Small caps fall on gloomy economic outlook
After an impressive rally on Tuesday, small caps fell under pressure amid gloomy economic outlooks and possible downgrades, and as crude oil prices gushed higher. In Wednesday’s trading, the Russell 2000 (NYSE:IWM) fell 18.97, or 2.78%, at 663.75, while the Dow declined 236.77, or 2.08%, at 11,147.44.
After jumping nearly $2 dollars into the open to roughly $138 per barrel, crude oil futures reversed course and fell $0.40 to $135.64 a barrel. The U.S. dollar also fell against both the euro and the Japanese yen.
Prices were catapulted higher in the morning on news that crude inventory levels slipped more than anticipated. The Energy Information Administration reported this morning that U.S. oil supplies declined by 5.9 million barrels, substantially greater than Platts’ forecasted decrease of 1.9 million barrels. Additionally, Iran test fired missiles to show that they would retaliate if Israel attacks their nuclear production facilities, heightening concerns among oil traders that a conflict could cut off the transportation of crude supplies through the Strait of Hormuz, a highly utilized shipping route for the transportation of crude supplies.
The International Monetary Fund said today that it remains weary on global economic growth this year and in 2009, as the credit crisis continues to grip global markets and skyrocketing food and fuel prices crimp consumers and businesses. IMF chief Dominique Strauss-Kahn, however, stated that he is more concerned about inflationary pressures.
In a research report this morning, analysts at Goldman Sachs said that a “snap-back rally” was always possible and that on a pure valuation basis, some investors might ask whether economic risk is now adequately priced into the stock market. “We think it remains dangerous to trade against the downside equity market trend based on valuation metrics alone at this point. The market is in the process of adapting expectations to a less optimistic view of the macro environment. And what looks cheap now may not look that cheap in the near future, should fundamentals turn even less friendly going forward. In this regard, the economic environment overall is still likely to remain challenging and uncertainty remains high,” the report said.
In economic news, the MBA Mortgage Applications Survey increased 7.5% in the latest weekly period, the second consecutive weekly advance. However, this data series can be volatile, and the total level of mortgage applications are still 18% below last year’s figures. The purchase index on the report rose 6.7%, but is also down 19.4% from 2007.
The second-quarter earnings season officially kicked off after Tuesday’s close with Alcoa Inc. (NYSE:AA). Results clocked in better than expected, but the aluminum producer’s bottom-line skidded 24% from the same period last year. However, the upside earnings surprise served to pacify apprehension surrounding earnings. Alcoa was down 2.44% in today’s trading.
In large-cap headlines, ratings agency Fitch Ratings put Fannie Mae (NYSE:FNM) and Freddie Mac’s (NYSE:FRE) long-term credit default ratings on watch for a potential downgrade. In today’s derivatives trading credit-default swaps are signaling that both mortgage lenders, which are currently rated Aaa, are being traded as if their debt were a rating of as much as five times lower. FNM was down some 13% and FRE declined nearly 24% in today’s trading.
Google (Nasdaq:GOOG) said it’s facing challenges in acquiring advertising sales for YouTube. Morgan Stanley lowered its earnings forecast on retailers, citing a continued tough consumer environment and the dissipation of the government’s stimulus package. GOOG fell 2.34% in Wednesday’s trading.
Industry sectors that attracted buyers today included metal mining, iron and steel, coal, electric utilities, alcohol and natural gas utilities. The many industry sectors experiencing a sell-off today included real estate operations, casinos, investment services, hotels and motels, audio and video equipment, restaurant services, forestry and wood products and apparel retailers.
Small caps releasing earnings today included Zep Inc. (NYSE:ZEP), an Atlanta-based maker of cleaning and maintenance products. In a midday conference call, Zep CEO John Morgan said the company is achieving it goal of achieving a simplified business model, but may go through a painful period over the next couple of quarters. Zep was down 3% in today’s trading.
Agricultural machinery manufacturer Art's Way Manufacturing Co., Inc. (Nasdaq:ARTW) said this morning that second-quarter earnings spiked 60.7% while revenues jumped 35%. The robust results lifted the stock some 26% today. High-pressure water pumps manufacturer Flow International Corp. (Nasdaq:FLOW) this morning reported fourth-quarter earnings that fell below the consensus on Wall However, fourth-quarter revenues increased 21%. Shares slipped 15.93%.
Other small caps in the news included Ultralife Corp. (Nasdaq:ULBI), whose shares rose 8% after the battery provider raised its second-quarter revenue guidance this morning. On the downside, Arris Group (Nasdaq:ARRS) fell 17.42% after the firm lowered its quarterly outlook.
A-Power Energy Generation Systems Ltd. (Nasdaq:APWR) jumped 15% today on news that the power generation systems provider had completed the first phase of its new wind turbine production facility in Shenyang, China. CIRCOR International Inc. (NYSE:CIR) soared 23% on Tuesday’s after-the-close announcement that the company was lifting its second-quarter earnings outlook.
