Bailout limbo takes a bite out of Russell
Small-cap stocks have sunk mid-session, as the market continues to await details of the proposed government bailout plan and the new banking landscape on Wall Street.
At 12:38 p.m. ET, the Russell 2000 (NYSE:IWM) was down 19.09, or 2.53%, at 734.65.
Though when initially announced the bailout was cause for celebration on Wall Street, as traders wait for the details of the deal the bears have found their place again. The administration’s leaders on the bailout plan have been meeting with congressional leaders today, who support the plan. President Bush said that failure to act on the bill would have broad consequences beyond just the pain on Wall Street, but that he was confident the legislation would move forward. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke are expected to brief Congress on the economy Wednesday.
“Last time I checked, there’s no provision in the U.S. constitution to turnover the country’s check book to one plan, one department, and one man,” BMO Capital’s Andy Busch said in an email. “This is a huge leap of faith and I suspect that leaders of Congress and the Presidential candidates will urge caution or act cautiously. This is the time for action, but not the time to essentially restructure the entire financial system of the country that has worked well up until we had 1% interest rates. There are other solutions and ideas that need to be considered. Remember, this is not an RTC type situation where the government already had the bad assets put to them via the FDIC and then had to figure out what to do. This is a takeover of choice.”
In the mean time the banking landscape continues to change on Wall Street. Investment banks Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) said Sunday that they will be converted into commercial banks effectively ending Wall Street’s legacy of independent investment banks. The move will create easier access to credit, will enable them to better organize their assets as well as shore up their leveraged and riskier businesses in light of the now dead short-term financing markets. Investment banks thrived off of short-term financing for the past five years. Now that the leverage is obsolete, the oxygen is gone and the banks have no choice but to change their ways or to cease to exist. The new move; however, will also create greater oversight from the Federal Reserve.
“It will be interesting to see whether Goldman and Morgan continue in the top ranks of businesses we historically have associated with investment banking,” said Bill Wilhelm, equities professor at the University of Virginia’s undergraduate business school and co-author of the recent book Investment Banking: Institutions, Politics and Law. “My belief is that commercial banks have an advantage in financial capital and scale intensive businesses if for no other reason than that deposit insurance provides them with a low-cost source of relatively long-term capital. On the other hand, attracting and managing the people central to advisory functions (and some high-end trading activities) is not best undertaken in very large scale organizations. In relative terms, I expect boutique firms for M&A, hedge fund management and private equity to continue growing in importance.”
Also this morning, Morgan Stanley reported that Japan’s Mitsubishi UFJ Financial Group will purchase a 20% stake in the firm. Shares are up 9% midday.
With the focus on the bailout plan and the future of the major banks, oil has quietly crept higher today while the dollar has gotten clobbered. A barrel of light sweet crude was up $4.51 a barrel to $109 midday, while the dollar had sunken to $1.4688 from $1.4474 in the previous session.
In corporate news, Nike (NYSE:NKE), Microsoft (Nasdaq:MSFT) and Hewlett-Packard (NYSE:HPQ) all said today that they will repurchase shares.
On the flipside of buy backs, the SEC continues to add to the list of firms that are protected from short-selling activity, adding some 30 companies to the run of 799 financial firms that were under the temporary ban. General Electric Co. (NYSE:GE) and General Motors Corp. (NYSE:GM) were included in the latest short-selling ban.
In broader industry groups, renewable energy equipment, platinum and precious metals and gold mining are all seeing some upside, while real estate, banks and mortgage finance are lower.
In small-cap news, private school operator Nobel Learning Communities Inc. (Nasdaq:NLCI) gained nearly one-quarter of its value this morning following reports that it received an acquisition proposal from Knowledge Learning Corp for $17 per share. Shares were up 24% midday.
Hoku Scientific Inc. (Nasdaq:HOKU) said this morning that it signed an electric service agreement with Idaho Power Co. to buy power in support of its polysilicon plant. Shares rose 4% midday.
Electric energy provider Otter Tail Corp. (Nasdaq:OTTR) was upgraded this morning by Robert W. Baird to “outperform” from “neutral,” as the company is now expected to see above-average earnings per share growth. Shares edged up 2% midday.
