Bashed banks basking in spotlight lead Russell to 2nd best day of ‘09
Small-cap stocks stormed higher Wednesday as investors anticipated the government taking quick steps to remove toxic assets from bank balance sheets and perhaps forming a “bad bank” facility to further mop up mettlesome losing bank paper, which would in turn loosen lending habits. The Russell 2000 (NYSE:IWM) rose 17.44, or 3.83%, to 473.02, generating the second-largest one-day gain of the New Year. For 2009, the Russell is off 5.3%, while the Dow is down 4.5% and the S&P 500 is down 3.2%.
As for cleaning bank books of losing paper, it’s a familiar story, one that was supposed to be the focal point of the whole Troubled Asset Relief Program (TARP) in the first place, but which got sidetracked when Bush Administration officials decided they would get more bang for the buck via direct capital infusion into banks. The stock market has repeatedly rallied on signs that the TARP funds would be used to buy up those troubled assets, and momentum under the Obama Administration seems headed that direction, hence investors were happy to gobble up bargains on beaten down bank and financial shares.
The market also got a brief extension of the rise in the afternoon after FOMC members said they were prepared to buy longer-term Treasury products to help lower rates further out on the curve now that Fed funds rates are essentially at zero. The immediate beneficiary of that announcement was the Treasury market, but the U.S. dollar, the Mexican peso and even crude oil futures rallied — at least for a moment — on the news. After a very brief upside pop on the announcement, Treasury prices then started to cascade lower, however, as debt traders in essence called the Fed’s bluff, taking a stance that saying they will buy longer-dated paper just isn’t the same as actually doing it. Yields on benchmark 10-year notes went from about flat right after the FOMC statement to rising more than 5% by the stock market close.
Banks were clearly the star of the stock market show today, with the KBW Banking Index soaring 14%. Wells Fargo & Co. (NYSE:WFC) jumped 30%, Citigroup Inc. (NYSE:C) rose 18% and Bank of America (NYSE:BAC) was up 13%, providing strong leadership that provided a boost to regional and small-cap banking institutions as well.
Energy stocks trailed the overall market rally today, but still put in a solid performance. After an up and down day, crude oil futures in the U.S. edged higher on the close, gaining 1.4%, or $0.58 a barrel, to $42.16 as OPEC leaders vowed to hold the line on output cuts and as gasoline and distillate stocks saw a drawdown even though crude stocks shot higher. Meanwhile, energy stocks rose about 2.5% on the session.
Individual small caps in rally mode today were dominated by banks and financial firms. Outside of that arena, VistaPrint Ltd. (Nasdaq:VPRT) gapped higher and soared 35% on unusually brisk volume as the small business marketing company rallied off solid earnings. Eagle Bulk Shipping Inc. (Nasdaq:EGLE) jumped nearly 20% with bulk shippers in general having a good day.
On the downside, the biggest mover was Century Aluminum Co. (Nasdaq:CENX), which tumbled nearly 40% as the firm announced plans to offer $100 million of new shares of common stock. Royal Caribbean Cruises Ltd. (NYSE:RCL) fell almost 15% amid worries ahead of earnings news, with a conference for analysts slated Thursday morning. Barclays Capital issued a note on RCL saying that they expect the cruise line will stay solvent, but could face liquidity problems.
From a charting standpoint, today’s session represented an impressive upside breakout through the recent trading range, which was defined loosely by the inauguration day collapse Jan. 20. That high was at 466.45, and today’s push through that peak suggested an upside breakout that carries a target move of 33 handles to about 499. The Russell will need to hold up against 466 again on Thursday to provide validation for the breakout. Thursday’s session also ushers in a fresh set of economic indicators to navigate, including weekly claims, durable goods orders and new home sales.
Interestingly, the market completely ignored today’s MBA Mortgage Application Index, which tumbled to the lowest point since the week ended Nov. 21, which just so happened to coincide with the stock market collapse low. Perhaps investors think the sudden drop off in mortgage activity is just a temporary lull, or maybe they believe that the Fed will act to lower mortgage rates since they have popped off the lows in recent weeks. While it’s a good sign to see the stock market shrug off the decline in mortgage activity, it’s still a little worrisome to see the pace back down to November levels. When the MBA index jumped a few weeks ago, homebuilder shares took flight, and today the ISE Homebuilders Index still rose more than 7%, which suggests the market isn’t worrying about one week’s worth of data on mortgage activity – at least for now.
