Sharp slide is brief amid hope White House to rescue autos
Small-cap stocks started out the day in dramatic fashion, with a jolting opening decline taking place on news that the Senate shot down a bill authorizing $14 billion in bridge loans for the beleaguered U.S. auto industry. However, the opening slide wasn’t as bad as it looked about an hour before the open, as it appears like the White House will try to come to the rescue of automakers. In fact, the Nasdaq actually traded in positive territory briefly about 30 minutes after the open, and small caps jumped nearly 10 handles off the morning low. At 10:01 a.m. ET, the Russell 2000 (NYSE:IWM) was down 1.73, or 0.38%, at 449.51.
Much of the investor focus today will be on trying to decipher just what the Senate’s rejection of the automaker bailout will mean to the market. There have been a few outlier “gloomsday” scenarios that predict that a GM bankruptcy would send the stock market another 20% below the recent bear market lows as a domino effect ripples through the economy. There are still some options in play however that could avert a bankruptcy, including the Bush Administration trying to open up TARP funds for automakers. The initial reaction was predictably awful for General Motors Corp. (NYSE:GM) and Ford Motor Co. (NYSE:F), which were down 30% and 25%, respectively right after the open, but then were rapidly improving from the worst levels after the Treasury Department said they were ready to prevent an automaker failure.
The retail sales report headline figure came in at minus 1.8%, which was on target with analyst projections. That said, minus 1.8% is still a terrible figure and marked the fifth consecutive monthly decline. It should be noted, however, that a major downside force on retail sales was a whopping record decline in gasoline prices of 14.7%. In tandem with the retail sales release, the producer price index for November came in at minus 2.2%, which was a little lower than the projection for a decline of 1.8%. As one might expect, gasoline prices were a major influence on PPI declines too. The gist of it all is that inflation simply isn’t an issue right now, especially with the economy mired in recession and unemployment claims at 26-year highs.
Also on the data front, business inventories came in at minus 0.6%, well below the projection for a dip of 0.2%. The Michigan sentiment survey came in better than expected at 59.1, above the forecast of 55.0, as consumers found comfort in falling gasoline prices and retailer discounts. The sentiment figure appeared to pare gains in Treasury futures and helped lift equities.
As if the morning news wasn’t already bleak enough, investors awoke to news of a huge Wall Street scandal as Bernard Madoff, former Nasdaq chairman, was arrested and charged with running a fraudulent hedge fund that may have racked up a startling $50 billion in losses.
Commodity and energy markets have been trying to carry stocks in recent days, but the collapse in equities this morning took a toll on crude oil prices, which were off some $3.50 dollars a barrel. The dollar was getting absolutely clobbered against the Japanese yen as investors flee to the low-yielding yen as a safety outlet. Along that safe-haven vein, yields on Treasury products were also lower this morning. As the day plays out, it will be interesting to see if investors flee equities ahead of the weekend unwilling to shoulder riskier assets amid the auto uncertainty. Conversely, if the White House comes up with some emergency measure for automakers, will that spark a sudden reversal of fortune for stocks?
Individual small caps on the slide this morning were highlighted by Insteel Industries Inc. (Nasdaq:IIIN), which gapped lower and tumbled 14% as the company announced a downward revision in guidance figures for the quarter. Chicago Bridge & Iron Co. NV (NYSE:CBI) tumbled 17% and has now given back the recent advance tied to plans from President-elect Obama to initiate a massive infrastructure project. On the upside, Macerich Co. (NYSE:MAC) was up 14% as the regional shopping center operator completed a $250 million refinancing deal.
The chart picture clearly deteriorated this week. The key event appears to be the early-week rejection of our 491 resistance point as the market simply wasn’t ready yet to snap the bearish behavior cycle of posting lower lows and lower highs. The Russell smashed minor trendline support off those recent lows, but really won’t do significant damage to the overall picture unless we take out 416. The downside target drawn off Thursday’s breach of the consolidation rectangle was 430, but it’s a little bit of a shock to see that target on the radar screen so quickly. As we progress today, chart support is at 433, 423 and 415. If the market can stage a bounce, then resistance will be at 452.50 and 464.
