New credit facilities offset by weak econ data
Small-cap stocks pushed higher on the opening but slipped briefly into negative territory as optimism over a new government plan to open credit facilities for mortgage assets and “consumer” loan assets was countered by soft economic reports. The credit news helped the market strive to look past a predictably weak GDP report and a report that said home price declines posted a record decline from year-ago levels. At 10:07 a.m. ET, the Russell 2000 (NYSE:IWM) was up 1.14, or 0.26%, at 437.94.
The Federal Reserve and Treasury Department announced a new TALF (Troubled Asset-Backed Securities Loan Facility), which will be granted initial funding of $20 billion via the original $700 billion in TARP money (i.e., taxpayers). This facility is expected to provide funding for asset-backed securities such as auto loans, student loans and credit card debt.
The GDP report came in at minus 0.5%, which hit the forecast on the nose and meant the number might be awful, but was in line with market expectations. The scary part is that economists are unanimously saying that things will get worse before they get better. “Economic growth dipped in Q3, the result of a sharp drop in consumer spending on top of a weak housing market. Because both have deteriorated even more quickly so far in Q4, GDP will shrink much more rapidly in the current quarter. Our current estimate is minus 4.5%,” Steven Wood, chief economist with Insight Economics, said in an email.
The Case-Shiller Home Price Index tumbled a record 17.4% from last year and the composite index of 20 metropolitan areas was down 1.9% in September from the previous month. “The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals,” David Blitzer, chairman of the Index Committee at Standard & Poor’s, said.
The consumer confidence report came in better than expected at 44.9, which stemmed a sudden slip off the morning highs, but was also offset somewhat by a drop in the Richmond Fed’s manufacturing index, which slumped to minus 38 from minus 26.
One strange divergence from the norm this morning was that Treasury yields were taking a big downside hit even while the stock market was pointing toward a strongly higher open. When yields for bonds and notes are going lower, it means demand for the product is driving prices higher; typically – especially of late – when Treasury yields are going down the stock market is also going down and money is flowing into bonds and notes for safe-haven purposes.
Crude oil prices were off about $2 a barrel shortly after the stock market opening, absorbing a mild pullback off the big 9% surge Monday. After the TALF announcement, the U.S. dollar turned lower against the euro, which could provide some support today for commodities and commodity themed stocks. On the commodity front, miner BHP Billiton dropped a mega $66 billion takeover of Rio Tinto PLC (NYSE:RTP). Shares in RTP were off some 26% early.
Individual small caps on the move this morning included Futures Canada China Environment Inc. (OBB:FCCE), which jumped 33% on extremely light volume (only 1,000 shares). Life Time Fitness Inc. (NYSE:LTM) rose 33%, gapping higher after plunging to 52-week lows Monday. On the downside, Zale Corp. (NYSE:ZLC) was down 25% as the jeweler reported a larger-than-expected loss.
As the day progresses, look for chart resistance for the Russell at 442, then at 453 and 464 (just in case things really heat up like Friday and Monday). Meanwhile, if the market is unable to sustain the recent rally, look for support at 424 and 413.50.
