Small caps slip into red, despite crude's gush lower

Jennifer Schonberger | Jul 07, 2008 12:54pm EDT | Comment

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After opening higher, small caps have cascaded into the red midday, despite a continued sell off in crude from its record levels throughout the session and ahead of second-quarter earnings.

At 12:51 p.m. ET, the Russell 2000 (NYSE:IWM) was down 8.35, or 1.25%, at 657.43, while the Dow was down 63.67, or 0.56%, at 11,224.87.

After breaching a new record level of above $145 a barrel ahead of the July 4th weekend, crude oil futures pulled back sharply today. Crude is off $5.12 to approximately $140 a barrel midday. The commodity is still up some 50% for the year.

Oil prices are seeing downward pressure, as tensions in the Middle East are deflating in the minds of oil traders. Iran's foreign minister Manouchehr Mottaki said in an interview with CNN on Sunday that Iran is now assessing western governments with a new point of view. The Iranian foreign minister also suggested Iran might entertain the idea of a compromise with its nuclear program. Also, the country is expected to meet with the European Union's head of foreign policy surrounding the country’s nuclear program.

Oil also sold off as the dollar rallied. The greenback was buoyed by weak output numbers in Germany and the United Kingdom as well as resistance to sell the dollar in the midst of the G-8 leaders open summit meeting today in Japan.

“For the U.S. dollar, it's a question of a global economic race to the bottom between Japan, Europe and the United States,” Andy Busch, global foreign exchange strategist for BMO Capital Markets, wrote in an email. “Whoever hits first and bounces wins.”

Bottom fishers were prowling the Street earlier in the session, as valuations have been knocked down to the cheapest level since April. However, probable jitters that prelude second-quarter earnings results seemed to have superseded the low valuations that had clouded investors’ actions earlier today. Quarterly earnings results are expected to begin trickling in Tuesday, as Alcoa kicks off the season. Analysts expect this to be the fourth consecutive quarter of negative earnings. Analysts expect earnings to slide some 11% in the second quarter, following a decline of 16% in the first quarter of 2008, a decrease of 23% in the fourth quarter of 2007 and a decline of 2.5% in the third quarter of 2007.

In large-cap headlines, Microsoft (Nasdaq:MSFT) said today that it’s open to renewing talks to purchase all or part of Yahoo! Inc. (Nasdaq:YHOO) if Yahoo elects a new board. General Electric (NYSE:GE) is expected to report second-quarter earnings Friday. General Motors said it plans to slash thousands of white-collar jobs and is contemplating divesting brands as the automotive maker seeks to boost liquidity. Following its bid for Anheuser-Busch, InBev SA has moved to expel members of the U.S. brewer's board.

In broader industry groups iron and steel, grocery stores and home improvement retailers saw upside, as oil retreated. On the downside, oil and gas, regional banks and consumer financial services were under pressure mid-session.

Small caps on the move midday include, Virtusa Corp. (Nasdaq:VRTU), which has been trounced some 28% midday after the information technology services company this morning lowered fiscal 2009 first-quarter guidance below the consensus on Wall Street, as business at British Telecommunications was negatively impacted late in the quarter. Increased expenses for onsite contractors and foreign currency transaction losses also contributed to the decline.

Shares of Interactive Intelligence Inc. (Nasdaq:ININ) have tumbled 28% mid-session after the communication software maker issued second-quarter preliminary results that was below analysts’ estimates on account of anemic sales from existing customers. Furniture Brands International Inc. (NYSE:FBN) is skidding 17%, along with other furniture manufacturers, as the St. Louis-based home furnishings company has suffered from the sluggish economy and lower consumer spending.

On the upside, Internet Gold Golden Lines Ltd. (Nasdaq:IGLD) shares have jumped 19% in midday trading today after the Israel-based communications company announced late Sunday that Microsoft (Nasdaq:MSFT) will operate its MSN portal in Israel independently beginning in October. The company also announced early today its board of directors authorized the repurchase of about $21 million worth of ordinary shares.

Marten Transport Ltd. (Nasdaq:MRTN) is up 12% today as crude oil has fallen off. Marten Transport is a temperature-sensitive truckload carrier and, like many other trucking companies, has felt the squeeze from gas prices soaring above $4 per gallon.