Heroic comeback as GSEs bounce off lows
Small-cap stocks led an afternoon recovery charge in the stock market, grabbing a budding bid and running with it when Federal Reserve Chairman Ben Bernanke confirmed talk that government-sponsored mortgage firms would qualify for cheap money through the Fed’s discount window. The comeback push was impressive given a huge rally in crude oil futures to record highs above $147 dollars a barrel. In the end, the Russell 2000 (NYSE:IWM) closed up 4.51, or 0.67%, at 674.95.
It was a roller coaster session for stocks, with a morning downside rout triggered by steep losses in mortgage lending giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), which ignited another bout of fear tied to the credit crunch and the slumping housing market. There was talk in the morning that the GSEs were on the cusp of insolvency and shares in both agencies were down nearly 50% as investors bailed out. However, by the end of the day, FNM pared losses down to the 20% range, and FRE to the 7% zone — still nothing to dismiss — but far more palatable to investors worried about systemic issues. Volume on FNM and FRE was humongous to say the least, and individual stocks often carve out major tops or bottoms in conjunction with volume spikes.
“The key significance of Fannie Mae and Freddie Mac in the current economic climate is their ability to soften the impact of the credit crunch,” Goldman Sachs analysts said in an email earlier today. The Goldman research note even predicted ahead of time that the Fed would extend outright credit support to GSEs. The notion that bringing the GSEs onto the Federal balance sheet would “raise government debt by $5.3 trillion” and thereby sharply worsen the U.S. government’s creditworthiness was misleading, Goldman said. “The $5.3 trillion refers to the GSE’s holdings of mortgages and loan guarantees, which is not at all the same thing as outright liabilities. The government would have to cover any GSE losses, but this would be a much, much smaller number under any reasonable set of assumptions,” Goldman analyst Jan Hatzius wrote.
Small-cap stocks were noticeably strong relative to large-cap index products, a theme that has been in play for the last few weeks. Even though the Dow is at two-year lows, and the S&P 500 slumped to near two-year lows today as well, the Russell 2000 still is above the March 2008 bottom.
Financials are over weighted in the large- and mid-cap arenas compared to small caps, so the weakness in the group is benefiting smaller caps on a relative basis, Scott Fullman, market strategist with WJB Capital Group, said in an email to SmallCapInvestor.com.
All the hand-wringing surrounding GSEs today kept some of the glaring spotlight away from energy prices, but it was still impossible to ignore crude oil prices soaring to a new record high ahead of the weekend. In the last two days crude oil prices have exploded some $10 dollars a barrel as tension in the Middle East between Israel and Iran (the fourth-largest oil exporter) remains high and supply fears were heightened by a looming strike in Brazil and threats to end a cease-fire in Nigeria.
From a broad market sector perspective, the best-performing stocks were found in brewers, gold, automobile manufacturers and coal. On the downside, financial businesses dominated the list, with thrifts and mortgage finance firms leading the way.
Among small caps on the move, FCStone Group (Nasdaq:FCSX) took a nose-dive for the second consecutive session as earnings figures and the outlook forward failed to impress investors. FCSX stock lost about 15% today after shedding over 40% Thursday. Dineequity Inc. (NYSE:DIN), tumbled 19% on disappointing same-store sales results from Appleby’s restaurants. Also, BGC Partners (Nasdaq:BGCP) was down about 12% to fresh move and 52-week lows. On the upside, Diamond Management and Technology Consultants (Nasdaq:DTPI), gapped higher and rallied 27% on unusually brisk volume as the company upgraded its outlook. Sucampo Pharmaceuticals (Nasdaq:SCMP) gained 15% without any apparent fresh news to fuel the rise.
In other news today, the Michigan sentiment survey came in better than expected, with the headline figure at 56.6, compared with the median forecast of 55.5. In general, this was a very slow weak for meaningful economic data, but that will change next week when the market gets a chance to digest key reports on inflation, consumer spending and manufacturing. What’s more, Bernanke will testify on the economy and monetary policy Tuesday and Wednesday, which promises fireworks.
Looking at the chart picture right now, although it’s hard to stomach the market being roiled by fear, uncertainty and sinking prices, it’s interesting to note that volatility has ramped up noticeably this week. Why is that worth mentioning? Until this week, the decline off the highs had been relatively calm, without the spike in volatility we might expect. Now that volatility has ramped up at these levels, it’s worth noting that volatility was also high when the market bottomed back in January and March. While that might be a step toward finding a bottom, the market will still need to generate a dynamic reversal pattern or build a bottom foundation — simply spiking volatility is not enough to try and catch a falling knife.
