Chicken or the egg?Does hiring workers lead to more profits? Or is it profits that lead to hiring?

That's the investing version of the eternal "Which came first, the chicken or the egg?" debate. But while scientists still grapple with their conundrum, investors can get a pretty definitive answer to the overarching question: Do I want to own companies that are hiring or firing workers?

Wall Street Loves Layoffs

During good times, most people don't think too much about the pink-slip profit conundrum. But go back to 2008 and 2009, when corporations were shedding jobs faster than we could count, and it was a different story.

Back then, analysts were chastising companies that didn't cut fast enough, no one knew if growth companies would keep growing, and very few companies didn't shed at least a few jobs.

We may be seeing a repeat performance now, with layoffs announced at Cisco (CSCO), HSBC (HBC), and even Campbell Soup (CPB). But is that a sign these companies are cutting the fat, or that they'll stop growing profits?


Gallery: IN PHOTOS: Companies Facing Layoffs
Companies facing lay offs


By the Numbers: The Effect of Pink Slips on Profits

Exactly what kind of payoff do investors get when companies fire workers?

During the period that spans the depths of the recession -- when both profits and stock performance swung wildly -- the companies that cut the most jobs didn't fare too well.

In the table below are six companies that laid off the most workers during the height of the recession, according to Forbes.com's Layoff Tracker. Next to each is the company's stock performance over the last three years and the change in trailing 12-month profits over the past three years.

Company
Number of Layoffs
3-Year Average Annualized Stock Performance
3-Year Average Annualized Profit Change
General Motors*
75,733
(84.1%)
NA
Caterpillar (CAT)
27,499
10.6%
0.6%
Verizon (VZ)
21,308
5.8%
2.7%
Pfizer (PFE)
19,872
0.7%
(1.7%)
Merck (MRK)
16,000
0.1%
(16.6%)
Emerson Electric (EMR)
14,200
0%
0.9%
Source: Yahoo! Finance. *GM numbers are for Motors Liquidation Company, the survivor of the pre-bankruptcy GM. **Stock performance and profit change averages do not include General Motors. NA = not available.

As you can see, investors weren't exactly rewarded for massive layoffs these companies made. Also consider that the company with the largest number of layoffs -- General Motors -- even had to go to the government with its pockets turned out before heading through bankruptcy.

So what happened to the companies that hired the most during the recession?

Are You Crazy? You're Hiring in a Downturn?

Below is a list of five public companies that made CNN Money's "They're hiring!" list in both January 2009 and January 2010. (To keep me from cherry picking companies to prove a point, the results are limited to companies that invested throughout the recession.)

The job openings may not be impressive compared with the layoffs above, but consider that January 2009 was the depth of the recession. Again, look at the stock and profit performance over the same three-year span we used above.

Company
Job Openings in January 2009
3-Year Average Annualized Stock Performance
3-Year Average Annualized Profit Change
Whole Foods Market (WFM)
800
44.3%
23.0%
Google (GOOG)
350
5.0%
23.1%
Cisco (CSCO)
500
(16.4%)
(3.4%)
Genentech
585
NA
NA
NA = not available; Genentech was acquired by Roche on March 26, 2009.

It isn't hard to see that profit growth is wildly higher at companies hiring during the recession. Stock performance is also significantly better on average. The one exception of course is Cisco, who just announced 6,500 job cuts. Ironic?

So if companies hiring in the middle of a recession not only generate more profit growth but also better stock performance, who would you want to invest with?

I'll Invest with the Egg, Thank You Very Much.

Planting the seeds of growth when times are tough has to be hard, but it has paid off more than cutting to make an organization leaner.

So the next time a company announces layoffs in the middle of a recession, consider what it will mean for its long-term prospects. There will be fewer workers to develop products, make products, and sell products. And eventually that's going to trickle down to the bottom line.

Motley Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw. The Motley Fool owns shares of Whole Foods Market and Google. The Fool owns shares of and has created a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of Whole Foods, Pfizer, Google, Cisco, and Emerson Electric.


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watchclock

Check this outBank of America Stock Is Up ... But So Are Bets That It Will Fail
Zero Hedge notes:

With Bank of America stock up 9%, its CDS is ...35 points wider: the highest since April 6, 2009.
(Higher credit default swap spreads mean more people are betting the bank will fail.)

Barron's reports:

Even though the stock is higher Thursday on an up day for banks and the broader stock market, Bank of America's puts are gaining much attention in the options market.

When investors buy put options, they are betting that shares will fall in value.

Desperately Trying to Raise Cash
Just like Lehman before it went belly up, Bank of America is desperately trying to raise cash.

For example, B of A is in talks to sell most of its $17 billion dollar stake in China Construction Bank.

And the Bank's CEO is desperately trying to assure investors with a bunch of fast talk.

But rumors of bankruptcy are swirling around America's biggest bank.

Not The First Time Bank of America Became Insolvent
Bank of America was insolvent in the 1980s, but the government made a concerted decision to cover that up.

Financial writers such as Mish and Reggie Middleton pointed out in late 2007 and early 2008 that B of A was again insolvent.

Nouriel Roubini noted in January 2009 that the entire U.S. banking system is "bankrupt" and "effectively insolvent":

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion.” ***

“The problems of Citi, Bank of America and others suggest the system is bankrupt,” Roubini said. “In Europe, it’s the same thing.”

Bailed Out ... Again
Fortune notes:

Taxpayers may not realize it, but they just bailed out Bank of America again, this time to the tune of more than a half billion dollars.

The Charlotte, NC-based bank was one of the biggest recipients of bailout funds during the financial crisis [the second biggest, to be exact]. But Bank of America ... continues to face deep problems related to its troubled mortgage portfolio and investors have battered the stock, which has plunged over 40% so far this year. That's escalated concerns that the bank may need to raise more capital. Yves Smith at Naked Capitalism has even started a BofA death watch.

But apparently the federal government is determined to resurrect BofA: the Wall Street Journal reports the feds have just used Fannie Mae, which is controlled by the U.S. government [and which gets bailed out again and again], to infuse BofA with $500 million and ease one of the bank's biggest headaches.

Government Policy Is Perpetual Bailouts And Allowing Fraud ... Against Public Wishes
Polls have consistent shown that Americans overwhelmingly think the government should stop providing money to the banks. And see this.

But the government has thrown trillions at the giant banks like B of A, and made it official policy to allow fraud by the banks. And see this.

Bailing out Bank of America and the other banking behemoths hasn't really done anything to stabilize them, and another crisis was wholly predictable.

And as I've repeatedly noted:

The too big to fails are - by their very size and the moral hazard created by the government's actions - drawing the American economy down into a black hole.
I pointed out last month that - unless if we don't break up the giant banks now - they'll be bailed out again and again, and virtually all independent economists and financial experts say that will drag the world economy down with them.

Unfortunately, as I've previously noted, the government has decided on perpetual bailouts for the too big to fail banks.

As former chief IMF economist Simon Johnson writes today:

The Dodd-Frank reform process decided not to break up global megabanks, but rather to handle them under the F.D.I.C.’s resolution framework. We’re about to find out if this was a good idea — or if we are just on the brink of more unconditional bailouts.

August 12 2011 at 1:44 PM Report abuse rate up rate down Reply
watchclock

Profits are always first.

August 12 2011 at 1:42 PM Report abuse rate up rate down Reply
orbit7777

If there is anything I hate it is stock analysts. They are the scourge of employment in this country. They have caused more people to lose their jobs than anything else under the sun. They beat up on companies from behind their wall of safety and have absolutely nothing to lose if what they mouth off is wrong. Of course, there is always the personal benefit to themselves that may come into play along with their shenanigans. They ought to be outlawed.

August 12 2011 at 10:12 AM Report abuse +2 rate up rate down Reply
2 replies to orbit7777's comment
warrenbent

If they are consistently wrong, their jobs is what they have to lose.

August 12 2011 at 11:06 AM Report abuse +1 rate up rate down Reply
tmachine2

orbit,

I know. They push corporations to become more profitable by cutting jobs or outsourcing jobs overseas, then investors pull out investments after a bad jobs report. Create jobs in the U.S.

August 12 2011 at 12:02 PM Report abuse rate up rate down Reply
dodie1990

The new jobs are part-time,minimum wage, no benefit, no future Wal-Mart or Burger Barn type. Even if business picks up hiring the "new" jobs wqn't be good paying full time with benefits. Look at Boeing, new jobs in a non-union plant in S. Carolins. Low pay probably no benefit many part-time temporary type with absolutely no union protection of any kind for the employe and no worker rights or protection. No one looking out for the employee.. If they don't like your shirt, good-bye and you can do nothing.

August 11 2011 at 9:30 PM Report abuse +4 rate up rate down Reply
1 reply to dodie1990's comment
tmachine2

The corporate righties will say they owe you nothing. They will all answer to the Maker one day.

August 12 2011 at 12:08 PM Report abuse +1 rate up rate down Reply
garryangel

Lets get real for a moment ... First of all Google let thousands go during the downturn, but that's another discussion. Look if you are running a business ( I managed one for over 20 years) the 2nd to last thing you ever want to do is let people go, However, the last thing you want to do is close the doors. Look there's no quewstion here. If you don't have enough revenue and you have too much labor overhead there isn't much of a choice. That's the basics !!!

Now, lets take a look at what has been going on in this world today. When the current administration took over and began by demonizing the "millionaires, billionaires, and the big bad businesses ..." They took over GM, threw the shareholders and bondholders under the buss and gave the company to the union. They threatened to take over any business if they believed it was in the "national" interest. They continue to this day bad mouthing the corporations, and tax thenm into oblivion. Ever hear the expression "Biting the hand ..." Look at what Boeing is dealing with ... They are being sued by NLRB because they want to open an assembly plant in South Carolina. Last time I checked we lived in a free country ... don't we ???

Is it any wonder why businesses are sitting on thie assets maybe waiting and praying that a new administration might be a little more receptive to a favorable business climate.

August 11 2011 at 9:09 PM Report abuse -2 rate up rate down Reply
1 reply to garryangel's comment
tmachine2

Freedom isn't free. Corporations for many years, if you read your history, were not considered people until Citzens United case adopted by a right-wing Supreme Court, and they were supposed to be servants to the people. Our founding fathers were very skeptical of large banks and large corporations. It was very hard in the late 18th and 19th centuries to get public corporate charters. We are losing our democracy to large corporations and Wall Street banksters.

August 12 2011 at 12:13 PM Report abuse +2 rate up rate down Reply
1 reply to tmachine2's comment
BRUCE

Well said! They are just as much to blame as are our politicans for the economic mess we are experiencing!

August 12 2011 at 12:54 PM Report abuse +1 rate up rate down
Norm1000

Its demand everything else is a distant 2nd

August 11 2011 at 9:00 PM Report abuse rate up rate down Reply
gramps180

This article should be labeled no jobs no business . Without jobs no one buys anything therefore no business.

August 11 2011 at 5:42 PM Report abuse +3 rate up rate down Reply
1 reply to gramps180's comment
tmachine2

If corporations want to do what they were intended to do is to serve the public, and that is by creating livable wage jobs and support the communities they exist in. If they don't do it, then the people should be able to revoke their corporate charters.

August 12 2011 at 12:16 PM Report abuse +1 rate up rate down Reply
Ken

Instead of regular hiring, there has been a pattern of Temporary hiring in companies; like Microsoft, who want to have it both ways...workers, without permanent jobs and no benefits!

August 11 2011 at 5:01 PM Report abuse +2 rate up rate down Reply
1 reply to Ken's comment
tmachine2

All corporations do is eliminate their U.S. customer base by outsourcing jobs overseas or providing low-wage temporary jobs at home. People buy large ticket items when they feel they are making a good income and have job security.

August 12 2011 at 12:18 PM Report abuse +1 rate up rate down Reply
tmachine2

If a company is profitable, it should do the morally right thing and create jobs in the U.S. and not react to the what ifs? By having U.S. employees, it's creating demand. It's not rocket science. This is about greed and excessive profits. Eventually, they will shoot themselves in the foot.

August 11 2011 at 4:18 PM Report abuse +5 rate up rate down Reply
3 replies to tmachine2's comment
drichfatcat

Hiring and firing has more to do with the certainty of the markets two, three even five years down the pike. Determining the risks involved with respect to expenses due to taxes and government regulations is a better predicter of job growth or stagnation. It is a misnomer that the government can create jobs. The Obama administration has done nothing to limit the uncertainty that has plagued us these past four years.

August 11 2011 at 4:04 PM Report abuse -2 rate up rate down Reply
1 reply to drichfatcat's comment
tmachine2

The government can stimultate the economy. FDR did it during the 1930's. Eisenhower did it in the 1950's. It's all about infrastructure and public works projects that we desperately need.

August 12 2011 at 12:20 PM Report abuse +1 rate up rate down Reply