Small caps down on mixed jobs reaction

Kevin Pendley | Aug 01, 2008 10:05am EDT | Comment

Rating: Unrated [rate it]

Small-cap stocks slipped into the red shortly after the open, pulled down concerns over a four-year high in the unemployment rate and by massive losses posted by U.S. manufacturing icon General Motors Corp. (NYSE:GM), which only stirs the pot on economic fretting. At 9:51 a.m. ET, the Russell 2000 (NYSE:IWM) was down 4.91, or 0.69%, at 709.62.

Investors and analysts continue to grapple with the mixed details seen on today’s monthly Labor Department employment report. The “headline” figure for non-farm payrolls came in at minus 51,000, which was better than the consensus forecast for a loss of 75,000 jobs. There was some trepidation that the non-farm figure could swell beyond the forecast after Thursday’s dreadful weekly claims report (which was taken after the monthly jobs figures were gathered). The initial response to the non-farm payrolls figure was a six-handle bounce in S&P 500 futures, a firming of the dollar against the euro and a rise in Treasury yields. However, the devil is in the details, and today’s jobs report was not without some troubling aspects.

The most obvious concern on the report was that the nation’s unemployment rate rose beyond expectations, climbing to 5.7%, which marked the highest level in more than four years. In addition, the number of people working part-time for economic reasons rose by 291,000 and has increased by 1.34 million, up 31.5% over the past year.

“Over the past year, the number of unemployed people has increased by more than 1.6 million and the unemployment rate has increased by a full percentage point. In the post-World War II period, every time the unemployment rate has jumped by a full percentage point in the course of a year, the economy has slipped into recession,” Steven Wood, chief economist with Insight Economics, said in an email.

Wood also noted that July marked the seventh consecutive decline for the first time since late 2001/early 2002 when the economy was emerging from recession. So far in 2008, some 463,000 jobs have been lost. “The economy has clearly slipped into a mild jobs recession because the housing meltdown and credit market turmoil has spread to the broader economy,” he said.

Although the focus for today’s activity will likely center on interpreting the employment data, earnings continue to roll in and the news was dreadful overnight for the nation’s #1 vehicle maker, General Motors Corp., which lost a stunning $15.5 billion in the quarter. GM shares were off 6% shortly after the open. Other large caps of note included Elan Corp. (NYSE:ELN), which was down 45% after brain cancer drugs were pulled off the market because of safety issues. ELN partner Biogen Idec Inc. (Nasdaq:BIIB) was off 27%.

Crude oil prices were soft overnight and remained in the red into the stock market opening, but pared losses. Crude action has been volatile of late and should be overshadowed by the economic data today, but if we see a big swing during the session it could easily magnify movement in equities. In other commodities inflation news, platinum prices were off 3% overnight to six-month lows, and lead was also down 3%. If the dollar remains firm today, it would finish off the week at four-week highs, which is a negative factor for most commodities that are priced in dollar terms.

Broad market sectors on the rise this morning include forest products, paper products, tobacco and soft drinks. On the downside, specialized finance, homebuilders, metals and mining, steel and automakers were taking a hit.

Individual small caps of note were highlighted by TomoTherapy Inc. (Nasdaq:TOMO), which was down 45% on earnings news. eHealth Inc. (Nasdaq:EHTH) was down 19%, also fueled by soft quarterly results.