Bad econ data, MSFT results spark freefall
Small-cap stocks took a dive on the opening, pulled down by gloomy economic data and also by worrisome profit numbers from Microsoft and Nokia, which pulled the rug out from under good news from Apple. At 9:52 a.m. ET, the Russell 2000 (NYSE:IWM) was down 13.83, or 3.03%, at 442.93.
On the economic data front, housing starts and permits tumbled to a record low in December, with starts sinking 15.5% to an annual unit rate of 550,000, well below the projection of 610,000. The year-over-year decline in starts and permits was the lowest since January 1991.
“Housing starts plunged again in December, their sixth consecutive decline that has pulled starts to record low levels,” Steven Wood, chief economist with Insight Economics, said in an email. “Substantial declines in single family starts over the past two years have helped home builders bring inventories of unsold new homes down significantly. However, those inventories are still elevated because sales of new homes have also fallen sharply. With sales very weak, the credit market still dislocated, and lending standards staying very tight, single family housing starts will remain low for an extended period of time. Housing's contribution to economic growth will be significantly negative again in Q4. The silver lining is that with housing starts now off more than 75% from their peak, housing construction should be getting close to a bottom,” Wood said.
Weekly claims jumped 62,000 last week, rising to 589,000 which was way above the forecast of 553,000. In addition, the number of Americans filing for continuing benefits rose to 4.607 million, which also was above expectations. Stock index futures clearly pulled lower off the gloomy economic data, while yields on Treasury products went lower and prices for interest rate futures rose — all of which reflect money moving away from equities.
Earlier this morning, the MBA Mortgage Application Index slipped 9.8% this week, but was still up 21.8% over year-ago levels. Rates for 30- and 15-year fixed mortgages jumped quite a bit this week, which could have stalled the recent surge in refinancing activity.
There has been a drought of economic data this week before we got this morning’s reports, so they took the brief spotlight away from a rush of key earnings reports. As far as the profit picture goes, the market continues to see a mix of terrible results, peppered in with the odd upside surprise. On the terrible side of the ledge, Nokia, the world’s largest cell-phone maker, reported dreary results in Europe, which took some of the wind out of the sails from a strong showing by Apple Inc. (Nasdaq:AAPL). The solid report from AAPL helped provide relative support to tech stocks ahead of the opening, which were outperforming the broad market early on, but that proved to be short-lived when Microsoft Corp. (Nasdaq:MSFT) badly missed the estimate while pre-announcing ahead of schedule this morning. Shortly after the open, AAPL was up 6.3%, while MSFT was down 6.8%.
Crude oil prices tumbled into the stock market opening, clearly rattled by the weak economic data and sloppy profit report from Microsoft, which plunged stock index futures deeper into the red before the official open. Energy shares were a strong component of Wednesday’s recovery bounce, but could be on the defensive today if crude oil prices remain sensitive to economic concerns over production cutbacks. The U.S. dollar was up about 0.6% against the euro, which could weigh on commodity markets as well. Shortly after the open, energy stocks were down 2.3%.
On the political front in what has been a historic week, Obama’s selection to lead the Treasury Department, Timothy Geithner, was expected to clear Senate approval today and receive the appointment next week, which could soothe worries about a lack of leadership at the Treasury helm as the recession continues to hinder business and consumer activity. Obama already has told military officials to close Guantanamo prison and to prepare plans for a troop withdrawal from Iraq while reviewing the strategy in Afghanistan. There was some hope that Obama could release details for his stimulus plans into the weekend, which could help provide a spark to the stock market.
Small caps on the move early today include Babcock & Brown Air Ltd. (NYSE:FLY), which tumbled 28% as the firm said they needed to retain cash and announced a dividend of $0.20 a share. Eclipsys Corporation (Nasdaq:ECLP) fell 28% as the health-care software and clinical help firm reported quarterly results. Teledyne Technologies Inc. (NYSE:TDY) fell 18% as the electronic systems designer also took an earnings-tied hit. On the upside, Interwoven Inc. (Nasdaq:IWOV) jumped 30% on news that the firm will be purchased by British software firm Autonomy Corp. for $775 million.
The chart picture for small caps remains in an extended sideways consolidation. Although the breakdown this week damaged some of the short-term bullish scenarios, the market is still holding well above the November lows, consistent with a long-term “L”-shaped recovery. The early push through the key swingline at 450 was troubling; there really is very little support of note below 450 until we get closer to those recent lows along 440-439. If the market can stabilize from this morning’s pullback, then resistance will be up at 453, then at 466.
