Small caps in the red

Jennifer Schonberger | May 13, 2008 1:22pm EDT | Comment

Rating: Unrated [rate it]

Small-cap stocks are treading shallowly in the red midday, while the other major indices remain deeper in the red after Fed Chairman Bernanke said that markets are “far from normal,” oil prices hit record levels, major brokerage houses on the Street were downgraded and housing prices saw the steepest decline in 26 years.

At 1:19 p.m. ET, the Russell 2000 (NYSE:IWM) edged down 1.45, or 0.2%, at 731.78, while the Dow had skidded 84.27, 0.65%, at 12,792.04.

Federal Reserve Chairman Ben Bernanke spoke earlier this morning about liquidity issues in the financial markets. He said that the liquidity measures taken by the Fed to ease the credit crisis have helped, but that the markets are still “far from normal.” Also slated to speak this afternoon on the state of the economy are Federal Reserve San Francisco President Janet Yellen, Kansas City Fed President Thomas Hoenig and Dallas Fed President Richard Fisher.

“I believe that the current credit problems will take some time to resolve. Therefore, monetary policy will remain loose for much longer than many are anticipating,” said Doug Roberts, chief investment strategist for ChannelCapitalResearch.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices. “You still have negative interest rates. Eventually as fear abates and as oil prices stabilize, small caps are going to start to rally because of the liquidity infused into the system. You’re even starting to see small caps at least in parity with large caps this year.”

Today’s pullback comes on the heels of Monday’s robust 1% advance. Oil reversed course nearing $127 a barrel intra-session on concerns that Iran may cut crude oil production. Gold slumped $16.60 per ounce to $868, as the greenback gained ground against the euro and the yen.

In other bleak economic news, the National Association of Realtors reported this morning that single-family home prices declined 7.7% in the first quarter, marking the biggest year-over-year decrease since 1982. The median sales price slid 4.8% to $196,300 when compared with the last three months of 2007.

One supposed bright spot in the gloom was the retail sales report. Retail sales clocked in at minus 0.2%, which was in line with the forecast. However, after eliminating the autos sales figure, retail sales were up 0.5% — well above the consensus of 0.2%.

“Looks like those rebates so far are having a desired impact on consumer spending,” BMO Capital Markets economist Jennifer Lee wrote in a note today. “Rebates given on checks will be mailed out starting Friday. Let's see what happens in May.”

After gaining ground Monday, the financial sector saw a sell off after Oppenheimer & Co. analyst Meredith Whitney lowered her earnings estimates for the largest securities firms on Wall Street.

Not even M&A news — the type of news that catapulted the market higher last year — could get the market started. Technological juggernaut Hewlett-Packard (NYSE:HPQ) said this morning that it will acquire Electronic Data Systems (NYSE:EDS) for $12.6 billion, which when combined creates the second-largest technology services provider behind IBM (NYSE:IBM).

In other large-cap headlines, Wal-Mart (NYSE:WMT) released earnings and topped the projection by a penny, but issued somber guidance, stating that the firm remains “concerned” about gas prices. Shares slid 2% midday.

Among industry groups, construction services is seeing the most upside midday, while gold and silver, water utilities and trucking are under pressure.

Small-cap movers midday included Iomai Corp. (Nasdaq:IOMI), whose shares shot up 117% on news announced this morning that the firm was bought out by Austrian vaccine maker Intercell for $189 million. USANA Health Services Inc. (Nasdaq:USNA) also jumped 23% midday, maintaining lofty levels on a takeover offer. Fuel Systems Solutions Inc. (Nasdaq:FSYS) soared 28% after reporting first-quarter results after Monday’s close that beat the street and raising full-year revenue guidance. On the downside, shares of U.S. Shipping Partners L.P. (NYSE:USS) sunk 27% after the marine transportation services company posted a wider-than-anticipated first-quarter net loss on waning demand in the spot market on account of overall declining economic activity and decreased demand for the domestic coastwise transportation of petroleum products. Crystal River Capital, Inc. (NYSE:CRZ) skidded 22% midday after reporting that it swung to a net loss in the first quarter from the year-ago quarter and said that it anticipates continued difficulties in the credit markets for the remainder of 2008.