VERSACE: Tension, patience and opportunity

ANALYSIS/OPINION:

This week has been one of patience and tension for investors. I say patience because, although some good and bad news has flowed this week, eyes and ears are waiting for Friday’s report of September nonfarm payroll data, which will give the latest snapshot of unemployment and job creation.

What makes this particular set of data all the more interesting, above and beyond as a measure of the economy and gauge on the consumer, is that this is the last such report we will get before the midterm elections. The Wall Street consensus is for no net job creation or loss in September, which would be a positive move from the 54,000 jobs lost in August per the Bureau of Labor Statistics.

Someone looking at that comparison alone would think, “Sounds good to me,” but you need more than one data point to make an informed decision. After all, it takes at least two data points to draw a line — you can’t do it with only one.

This brings me to investor tension, especially after the “unexpected” loss of 39,000 jobs in September per the ADP Employment Change report. I say unexpected because the outlook was for 18,000 jobs to be added that month and for an improvement over the 10,000 jobs added in August as reported by ADP.

While Thursday’s weekly unemployment claims data showed a modest decline, the weekly data have jumped around between 450,000 and 500,000 over the past several months. So while Thursday’s report was a tad better than expected, the trend shows weekly jobless claims above 440,000 for a prolonged period of time. Viewing this through a different lens, unemployment claims may have stabilized at lofty levels, but that does not equate to robust hiring now or in the near term.

With that in mind, two surveys have renewed the view that we face a slow recovery with some bumps along the way and weak job growth prospects near term. One of those is the semiannual PNC Financial Services Group small-business survey, which found that “measures of optimism have gotten a little worse than last spring,” according to Robert Dye, a PNC senior economist and co-author of the study.

This biannual survey has been conducted since 2003. Of particular note in the most recent results, the overwhelming majority (91 percent) say the U.S. economy has yet to noticeably improve and 71 percent feel the recovery is more than one year away, compared with 20 percent who expect improvement within the next 12 months. With that in mind, it’s not surprising that the job outlook remains weak — 22 percent of the respondents expect to hire full-time employees, the same as in the spring, but 12 percent still plan to reduce their work forces.

Is this outlook of flat hiring news? Not really. I have been watching Gallup’s Job Creation Index, which has been flat for the past five months. Since May, the index has shown the percentage of working Americans who say their companies are hiring has been 28 percent to 29 percent and the percentage saying their employers are letting workers go has been 20 percent to 21 percent.

Several columns ago, I noted how the rise in the overall stock market was on modest trading volume, which gave me concern about the overall confidence level in the market’s move. I would argue that the market and investors remain tense, if not downright jittery, in advance of the September unemployment report.

One example of this investor skittishness is how the market treated the shares of Equinix Inc. this week. After the market close on Tuesday, that company reported that it would miss the midpoint of its expected revenue range for the September quarter, but revenues would still be in the guidance range and the company’s margins would be better than expected. All in all, I would say that was not good news but not really all that bad either.

How did the market react to this?

Shares of Equinix fell 33 percent on what equates to a revenue shortfall of $7.5 million (2.2 percent) from the $336.8 million in revenue Wall Street had been expecting Equinix to deliver for the September quarter. In the eyes of some, this is a disaster. In the eyes of patient investors who are opportunistic and understand the nature of Equinix’s business and that it remains a strong player in data center services, this is an opportunity. For existing shareholders, it offers a chance to increase their position and average down should they still believe in the Equinix story the way I do.

To me, the overall market has had a strong ride — up nearly 13 percent in the past three months — and I suspect investors will get another bite at the stock apple once we are through this earnings season.

Let’s roll up our sleeves and do some homework so we are ready as opportunities present themselves.

• Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate access firm in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.