Oil takes the wind out of small caps’ sails

Jennifer Schonberger | Jul 30, 2008 1:45pm EDT | Comment

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Better-than-expected payrolls data and the Federal Reserve’s extension of credit to Wall Street banks buoyed small caps for the morning and early afternoon; however, they have since succumbed to the red tide, as oil has reversed course and marched higher.

At 1:40 p.m. ET, the Russell 2000 (NYSE:IWM) had slipped 3.19, or 0.45%, to 711.36. While the Dow remained in green territory, up 68.64, or 0.60%, to 11, 466, it is sliding from intra-session highs.

A positive surprise from the ADP Employment Report this morning bolstered investors’ expectations for the Labor Department’s monthly employment report due out Friday.

The ADP report showed an uptick of 9,000 in non-farm payroll jobs, substantially above the forecast for a decline of 58,000 non-farm payroll jobs. Historically, the ADP report carried muster, as it used to correlate with the Labor Department’s employment report; however that correlation has broken down over the last year and the ADP figure has tended to only be a good predictor when it falls near the consensus estimate. “It seems to be too optimistic in relation to the data coming from the BLS,” Bill Greiner, chief investment officer for UMB Asset Management and UMB Bank, and chief economist for Scout Investment Advisors, said. “This has been the case for some time.” Economists are expecting a slide of 75,000 jobs in Friday’s employment report from the Labor Department.

In other economic news, the weekly MBA Mortgage Applications Survey clocked in this morning at minus 14.1, the lowest level since December 2001. The combination of weak home sales and slumping home equity continue to take a toll on mortgage applications, despite moderating mortgage rates.

The Federal Reserve this morning extended its primary dealer credit facility through Jan. 30, reassuring investors that there will be a backstop should investment banks approach insolvency by ensuring investment houses have access to cheap capital. The central bank also said it will now offer loans to commercial banks with a duration of 84 days in addition to the 28-day loans that are currently available.

“The Fed needs to take the credit issue and banks on a case-by-case basis,” Greiner said. “I don’t believe the financial system is going to ‘heal’ and become healthy without a significant change in the way financial institutions treat leverage…So, I think the Fed needs to ‘allow’ certain banks and financial institutions to suffer fairly severe consequences due to their own bad judgment.”

Also, President Bush signed into law the rescue plan for mortgage financing firms, which will support Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), as the two firms own or guarantee nearly 50% of the country’s $12 billion in home mortgage debt.

The Securities and Exchange Commission also extended its short selling curbs on the 19 financial companies, including Fannie Mae and Freddie Mac, through Aug. 12.

Oil prices are climbing higher this afternoon and zapping an early session rally after U.S. gasoline supplies slipped last week and crude supplies declined less-than-anticipated. A barrel of crude gained a hardy $3.61 to roughly $125 a barrel midday. However, oil remains well off its highs of around $147 a barrel.

“Oil prices may be headed lower, due to a fundamental slowdown in worldwide economic momentum,” Greiner said. “However, from a technical standpoint, prices should see support — at least short-term — in the $115-per-barrel price range.”

Meanwhile, the dollar which had posted gains early on has turned and is now losing ground against the euro and the yen.

In broader industry groups, chemical manufacturing, oil and gas and metal mining are among the groups leading the market higher midday, while motion pictures, real estate operations and gold and silver are under pressure.

In small cap headlines, Barrett Business Services, Inc. (Nasdaq:BBSI) are spiking 34% after the provider of human resource management services posted second-quarter earnings after Tuesday’s close that trumped the consensus on Wall Street. Barrett also issued third-quarter earnings and revenue guidance above the mean analysts’ estimates.

Adding to the good news on Barrett, Roth Capital upgraded the stock to “buy” from “hold.”

Shares of decking and fencing manufacturer Trex Company Inc. (NYSE:TWP) are up 24% mid-session after reporting that its second-quarter earnings had more than tripled from the previous year. Hutchinson Technology Inc. (Nasdaq:HTCH) has advanced 14% after analysts at Brean Murray upgraded the maker of suspension assemblies for disk drives to “hold” from “sell.”

On the downside, shares of Silicon Motion Technology Corp. (Nasdaq:SIMO) have crumbled 37% on high volume after the maker of semiconductors for consumer electronics said this morning that net income for the second quarter plunged 44% and clocked in at half the level analysts were on average forecasting. Although sales increased 2% in the quarter, the top-line still fell below the consensus on Wall Street.
Results took a hit, as the small cap bore the brunt of anemic sales for storage products, as demand weakened. Silicon was unfavorably affected by weak demand from many customers, in both retail as well as its bundled card controller segments.