Financials sinking fast, small caps slumping
Small-cap stocks plunged on the opening, pulled down by worries about the credit crisis, which are taking a toll on financial stocks. A fresh batch of economic data this morning did nothing to ease the pain as the labor market continues to struggle against a backdrop of worry about global growth slowing. At 9:52 a.m. ET, the Russell 2000 (NYSE:IWM) was down 15.27, or 2.13%, at 701.90.
Financial shares have continually been dogged by the credit crunch over the last year, and as soon as things seem to cool down on that front, a new crisis emerges. The latest poster child for the debt debacle is Lehman Brothers Holdings Inc. (NYSE:LEH), as the firm appears to be getting snowballed under losses, is struggling to raise capital via finding investors and has seen its debt swaps widen dramatically, which makes it more difficult to fund borrowing efforts. LEH debt is now trading near distressed levels and the stock was off a whopping 38% shortly after the opening, trading near $4.30, a far cry from the $66 level it was trading at back in February. Another firm reeling from the mortgage-tied credit crisis is Washington Mutual Inc. (NYSE:WM), which was off 21% early today. Also, American International Group Inc. (NYSE:AIG) was down 12%, as was Merrill Lynch & Co. Inc. (NYSE:MER).
On the data front this morning, the weekly unemployment claims release came in at 445,000, which was above the consensus forecast of 438,000. Perhaps more importantly than the headline figure was the continuing claims number, which was 3.52 million, near a 5-year peak. At the same time that the claims number came out, data on international trade showed a jump in the U.S. trade deficit to $62.2 billion, well above the forecast for a deficit of $58 billion. The dreary data simply added to an already bleak morning picture for equities. Even before this morning’s claims report, analysts at Goldman Sachs said earlier this week that the slumping U.S. labor market reflected an economy that was in recession, regardless of how the “official” recession tags are applied.
Even before the soft economic reports, the stock market was getting hammered overnight, with a global index on stocks sinking to 14-month lows. Around the world, stocks were knocked, with Japan down 1.9%, China off 3.3%, Hong Kong down 3%, Taiwan down 3.1%, Singapore off 3%, India down 2.3%, South Korea down 1.7% and Australia down 1.8%.
Even though the stock market picture wasn’t pretty this morning, the U.S. dollar was doing well, with the dollar index climbing above 80 for the first time in a year. The dollar was at the highest point against the euro since September 2007 and charged to 2 ½-year highs versus the U.K.’s pound and even eight-month highs against Brazil’s real. The big divergence from the strong dollar theme was against the Japanese yen, which was up 1.2% on the greenback, as international traders were busy buying yen to sell euros, making bets that the eurozone economy was set to weaken.
Commodities were on the defensive early today amid the firm dollar tone, with crude oil slipping about $0.20 a barrel to the $102.30 range, edging lower even though Hurricane Ike is bearing down on the Gulf coast. However, Ike appears set to hit land south of the biggest production zones, although some 7% of Gulf fuel production has been shuttered ahead of the storm. In overnight trading, crude oil prices in London tumbled to six-month lows and elsewhere on the commodities front, gold prices hovered near 11-month lows and grains markets were called lower ahead of their opening.
Broad market sectors on the decline this morning were highlighted by insurance firms, investment banks, mortgage finance firms, metals and mining stocks, steel, diverse financial firms, diversified banks, specialized finance stocks and homebuilders. There were only three sectors on the upside immediately after the opening this morning, so the breadth of selling early on was stunning to say the least. Oil refining shares and railroads were higher, and that was basically it for the upside.
Individual small caps of note included Kenexa Corp. (Nasdaq:KNXA), which gapped lower and shed some 23% after the firm revised guidance for 2008 overnight. American Commercial Lines Inc. (Nasdaq:ACLI) was down 12% and rapidly approaching the summer lows, giving back solid recent gains.
Looking at the chart picture for small-cap stocks, the Russell 2000 was limping toward “figure” support at 700, but remains well clear of the July lows, even though the S&P 500 is rapidly approaching that summer trough. The dominant chart patterns in the Russell are bearish and if support along 701/700 is broken today, then the next key support point to watch is down at 694. If the market can right the listing ship today, then resistance is at 711.50, 716.60 and 720.50.
