Bailout hopes keep small caps in the green
Small caps remain in the green near their intra-day highs mid-session, snapping a three day losing streak, as hopes that lawmakers are near agreement on the $700 billion bailout plan cheered investors.
At 12:40 p.m. ET. the Russell 2000 (NYSE:IWM) was up 12.70, or 1.82%, to 710.46.
Investors are sending stocks higher today, as passage of the bailout plan looks more likely. President Bush addressed the nation on Wednesday night in an attempt to rally national support for the plan and called a meeting today with Congressional leaders. The administration and the republicans have conceded to democrats’ amendments surrounding caps on executive compensation and judges’ ability to change the value of the toxic mortgages. Still, issues remain on the table — most notably how to stagger the cost of the plan. Passage of the plan would help thaw the frozen credit markets and enable banks to value assets tied to mortgages.
“Despite the increasingly testy exchanges in Congress, I still assume that some close approximation of the plan (with amendments) as currently being discussed will be agreed and become law next week,” Don Straszheim, vice chairman of investment bank Roth Capital, said in an email. “If this effort would come completely unraveled and stalled out, not impossible, my assumption is we would see a financial sector meltdown almost immediately of monumental proportions. Enough people seem to hold similar views that the ‘failure-to-pass’ outcome seems implausible. It really is an insurance policy given the state of expectations at present.”
Though the two day testimony for the $700 billion financial bailout plan is complete, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson will remain on Capitol Hill to testify before the House Committee on financial services on the government bailout of mortgage giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE).
While equity markets were higher, treasuries are saying otherwise. Treasuries continued to see yields of unprecedented lows, in a sign that investors demand next to nothing for a safe haven for their short-term cash. The one and three-month Treasury bill yields were both negative at minus 0.38% and minus 0.65% respectively. However, the 2-year and the 10-year were both lower, as their yields were higher midday at 2.1% and 3.8% respectively. (Prices move inversely to yields.)
“I would watch for two developments: the passing of the plan and the structure of how it is funded,” Andy Busch, global exchange strategist for BMO Capital Markets, said in an email. “If done properly, the short-term crunch could get resolved while the long term crunch gets addressed and worked on. It comes down to which bonds from which institutions at what price. Until we see both parts of this, I would expect more of selling equities, buying bonds, and selling currency.”
On the economic data front, durable goods orders plunged 4.5% in August, a substantially larger decline than the minus 1.3% economists were forecasting. This compares with an increase of 1.3% in July. August’s orders represent the largest percentage decline in new orders since January 2008 and followed three consecutive monthly increases including a 0.8% July increase. Excluding transportation, new orders decreased 3%, and excluding defense, new orders decreased 5%.
New home sales for the month of August clocked in flat from July at 515,000. However, the headline sales figure was slightly below the consensus for sales of 518,000. This was 2.4% above the revised June rate of 503,000, but is 35.3% below the July 2007 estimate of 796,000.
Oil continues to ease this afternoon, as investors bet that the financial crisis will weigh on consumer demand. A barrel of crude eased $0.14 to $105 a barrel. The greenback is mixed midday against the euro and the yen, but remains lower against the euro. This ends two straight days of gains against the euro, as the uncertainty of the bailout plan coupled with the market futures’ consensus for a quarter-point rate cut in the Fed Funds Rate, is dragging the dollar lower.
In corporate news, General Electric (NYSE:GE) lowered its third-quarter and full-year outlook and halted its share buyback program in light of the difficulties in the financial sector that are weighing on the firm’s Capital division. It will also hold its dividend flat for the remainder of the year.
In broader industry groups, coal, aluminum and hotels are lower mid-session, while full line insurance, footwear and renewable energy equipment, are higher.
The banking sector is also up midday and Columbia Bancorp (Nasdaq:CBBO) is up some 30% midday, while Sussex Bancorp (Nasdaq:SBBX) had leaped 17%. Transmeta Corp. (Nasdaq: TMTA), which licenses computing, microprocessor, and semiconductor technologies, said that it has initiated a process to seek a potential sale of the company, with the assistance of its independent financial advisor Piper Jaffray. Shares gained 20% midday.
Shares of Ameron International Corp. (NYSE:AMN) have plunged 30% midday after the manufacturer of materials for the chemical, industrial, energy, transportation, and infrastructure industries reported fiscal third-quarter earnings after Wednesday’s close that declined 30% from the year-ago period and fell short of the consensus on Wall Street. As the company grappled with difficult market and economic conditions, revenues also fell short of the Street.
