in economic output. Along with this, add ample corporate profits, bountiful cash reserves, and an economic recovery that appears to be self sustaining, and we have all the necessary ingredients for a hiring boom.


KFY Chart


In fact, we are already seeing signs that demand for labor is rising. Overtime hours are increasing in the manufacturing sector. And there was a 34,000 gain in the number of workers in temporary employment last month.


Historically, this has been a leading indicator for the overall job market since firms tend to hire on a temp basis as they fill a need for more help without making a long-term commitment to a new employee. As the economy continues to recover, these immediate needs become permanent needs and temp workers gain full-time status.


The recent gains in productivity also suggest new hiring is imminent. New data shows that economic output per labor hour increased at a 9.5% annualize rate in the third quarter. Compared to last year, productivity is up 4.3% -- the largest 12-month rise on record for data going back to 1943. Moreover, back-to-back gains in productivity in excess of 6% have only happened five other times since 1947.


That's great, but there is a limit to how much companies can squeeze out of existing workers worried about losing their jobs. Net new hiring must begin soon.


KFY Chart


Deutsche Bank economists believe that the unemployment rate will peak by the end of December. Why? History shows that the economy has never experiences two straight quarters of economic growth without positive job creation.


They are forecasting current quarter GDP growth of 4% after the 3.5% expansion in Q3. If they're right, the stock price gains companies like Manpower and Paychex are likely to continue.


My positions


My extreme bullish stance has been very profitable over the last few days. My portfolio at Wall Street Survivor is up 15.2% for the week (vs. 2.3% for S&P 500) and 33.7% for the month (vs. 5.3% for S&P 500). My overall gain is 41.8%.


I've trimmed by broad index positions on my expectation of a brief consolidation period. Traditionally, blowout sessions like today (advancers outpacing decliners 5-to-1 on the NYSE) are followed by a short pause as the intense buying pressure temporarily exhausts the bull camp. So while I've exited the Direxion 3x Small Cap (TNA) and Direxion 3x Mid Cap (MWJ) ETFs, I'll be watching for a re-entry point.


Disclosure: The author does not own or control a position in any of the funds or companies mentioned.


Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

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