Progress on Paulson plan overshadows awful econ data
Small-cap stocks pushed higher Thursday, bolstered by reports that the $700-billion financial market rescue plan appears ready for approval through government channels. Optimism that quick passage of a rescue deal could free up clogged credit lines and spur economic recovery helped investors look right past a spate of dreadful economic reports that came out today. The Russell 2000 (NYSE:IWM) closed up 7.97, or 1.14%, at 705.74. The Russell is now down 7.8% for the year, compared with a loss of 16.9% for the Dow and 17.6% for the S&P 500.
Right now, the market appears to be of a one-track mind, with the immediate hopes rising and falling with the momentum of the Paulson Plan. This afternoon, key Senators said that the plan was progressing nicely, with Senator Chris Dodd, who is chairman of the Senate Banking Committee, saying that a “fundamental agreement” was in place. Meanwhile, Bob Bennett, a Republican senator from Utah, said “I expect we will have a plan that can pass the House, pass the Senate, be signed by the President and bring a sense of certainty to this crisis that is still roiling in the market.”
“Certainty” or the lack thereof clearly is the key. When it appeared Wednesday that political wrangling in an election year over rescue plan details could stall progress on a quick passage, the market made no bones about recoiling from those concerns. Conversely, when the stock market rallied today on hopes the bill could fly through the lawmaking process, investors made another statement by buying up stocks even in the face of slumping economic reports.
Speaking of those economic numbers, the market received bearish data on durable goods, a bearish surprise on weekly claims and yet another bearish report on new home sales. Usually, two out of three would be really bad for this trio, but with all the attention focused on the rescue plan, the market skated right by this terrible trifecta seemingly without worry. For the record, durable goods came in at minus 4.5%, well below the forecast for a dip of 1.9% (and last month was revised downward as well). Meanwhile, weekly unemployment claims shot to 493,000, compared with the consensus forecast of 450,000. Even if the report was “goosed” by Hurricane Ike-related claims, this was still the highest number since September 2001. If the market weren’t giddy about the potential for Main St. to mop up Wall Street’s credit mess with a $700-billion handout, stocks surely would have tanked on the weekly claims release. Then, just for good measure, new home sales slumped 11.5% to 460,000 units, which was well off the forecast pace of 510,000 units.
There are no economic reports on Friday to muddy the water, and we’ll get a steady diet of Federal Reserve speakers to add to the Paulson Plan watch. It appears like the next step will be for an outline of the revamped bill to get a viewing from President Bush and the two candidates John McCain and Barack Obama.
Broad market sectors on the rise Thursday were highlighted by footwear stocks, wireless telecoms, diverse financial services, homebuilders, industrial conglomerates, banks and other financial stocks. The PHLX KBW Banking Index rallied 2.5%, while the Financial Select Sector SPDR was up 1.8%. On the downside, thrifts, fertilizer firms, industrial gas shares, aluminum stocks, coal, farm machinery and hotels were among the poorest performers. Even though the soft stocks were dotted with various commodity themes, the iPath GSCI Commodity Index ETF was up about 1.5%, bolstered by a $2- a-barrel climb in crude oil prices.
Individual small caps of note included Transmeta Corp. (Nasdaq:TMTA), which jumped some 20%, gapping higher on unusually brisk volume amid news that the firm is looking for a buyer and that they have entered into a couple of licensing deals with Intel Corp. (Nasdaq:INTC). Targacept Inc. (Nasdaq:TRGT) rallied some 18% as the firm tries to recover lost ground from news in mid-September that an Alzheimer’s drug had failed testing. Brookfield Homes Corp. (NYSE:BHS) climbed 13% and was on target for the highest daily close since mid-May. Bucking the overall updraft, Charles River Associates Inc. (Nasdaq:CRAI) slumped some 26%, gapping lower on brisk volume following sloppy earnings news.
Looking at the chart picture, the bounce Thursday was relatively unimpressive on daily chart studies, although the daily close back above “figure” resistance at 700 was a nice victory for the bulls. The Russell still retains a top-heavy structure on daily and weekly charts, but a weekly close Friday back above 726 would help the bottoming argument along. Meanwhile, any slide back below 700 — and especially 692 — would be a troubling sign for stocks.
