Lower start after unemployment claims rise to 26-year peak
A bleak picture of the nation’s employment picture sparked a solid opening decline for small-cap stocks. Bearish momentum was furthered by a batch of weak profit reports and outlooks for various companies, but another firm tone in commodities offered up support. At 9:57 a.m. ET, the Russell 2000 (NYSE:IWM) was down 4.03, or 0.85%, at 472.37.
The weekly unemployment claims report headline figure came in at 573,000, which swamped the forecast of 525,000 and which was a cycle high so far in the economic malaise. What’s more, it also marked the highest claims number in 26 years. Even more scary is that the number of continuing claims, which tracks people who are out of work and just can’t get a job, rose to 4.429 million, way above the 4.1 million forecast and the highest point since November 1974. It has been fashionable to rally on “bad” economic news lately amid ideas that the market will be forward looking and rally away from the lows long before the news bottoms out, but it is difficult to look past numbers as bad as today’s claims report – especially if you don’t see things getting better for some time to come.
“Although the labor force is much larger now that it was 25 years ago, the number of people actually covered by unemployment insurance has declined substantially,” Steven Wood, chief economist with Insight Economics, said in an email. “More importantly, the deterioration in initial claims, continuing claims, and the insured jobless rate has been as bad as they were during the 1981-1982 recession, which was the most severe in the post-World War II period. Although these data are not for the survey week, they suggest another substantial decline in payroll employment and another jump in the unemployment rate for December.”
The International Trade report also came out this morning and the deficit widened to $57.19 billion, well above the forecast for a deficit of $53.5 billion. The U.S. dollar extended overnight losses against the euro after the report, with the greenback off about 1.8% ahead of the stock market open, slipping to 6-week lows.
On the auto bailout front, the House approved a bill last night authorizing $14 billion bridge loans to the carmakers, so now the debate shifts over to the Senate side, where the wheels of easy money could get stuck in the mud. Republican Senators aren’t happy with the bill and are threatening to gather enough votes to squash the bill. Shares in General Motors Corp. (NYSE:GM) were down 4.3% shortly after the open, while Ford Motor Co. (NYSE:F) was down 5.2%.
Commodities were the dominant upside push for small caps on Wednesday and remain in the spotlight today as the weak U.S. dollar should support various physical markets. Energy shares were a hot ticket Wednesday and crude oil prices were up about $2.20 a barrel this morning on news that Saudi Arabia trimmed production last month more than expected and on a report from the International Energy Association that demand should rebound in 2009. If crude oil can remain on firm footing today, it should provide some underlying support to the energy complex. Shortly after the open, energy shares were up 0.8%.
Lost a little bit in the latest barrage of economic data, and ongoing auto bailout watch were a flurry of large-cap profit reports/updates, with Eli Lilly and Co. (NYSE:LLY) with the drug company saying 2009 profits would be hurt by acquisition costs and foreign exchange gyrations. LLY was up 1.1% early. Warehouse club operator Costco Wholesale Corporation (Nasdaq:COST) beat the earnings forecast but seemed to tone down growth projections and was off 3.6%. Urban Outfitters Onc. (Nasdaq:URBAN) had flat comp sales and was downgraded by an analyst. URBN was off 20% shortly after the open.
On the small-cap front, individual stocks on the move this morning included Gildan Activewear Inc. (NYSE:GIL), which collapsed 43% as the sports apparel maker badly missed profit expectations. Pain Therapeutics (Nasdaq:PTIE) gapped lower and shed 25% as the FDA turned down the firm’s experimental pain killer drug. Within the pharma realm, Infinity Pharmaceuticals Inc. (Nasdaq:INFI) fell 19% on news that AstraZeneca decided to ditch two of Infinity’s experimental cancer drugs. Back to the clothing theme, Hanesbrands Inc. (NYSE:HBI) fell 18%. On the upside, China Eastern Airlines Corp. Ltd. (NYSE:CEA), gapped higher and soared 56% after the Chinese government served up an aid plan for airlines. Fellow small-cap China carrier China Southern Airlines Co. Ltd. (NYSE:ZNH) was up 33% on the news.
Looking at the chart picture, small caps look a little heavy at this juncture, after being unable to sustain upward momentum after failing on logical resistance earlier this week near 491. There is mild resistance today near 482, but the key test remains at 491. On the downside, support is at 464.50, 461, 452.50 and 442. Wednesday’s rise was basically confined to an inside session bounce within a more dynamic bearish reversal from Tuesday, which takes some of the bullish edge off the action from yesterday. It would also help the bullish cause today to see the Russell consistently hold above 473, which was the Black Friday peak and a potential swing line in the short-term picture.
