Small caps rise with auto hope, commodities rally
Small-cap stocks opened higher, bolstered by hope that a rescue package for embattled U.S. automakers is finally within reach. Still, Republican lawmakers have been threatening some type of filibuster, so tension about the proposed $15 billion bailout remains high. Worries about fresh corporate profit warnings could take some starch out of buying enthusiasm, but an early bounce in commodities should provide support to stocks with commodity themes. At 10:01 a.m. ET, the Russell 2000 (NYSE:IWM) was up 6.21, or 1.33%, at 471.92.
The wholesale inventory report came out at minus 1.1%, which was quite a bit worse than the forecast for a drop of 0.1%. Earlier this morning the weekly MBA Mortgage Application Index slipped 7.1% after a stunning 112% rise last week. That dramatic jump in mortgage applications last week sparked a three-day upside run for homebuilder stocks, but the move has cooled a bit in recent days. Mortgage rates are now at the lowest point since March 2004, but activity could be hindered a bit by the ongoing credit crisis, which has heightened lending standards and in some cases clamped down lending altogether.
All eyes today will be watching progress on the auto bridge loan package. Optimism that a deal was close sparked a rally in Asian carmaker stocks and the overall Asian equity market overnight. For instance, Honda shares were up 10.3%, Hyundai up 9.1%, Kia up 8.5% and Nissan up 5.2%, with Asian stocks overall up more than 3%.
Crude oil prices were on the rebound this morning, climbing about $2 a barrel amid talk of OPEC production cuts. Commodities in general were solid performers early on, especially the metals segment. Energy stocks were up 3.2% shortly after the open. Within the commodities realm, mining stocks were in the news overnight as Rio Tinto, the world’s third-largest miner, announced plans to eliminate 14,000 jobs, trim capital spending and sale assets to raise cash. Rio Tinto shares rallied sharply in Europe on the news and were up 17% in early U.S. trading.
Tuesday’s slide in U.S. equities appeared to be sparked by a spooky four-week bill auction, which came in at 0.000% with a 4.20 bid-to-cover ratio. When demand for credit instruments at low (or zero) yields is so high, it saps money away from equities and scares the market about the economic outlook. So far today, the picture is starting out brighter, with yields on bonds and 10-year notes climbing.
Individual small caps of note this morning include several dry bulk shippers, which have been this week’s version of last week’s run on homebuilder stocks. DryShips Inc. (Nasdaq:DRYS) was up 21%, Excel Maritime Carriers Ltd. (NYSE:EXM) was up 17% and Eagle Bulk Shipping Inc. (Nasdaq:EGLE) was up 15%. Elsewhere on the small-cap scene, Arc Sight Inc. (Nasdaq:ARST) rallied 13% as the security solutions provider got an earnings-related lift. South African paper maker Sappi Ltd. (NYSE:SPP) jumped 16% with the overall commodities rise and as South African shares in general were in rally mode this morning. On the downside, ADC Telecommunications Inc. (Nasdaq:ADCT) tumbled 15% after releasing quarterly results.
As for large-cap U.S. companies, profit news and outlooks continue to be bleak. This morning saw Praxair Inc. (NYSE:PX), the nation’s largest industrial gases firm, lower earnings projections and announce 1,600 layoffs. Electronic Arts Inc. (Nasdaq:ERTS) lowered guidance in anticipation of weak holiday sales as the video games maker also said additional workforce reductions will be implemented on top of the 6% cut announced back in October. Soft holiday sales could reverberate throughout retailers, with Nike Inc. (NYSE:NKE) the world’s largest sports shoe and apparel company on the end of an analyst downgrade this morning.
Looking at the chart picture, it will be interesting to see if the Russell can mount a lasting charge back above 473, which marked the Black Friday peak. Above that point, the next critical upside test lies at 491, which was not only yesterday’s reversal peak, but also corresponds with the highs from mid-November. Those mid-November highs marked the peak off rally from fresh bear market lows (at that point in time) and the market has not been able to take out previous bounce highs throughout this collapse that began in earnest in mid-September. If the market starts to falter today, support is at 461, 452.50 and 442.
