Wednesday, October 20, 2010

Manpower (MAN) Shows Impressive Results, as Potential Secular Change is Happening in Labor Markets

I used to spend most of my time thinking of big picture secular changes and then investigating stocks that can benefit from them.  That was one of my bread and butter strengths, and I enjoyed it.  However, the changing structure of the market has made a lot of this 'thinking' moot.... being sophisticated is now punished.  In the "student body left" stock market we now have, where algo trading of ETFs is the majority of the day to day action, most of the year everything moves in concert.... see yesterday.  China makes an interest rate move, dollar rallies, and a few tech companies don't reach lofty expectations?  Certainly every stock must drop in concert.  It's a bunch of nonsense but this is the market we are stuck with and I don't see it changing for a host of reasons ranging from captured regulators to exchanges who only care about volume even if cancelled millisecond HFT orders are 90% of it.

That said, I still have an inquisitive mind and like to think - even if that is now punished in a market supported by 1st grade level themes such as "the Fed prints money, therefore everything must go up".  One long term theme I've opined is the secular change that might be happening in the labor market.  Those of you reading in the U.S. who work in manufacturing  (sorry that is such a small sampling of people)  Those of you reading in China who work in manufacturing know of "just in time inventory"; essentially this is a method to try to tie up the least amount of capital in inventory and work in process, balanced against delivering the appropriate amount of goods in a timely manner. I believe "just in time labor" is a trend that has been growing in the U.S. and will only grow go forward.  I might be early - but I think in 5 years this might be talked up like "public pensions" or the "discrepancy between public v private pay is today" (now all over the media).... generally I am decent at noticing a trend early.

Just in time labor (i.e. temps) are a large part of why the underemployment rate was high a few years ago and only continues to burgeon  [Apr 2, 2008: The Underemployment Rate is Rising]   Even back then I wrote:

I've been struggling to think of a term for all these people who are struggling with part time work, working 2 jobs, or in contractor jobs where they get hired/fired on a daily whim ( I call them "nomad workers") This is a systematic and secular situation - nothing to do with 1 month's report or another. It is part and parcel with the erosion of living standards - and why so many in the middle and lower economic strata turn to home equity, credit cards, etc to just get by.

I expect this to only accelerate especially as full time workers continue to require benefits, especially that of a healthcare kind, that this country has no care in the world about trying to control.   (Use the power of bulk buying at the Medicare level to negotiate drug costs for the benefit of the citizens like every other first world country on Earth?  Nah, we have corporate lobbyist dollars to receive - who would want to risk that jackpot!)  Whatever you believe about healthcare and who should foot the bill, having the majority of costs on the back of U.S. companies - large, medium, or small - puts an excess 'tax' if you will versus many competitors in foreign countries.  So in a world where global labor arbitrage is a fact of life, this is net negative in creating employment versus countries where either (a) the government picks up the majority of the bill or (b) healthcare is on the shoulders of the citizen only.  In the U.S. small & medium sized business is increasingly simply unable to afford these costs - while large business is all about the bottom line and if that means (eventually) 98% of the workforce must be cut or moved to temporary so that the shareholders are happy, that appears to be the path we are heading - profits are the end all be all in our capitalism corporate socialism.  [Jul 27, 2010: NYT - Industries Find Surging Profits in Deeper Cuts]

We actually have seen this happen in Japan as there is a dichotomy in the labor force - people are either employed in "birth to grave" type work, OR due to market reforms a lot of the recent hires of the past 10 years have been solely temp jobs with zilch job security and benefits.  If business slows some, easy on (labor), easy off (labor).  I believe this is happening slowly in the United States of Corporations as well.

Early this year I highlighted a piece in USA Today [Feb 16, 2010: Use of Temp Jobs May No Longer Signal Permanent Hiring]

(Mark's comments) The implications for the society are profound, but for economic reasons it might make one of the commonly used 'old school' barometers of economic recovery less useful - that is "temporary hiring surges before full time employment recovers". Ironically "just in time" inventory had its nexus in Japanese manufacturing, and "just in time" employment also has the same origins. Although there is now a massive backlash among Japanese workers after embracing "Anglo Saxon type employment" practices to become "more competitive" globally.   [Sep 21, 2009: NYT - Japan Struggles to Balance Growth and Job Stability]
(Blurb from story) But critics blamed those changes for a widening income gap between lifetime workers and their poorer “temp” colleagues. The number of temporary workers, with low pay, few benefits and little job security, has surged in the last decade, reaching a third of the work force of 67 million.
People started to see high levels of economic inequality.The quality of jobs started going down, and there was a growing number of temporary workers,” said Steven K. Vogel, a professor of political science at the University of California, Berkeley. 

Thankfully we are nothing like Japan (ahem).  Although in the U.S. we could expand that to public workers v private as well.


Does any of the above matter to HAL9000?  Nope... just plug in "dollar does XX, algo does YY" and trade the next 213 milliseconds accordingly.   But let's continue the discussion because believe it or not there is such a thing as an economy - and the stock market is not the "only thing".

Manpower (MAN) is considered a great tell on the U.S. temp workforce - heck until a few years ago I used to think so myself, because in the manufacturing world I lived in for many years, Manpower employees were everywhere.  But when I looked closer in 2008 I saw MAN was actually a business with a large % of revenue overseas (located in 82 countries) and hence a neat weak dollar play.   [Apr 21, 2008: Manpower as a Weak Dollar Play? Who Knew

So a bit of a conundrum - to get a pure play on a secular change from full time employment to temporary in the U.S. alone, probably MAN is not the best choice - maybe something like Robert Half International (RHI) or SFN Group (SFN) [Spherion].  However, to offset that the U.S. labor market in whole is just very weak - even with the potential changing complexion in mix between temp and full time.  So if you believe this to be a global trend and not just U.S. - Manpower is definitely the play.  Further, being a global company, Manpower is interesting from a macro economic standpoint in terms of the employment picture.  They reported last evening, some tidbits:

Via Reuters:
  • Manpower Inc's (MAN) quarterly profit beat Wall Street estimates, as an uncertain global economy continued to support demand for temporary workers in the United States, Germany, Britain and other major markets.
  • The global employment services company reported a profit of $51.3 million, or 62 cents per share, Analysts on average expected a profit of 47 cents per share.
  • Revenue rose 19 percent to $4.97 billion, compared with Wall Street forecasts of $4.8 billion.
  • "The U.S., Germany and the UK did particularly well, as did the emerging markets," Chief Executive Jeff Joerres said in a statement. "The trends continue to be strong for our industry."
  • Manpower, which generates most of its sales and profits outside the United States but is considered to be a bellwether for the U.S. staffing sector, said it expected fourth-quarter earnings between 54 cents and 62 cents a share, before restructuring charges of up to 20 cents.  Analysts were expecting 52 cents.
Pretty solid results for a generally staid industry.

So the question is - is this a cyclical rebound, or part of a secular change away from full time employment, both domestically and potentially globally?  Are we destined to be a globe of 'nomads' as labor is pitted against each other on a worldwide scale in a race to the bottom?  Is there potentially too much global labor (growing by the year as education standards improve) chasing a relatively fixed number of global jobs, weighing the balance of power into the hands of employers?   [Sep 21, 2009: USA Today - More of World's Talented Workers Opt to Leave USA]  Or as the economic pie expands globally, will we all sing happy songs of "everyone wins"? We'll know better a half generation from now.

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