Small caps fall on Fannie and Freddie troubles, rising oil
Small-cap stocks plunged shortly after Friday’s opening, showed resilience during the first hour of trading but have exhibited a downward trend in afternoon trading. The uncertainty surrounding Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) combined with record-high crude oil prices have spurred a sell-off today. At 2:17 p.m. ET, the Russell 2000 (NYSE:IWM) was down 2.07, or 0.31%, at 668.37.
Investors responded tepidly to Treasury Secretary Henry Paulson’s short statement that the U.S. government is committed to “supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.”
Fannie Mae has fallen some 24% this afternoon, and similar losses were pinned on Freddie Mac on high volume. Selling fury was fueled overnight by an article in the New York Times suggesting the government was considering a takeover of the embattled mortgage lending giants as the housing slump and credit crisis wallop the firms.
The freefall in federally chartered corporations, or GSEs, spilled over to the rest of the financial sector, with large caps such as Wachovia Corp. (NYSE:WB) down 9%, Merrill Lynch down 5% and Lehman Bros. (NYSE:LEH) off 15% in afternoon trading.
“Retail and credit issues sparked selling Thursday and remain a concern today. Volatility is high right now,” Nick Kalivas, vice president of financial research with MF Global, told SmallCapInvestor.com in an email interview. “I think FNM and FRE are vulnerable to further losses, but the market is thinking that the government will aid the GSEs in some way and keep the financial system whole.”
Small caps were able to outperform large caps during Thursday’s bounce, but Kalivas said the move was powered more by a recovery in oil and natural gas that sparked money pouring back into small-cap energy firms. “I think it is more a beta trade or a sector trade than a sign of the market’s overall health. I’m not reading much into it,” he said.
In recent trading, crude oil futures are up about $3 to $144.73 a barrel. The U.S. dollar is down against both the euro and the yen.
The Michigan consumer sentiment survey for July came in better than expected, with the headline figure at 56.6, compared with the median forecast of 55.5. The survey clocked 56.4 in June.
Among broad market sectors, gold and silver, alcoholic beverages, printing services, coal, and oil and gas operations were on the rise. On the downside, footwear, fabricated plastics and rubber, airlines, apparel and accessories, money center banks, computer storage devices, hotels and motels and construction materials were experiencing a sell-off in afternoon action.
Small caps on the move this afternoon include holding company WGNB Corp. (Nasdaq:WGNB), which is down nearly 13% today to a 52-week low after it announced a second-quarter loss of $4.3 million, or $0.71 per share, compared with earnings of $2.3 million, or $0.45 per share, for the same quarter a year earlier. DineEquity Inc. (NYSE:DIN) is down 11% after announcing after the close Thursday that its second-quarter same-store sales had increased for IHOP restaurants but had decreased for Applebee’s. Alaska Air Group Inc. (NYSE:ALK) is down 14% to a 52-week low as higher crude prices drag down the airline industry.
On the upside, China-Biotics Inc. (OTC:CHBT) is up 12% this afternoon after reporting improved fourth-quarter results late Thursday. Momenta Pharmaceuticals Inc. (Nasdaq:MNTA) is up some 7% in trading today after the biopharmaceutical company announced ahead of the opening that the FDA accepted the Abbreviated New Drug Application for a generic version of Copaxone. Bank of the Ozarks, Inc. (Nasdaq:OZRK) is up 3% after the bank holding company reported second-quarter net income of $8.6 million, or $0.51 per share, which topped Wall Street’s expectation of earning $0.50 per share.
