Crude gush, financials roil small caps
A spike in crude combined with a depreciating dollar, financial sector woes and disconcerting economic data sunk small caps lower on the session midday.
At 12:12 p.m. ET, the Russell 2000 (NYSE:IWM) was down 5.98, or 0.82%, to 725.62, while the Dow had sold off 35.83, or 0.31%, to 11,381.60.
After stabilization within the $115 range, oil has broken out in a volatile spike, climbing almost $6 a barrel, as a weaker dollar and jitters that bubbling contention with Russia over its penetration of Georgia could disrupt oil deliveries. With oil's spike the market sold off further, as a rise in the commodity means greater inflation, crippled profits for businesses and usurped consumer spending power.
While oil climbed the greenback sold off against both the euro and the yen. “The U.S. dollar [has] tank[ed] on the soft data along with the rise in oil,” Andy Busch, foreign exchange strategist for BMO Capital Markets said in an email. “With a firm bottom in oil at $112 and continued focus on GSEs, the dollar has peaked.”
The financial sector has yet again brought the broader market down, as Citigroup slashed its earnings outlook for Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and Lehman Brothers (NYSE:LEH). Fear of a collapse in government-sponsored enterprises Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM) continue to enrapture equities, as the market speculates the government is near to bailing them out.
Lehman Brothers has sold off on reports from the Financial Times that Korean and Chinese investment groups have backed away from taking a stake in the embattled Wall Street brokerage/banking firm. Additionally, the Wall Street Journal is reporting today that the Federal Reserve is said to have called Credit Suisse in July to ascertain if it had indeed yanked a line of credit from Lehman Brothers in response to a rumor. If indeed the Fed did do this, its actions only serve to confirm the rampant fears in the market.
“[With] U.S. equities death spiraling with GSEs, the dollar’s death spiraling with commodities going up, bond yields death spiraling with the world economy slowing down, the rest of the week will focus on what the U.S. Treasury is going to do with GSEs,” Busch said. “Paulson’s statement that they're not going to use their special powers and keeping everyone in the dark doesn't seem to be a solution at this point. It adds to the uncertainty and markets hate that.”
In dreary economic news, The Conference Board’s leading indicators report dipped 0.7% in July, as building permits, stock prices, and weekly initial claims converged to drag the index down. The sharp decline was worse than the 0.2% economists had forecasted. “After stabilizing in March and April, the leading index has reverted to the downward trend that began in the middle of 2007,” the Conference Board said in a statement.
However, not all the economic news was relatively dismal. Weekly claims clocked in slightly better than feared, while the Philadelphia Fed Survey was weak, but better than expected. Weekly unemployment claims were 432,000, which was below the forecast of 440,000 and a decline from last week’s 445,000 number. The four-week moving average on claims rose to 445,750 while continuing claims dipped to 3.362 million. Though today’s weekly number was better than projected, the four-week moving average was the highest since December 2001.
“The latest reading is worth watching as it includes the survey week for the August payroll report,” BMO Capital Markets economist Jennifer Lee wrote in a research note. “Despite two consecutive declines in a row, the number of first-time claimants is still 60k over the last survey period, which doesn't sit well for those waiting for some improvement, or any improvement for that matter, in the labor market. bottom line, it may be that the distortions caused by the extension of the benefits program are falling out of the mix. But the elevated readings for claims and continuing claims (on a smoothed basis) are not comforting for the August jobs report.”
In broader industry groups, coal, platinum and gold mining are higher, while airlines, forestry and full line insurance remain under pressure.
Individual small caps of note included Hot Topic, Inc. (Nasdaq:HOTT), whose shares have swooned almost 22% midday after the mall retailer issued third-quarter earnings guidance after Wednesday’s close a penny shy of the Street, and disseminated fourth-quarter earnings projections below to inline with analysts’ mean estimate. The earnings guidance, which is based on a decline in comparable store sales in the low-single digits, stole the limelight from the company’s narrowed second quarter loss.
Citi Trends, Inc. (Nasdaq:CTRN) posted strong second-quarter results after Wednesday’s close that trumped the consensus on Wall Street. The retailer saw sales increase 19.5% and comparable stores sales increase 6.5% in the quarter, as stimulus checks and an improvement in gross margin on account of lower inventory levels and markdowns served to buoy results. Shares gained 12% midday.
Shares of Thermage Inc. (Nasdaq:THRM) have surged 37% mid-session after the skin treatment company announced late Wednesday the receipt of a revised unsolicited third-party acquisition proposal. Hayward, Calif.-based Thermage is planning to merge with Reliant Technologies Inc. of Mountain View, Calif., in a cash-and-stock transaction worth about $95 million, or $25 million in cash and 23.6 million shares of Thermage's common stock.
