Small caps slump as weak economy back in spotlight
Small-cap stocks pushed lower on the open as sloppy profit numbers and weak economic data returned to center stage now that the U.S. presidential election has been decided following last night’s historic runaway victory by Barack Obama. At 10:05 a.m. ET, the Russell 2000 (NYSE:IWM) was down 7.05, or 1.29%, at 538.90.
The ISM Non-Manufacturing Survey came in at 44.4, which was well below the forecast of 48.0 and was at the lowest point in the 10-year history of the survey. Interestingly, stocks actually trimmed losses after the glum report, but remained in negative territory.
Earlier this morning, the ADP Employment Survey was reported at minus 157,000, well below the forecast for a 100,000 loss. Even though the ADP report has not been tracking very well with the Labor Department survey, today’s ADP data cast a pall on the market heading toward Friday’s big monthly employment report. In addition, the MBA Mortgage Applications Index tumbled 20.3% last week to the lowest point since December 2000 in response to a jump in fixed mortgage rates, and purchase activity slipped by 13.9% and is also at the lowest level since December 2000.
There was another big pullback in Libor rates overnight, which should help encourage inter-bank lending and help thaw out the credit market freeze. Supply remains an issue in credit markets and today the Treasury said it will resurrect the 3-year note and conduct more frequent auctions of 10-year notes and 30-year bonds to fund the government’s staggering borrowing needs.
The market was now buzzing over what impact President-elect Obama will have on difficult pressing issues about the economy, jobs erosion, the housing meltdown, the financial crisis and the wars in Iraq and Afghanistan. While it appears a daunting task, Obama will enter the job with a mandate for change from the people and a big majority in the House and Senate to further his plans. From a historical perspective, it’s interesting to note that the stock market has lost about 1% in the first month after electing a new Democrat changeover to the White House, but then the market has rallied 10% over a 12-month period after the election. From a strict company perspective, there is a broad sense that an Obama presidency would be positive for solar and wind companies and potentially negative for defense contractors and big oil companies.
Strategists with BMO Financial Group said in a press release that Obama’s victory and the “feel-good” response it will trigger in America should help counter some of the current gloom and doom dour mood, which favors financial assets. Donald Cove, global portfolio strategist with BMO said that Obama’s spending plans will be seen as favorable to the economy and that the president-elect is committed to ethanol, which is good news for depressed stocks in that area. Coal could be hurt by Obama’s threats to impose carbon taxes on coal-fueled electrical plants. BMO’s Andrew Busch said that a stimulus package of $150 billion will likely be enacted, with checks mailed out by March, which would bolster consumer spending next spring.
Crude oil prices pushed lower into the stock market open, staging a moderate pullback after Tuesday’s big rally and before inventory data comes out later this morning. Commodities in general could have a little correction day after big gains Tuesday, especially with the dollar regaining a little momentum versus the euro. Shortly after the open, the greenback was up about 0.5% against the euro.
On the big-cap earnings front, Time Warner Inc. (NYSE:TWX) beat the profit forecast, but lowered the outlook and shares in the world’s largest entertainment company rose 1.7%, reversing overnight trends. Ambac Financial Group Inc. (NYSE:ABK) reported losses that were much bigger than expected and ABK was off 31.1%. Molson Coors Brewing Co. (NYSE:TAP) met Street expectations and was down 1.3%. Sara Lee Corp. (NYSE:SLE) reported higher profits and strong sales, but trimmed the 2009 forecast and was down 6.4%.
Individual small caps of note included i2 Technologies Inc. (Nasdaq:ITWO), which gapped lower and was off 27% after JDA Software Group Inc. (Nasdaq:JDAS) requested an adjournment of ITWO’s shareholder meeting to negotiate a reduced purchase price for the firm. Stone Energy Corp. (NYSE:SGY) tumbled 20% tied to earnings news and Clean Energy Fuels Corp. (Nasdaq:CLNE) gapped lower and was down 17%, giving back most of the sizable previous three-day rally.
The chart picture shows some stalling signals on short-term studies as the market has filled upside targets on a symmetrical bounce and ran into logical resistance in the 546 to 551 zone. Above 551, resistance comes in at 559 and 564.50, but with the market trading lower on the open, support could be more in play today. The initial downside point of note is close by at 534.50. Below there, support is at 525 and then a key level is at 514.50.
