Russell floats in the red on Goldman, economic reports

Jennifer Schonberger | Jun 17, 2008 12:58pm EDT | Comment

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After opening higher, small-cap stocks slipped into the red and continued to bleed midday, as traders grappled with earnings from Goldman Sachs Group Inc. (NYSE:GS) and a proliferation of economic reports.

At 12:58 p.m. ET, the Russell 2000 (NYSE:IWM) was down 2.41, or 0.33%, to 738.33, while the Dow is down 80.28, or 0.65%, to 12,188.80

As investors try to take the credit crisis’ latest temperature, Goldman Sachs said this morning that net income slid 11%, while revenues flopped off 7.5%, as the investment bank incurred further credit losses. Although results slipped, they still managed to beat the consensus on Wall Street. Goldman is the second financial house to report this week after Lehman Brothers (NYSE:LEH). Morgan Stanley is due to report Wednesday.

In sobering economic news, the Producer Price Index, reported this morning, clocked in at 1.4%, above the forecasted rise of 1%. The inflation indicator was fueled higher by an up tick in energy prices of 4.9% and an increase of 0.8% in food. The “core” rate, which excludes food and energy prices, was on target with a gain of 0.2%. Year-over-year, PPI was up 7.2%, marking the eighth consecutive month in which that number was above 6%, which hasn’t happened since 1977 to 1982.

Today’s PPI report comes on the heels of Friday’s CPI report, in which consumer prices jumped up 4.2% year over year.

“No big surprises here,” BMO Capital Markets economist Jennifer Lee wrote in a note today. “But with pipeline pressures showing little or no sign of let-up (intermediate and crude stages), policymakers will continue to keep an eye trained on inflation.”

Indeed, with The Fed’s hawkish comments in the back drop from last week, traders are now factoring in a rate hike of almost as much as 1%.

Also in less-than-welcoming economic news, housing starts came in slightly below expectations at 975,000 units, which marked the worst showing since 1991. Finally, the industrial production report was down 0.2%, well below the median forecast for a rise of 0.1%.

“We're now past the worst of the housing crisis and in the middle of the process of healing,” Andy Busch, global foreign exchange strategist for BMO Capital Markets, said in an email. “Home building must fall to reduce inventory. Therefore at this stage, it's more of a positive to see housing starts and building permits fall.”

Busch also says home prices have to drop in order to attract buyers. “Prices have fallen dramatically and pending home sales finally rose significantly,” he said. “This means that U.S. inventories should begin to decline toward the norm of five months — and as inventories decline, we should see prices stabilize. Once prices stabilize, mortgages and the derivatives of home prices will stabilize and the supply will increase.”

Crude oil took the back seat for the first time in a while. A barrel of crude oil is up marginally midday, while the dollar has lost ground against the euro and the yen. Gold is up slightly to $888 per troy ounce.

Water transportation, oil and gas exploration and production and coal are among the industry groups leading the market higher mid-session, while hotels, forestry and consumer financial services are among the groups seeing the most downside.

Small-cap movers midday include, Spire Corp. (Nasdaq:SPIR), which spiked 13% midday after Jesup & Lamont initiated coverage on the provider of products and services in the areas of PV solar, biomedical and optoelectronics with a “buy” rating.

On the down side, Harris & Harris Group, Inc. (Nasdaq:TINY) a publicly traded venture capital company, said this morning that it will sell approximately 2.54 million shares at $6.15 per share to institutional investors for net proceeds of roughly $14.39 million, pushing shares down 12% midday. Shares of Columbia Bancorp (Nasdaq:CBBO) have deflated 10% mid-session after FTN Midwest downgraded the regional bank to “sell” from “neutral.”