Small caps slip as GSE bailout rally loses steam
Small-cap stocks dipped into the red about 30 minutes after opening solidly higher, pulled down by ongoing jitters in the financial arena despite hope stirred by a Treasury Department plan to help shore up troubled government-sponsored mortgage giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). At 10:00 a.m. ET, the Russell 2000 (NYSE:IWM) was down 3.73, or 0.55%, at 671.22.
The rescue proposal for GSEs was a scenario that reminded many investors of the stock market bottom that accompanied the bailout of Bear Stearns. There was a hope among many that the government would ensure the health of FNM and FRE, a calming influence in the wake of last week’s failure at IndyMac (NYSE:IMB), which became the third largest banking failure in U.S. history when the bank could not cover a run by depositors. Shortly after the open, FNM shares were up 22%, while FRE stock was up 17%. The advance in GSEs was expected to provide a lift to the overall financial sector, but that wasn’t playing out in early trading today.
Anheuser-Busch Co. (NYSE:BUD) announced that it would embrace a takeover from Belgian brewer InBev NV for approximately $52 billion, which is yet another large M&A deal put together in recent days. Merger activity typically creates bullish momentum among investors, and if there are deals to be done in large caps, then there are also bargains to be found in the small-cap arena. BUD shares were up only 1.2% shortly after the open as this takeover has been in the news and priced into the stock for weeks now.
The overnight bounce in U.S. equities pulled the greenback along for the ride, halting a dramatic slide in the buck that hit a crescendo late last week as the GSE crisis spiked. Shortly after the open, the dollar was up 0.2% against the yen, and almost 0.5% versus the euro, but those gains were trimmed away within 30 minutes after the stock market open.
To start the week, stocks opened higher, the dollar was firm, and even energy prices were taking a breather from the dramatic upward thrust seen late last week. Crude oil prices were lower overnight, but clawed back up to flat levels, with pressure from the firm dollar countered by a strike in Brazil. Also on the commodity front, grains futures were called sharply lower this morning. Despite the preponderance of supportive news early on, the market clearly was leery of the staying power of any rally, as small-cap shares once again paced the decline into negative territory this morning.
Broad market sectors on the rise were highlighted by thrifts and mortgage finance firms. Also on the rise were apparel and retail stocks, homebuilding shares and railroads. On the downside, environmental services, automobile manufacturers, gold and refining stocks were attracting sellers.
Individual small caps of note included Cardiome Pharma Corp. (Nasdaq:CRME), which gapped higher, climbing to an eight-month peak on a positive clinical trial. Qiao Xing Universal Telephone Inc. (Nasdaq:XING) jumped 21% on earnings-related news after hitting fresh 52-week lows last week. On the downside, a list of percentage losers was dominated by small banks and financial firms.
As the day progresses, it will be interesting to see if the bulls can sustain the opening enthusiasm. There was some concern that the planned “bailout” of GSEs is only a temporary band-aid on the troubled financial system. The market also faces quite a bit of volatility risk Tuesday morning in the form of PPI data, retail sales numbers, the N.Y. Manufacturing Survey and Senate testimony about the economy and monetary policy from Federal Reserve Chairman Ben Bernanke. With all of those potentially big market moving events hanging over things into Tuesday, it could create some choppy, position-evening activity later today.
Also, on the chart front, it will be important for any pullback this week to be contained above 660. A breach of that area would suggest that a retest of last week’s lows — and probably the March lows — are in the cards. Looking at short-term action for today, support is at 669, then at 661. Meanwhile, resistance comes into play at 684, then at 690.
