Red’s the name of the game for small caps today
It’s been a roller coaster morning and small caps are close to hitting their lows of this morning again, as a disappointing existing home sales number created a cloud cover over famed investor Warren Buffett’s investment stake in now commercial bank Goldman Sachs (NYSE:GS) all against a backdrop of testimony on the bailout plan.
The Russell has remained in the red for most of the session, while the other major indices flutter between the red and green. At 12:29 p.m. ET the Russell 2000 (NYSE:IWM) was down 5.19, 0.73%, to 704.
Existing home sales for August declined 2.2% to 4.91 million, down from 5.02 million in July, and slightly less than the 4.93 million economists were expecting. National Association of Realtors said home sales rose in the Midwest and South but fell in the Northeast and West, as tight mortgage credit curtailed activity. The one supposed bright spot in the housing report was that inventory slipped 7% in the month of August. While inventory levels clearly haven’t stabilized, the decline is a step in that direction and a step towards recovery.
The broader market applauded the Oracle of Omaha’s move, as it proved that there is confidence in the system and the decimated financial services sector. Buffett’s Berkshire Hathaway will invest $5 billion in Goldman Sachs by way of preferred stock. The deal could yield potential ownership of 10%.
“The stock market has been looking to see when Buffet would do a deal in the financial sector as a major sign that we're at the bottom,” Andy Busch, global foreign exchange strategist for BMO Capital Markets, said in an email.
Meanwhile, Fed Chairman Bernanke and Treasury Secretary Henry Paulson continue to testify for a second day before the House on their $700 billion bailout plan. Bernanke again urged lawmakers to act quickly and painted a dismal picture should Congress fail to act. “Ongoing developments in financial markets are directly affecting the broader economy,” Bernanke said in Congressional Testimony. “Stabilization of our financial system is an essential precondition for economic recovery.”
Senator Charles Schumer (D., NY) said that lawmakers were closer to an agreement today than Tuesday due to greater cooperation. Day one of testimony on Tuesday was greeted coldly by the Senate with skepticism on both sides. Lawmakers grilled the administration’s economic officials. SEC Chairman Chris Cox called for regulation of credit default swaps (a security that acts like insurance on a loan or bond), which were responsible for pushing Lehman Brothers over the edge and forcing AIG into regulators’ hands. Democrats were keen on enacting limits on executive compensation and on allowing the government to take equity stakes in firms who take federal aid.
While the battle rages on, few perceive that a bailout solution would collapse all together.
Crude has pared some of its gains midday. The commodity was up $0.83 to $107 a barrel, which is down from the $2.43 a barrel this morning. Gold has also deflated from this morning, up only $2 per troy ounce midday from a positive $13 this morning. The dollar has gained ground against the euro and the yen midday and treasuries are mixed.
In broader industry groups, home construction, consumer electronics and aluminum and are moving higher, while full line insurance, diversified industrials and alternative energy are losing ground.
In small-cap news, James River Coal Company (Nasdaq:JRCC) said it will offer 1.5 million shares, pushing the stock down 10%.
Specialty pharmaceutical company Medicis (NYSE:MRX) said today that it will have to restate its financial statements for the years 2003 through 2007 and the first and second quarters of 2008 due to the company’s misinterpretation of the accounting of sales return reserve calculations under GAAP. Shares swooned 11%
On the upside, Evergreen Solar Inc. (Nasdaq:ESLR) is up 11% after the solar company was upgraded by RBC Capital to “sector perform” from “underperform.” Solar stocks are seeing a boost after the Senate passed a bill that offers $17 billion in renewable energy tax incentives.
