Early slide on bank woes, retail sales collapse
Small-cap stocks went into a tailspin on the opening, with worries about the banking sector combining with slumping retail sales to spark a flight away from equities. At 10:01 a.m. ET, the Russell 2000 (NYSE:IWM) was down 11.62, or 2.45%, at 462.17.
The retail sales report headline figure for December came in at minus 2.7%, which swamped the median forecast for a decline of 1.2%. What’s more, the November figure was revised downward, rubbing a little sale in the wound. The ex-autos figure was off 3.1%, also way off the forecast for a decline of 1.3% and which marked a record drop. Even though this fall in retail sales was “goosed” by a 16% slide in gasoline prices, the dramatic slide in retail sales still suggests that the shock of recession and rising unemployment has stunned households, who in turn are turning off the spending spigot.
The troubling retail sales report clearly sparked money flow away from stocks and into Treasury markets. The yield on benchmark 10-year notes, which runs inverse to price, was off 2.6% early today as investors look for a safe-haven outlet away from equities.
Also within the economic data news, business inventories came in at minus 0.7%, slightly below the forecast for a drop of 0.5%. Earlier this morning the import price series tumbled 4.2%, well below the forecast for a drop of 0.5%. The drop in exports was the largest in 10 years, which isn’t exactly great news if you sell widgets to customers across one of the ponds.
On the financial front, bank stocks were hammered in European trading overnight. HSBC fell some 8%, Deutsche Bank was down 10% and Commerzbank was off 9% as worries about the credit crunch and debt writedowns resurface into the earnings season. U.S. banks remain in a negative spotlight, with Citigroup Inc. (NYSE:C) selling off brokerage assets to raise cash into earnings and Wells Fargo & Co. (NYSE:WFC) downgraded by analysts. Shortly after the open, Citigroup was down 15%, while Wells Fargo was off 6%.
Traders say that concerns over the appointment of Timothy Geithner to Treasury Secretary has played into the overall market malaise and particularly in the banking sector. Geithner’s nomination was cheered by the financial community when President-elect Obama announced his pick to lead the Treasury Department, but Geithner’s nomination has run into opposition amid allegations of not paying taxes properly and letting paperwork on a housekeeper lapse. Forcing Obama into damage control on Geithner is a prickly situation when the President-elect is also looking to release $350 billion in TARP funds to a Congress that feels they were run over roughshod on the first batch of TARP funding.
Crude oil prices pushed into positive territory this morning ahead of the retail sales report, but retreated back into the red after the gloomy report cast a dark shadow over the economic picture in the United States (which just happens to also be the world’s largest consumer of energy products). With a huge cold weather front pushing into the northern Midwest and Saudi Arabia apparently holding the line on production cuts, crude prices appear to have a base built in, even with the dreadful economic news. Elsewhere on commodities, copper futures tumbled 5% on the opening of New York trading today, yet another worry sign for the economy as copper is a key component in construction. Also on commodities, soybean processor Bunge Limited (NYSE:BG) warned about profits after the close Tuesday and shares in BG were off 15% early today.
Speaking about disappointing profit news, small-cap apparel firm Under Armour Inc. (NYSE:UA) announced preliminary results that were sloppy and UA’s stock took a 15% hit early this morning.
The chart picture has rolled over into an intermediate bearish tilt, but remains within the longer-term sideways consolidation. The recent breach of 491 and 473 support raises the caution flag higher, and any decisive push through 461 opens the door for a quick slide to 450. Once at 450, the market then runs a risk of retesting the bear market lows. If the market can stabilize today, then resistance will be near 474 and 481; support is at the aforementioned 461.
