Small caps remain under pressure on bailout deal limbo

Jennifer Schonberger | Sep 26, 2008 12:24pm EDT | Comment

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After opening sharply lower, the Russell 2000 has fallen to a low on the session, as lawmakers continue to haggle about a bailout plan that was once almost a done deal, and after Washington Mutual, one of the nation’s largest thrifts, failed.

At 12:22 p.m. ET the Russell 2000 (NYSE:IWM) had sunken 13.62, or 1.93%, to 692.14.

Negotiations over the $700 billion bailout plan continue on Capitol Hill after what appeared to be a strong compromise unraveled after a meeting at the White House with Congressional leaders and Presidential candidate hopefuls. The compromise was put on hold Thursday night after the House Republicans presented an alternative plan that would allow banks to purchase insurance for toxic mortgages instead of relying on taxpayer money.

This morning; however, House Republicans sent Roy Blunt (R. Mo.), the second top Republican in the House, to resume negotiations on President Bush’s $700 billion bailout plan. Also, in an effort to ease markets, both parties made statements aimed at conveying that both sides are interested in regaining a consensus to pass a plan. President Bush said this morning, “We are going to get a package passed;” while democratic Senators Harry Reid (D., Nev.) and Chris Dodd (D., Conn.) echoed what Bush said. Senator Reid says he perceives a deal can be completed before Monday and that Congress will remain in session until a consensus is reached and a plan is passed.

In a reality check for Washington, federal regulators seized Washington Mutual (NYSE:WM) on Thursday after it became evident to the Federal Deposit Insurance Corp. that there had been such a large run on deposits that the bank no longer had sufficient liquidity to continue operating. WaMu’s collapse marks the biggest bank failure in U.S. history. After taking over the bank, regulators struck a deal with J.P Morgan (NYSE:JPM) to sell the majority of WaMu’s operations to the bank for $1.9 billion. As a result of the deal, JP Morgan supersedes Bank of America as the largest bank in the nation as measured by deposits. The fact that no banks were willing to purchase WaMu until it failed is a sign of the market’s low confidence in the system and is all the more reason for Washington to quickly pass a bailout plan to restore confidence.

Fears that the bailout plan is stalling, saw continued angst in the credit markets. The spreads between 3-month Libor to 3-month Overnight Index Swap are higher and continue to point to a complete collapse of lending between banks. Short-term money markets continue to be enveloped in disarray. Yields on the one-month and six-month treasures are higher this afternoon, while yields on the two-year and ten-year treasuries are lower, as investors buy up longer-term bonds. Still, on a relative basis bond yields are markedly lower, as investors seek a safe haven for their cash.

In economic news, The Commerce Department downwardly revised GDP for the second quarter to 2.8% from its previous estimate of 3.3%, as consumers spent less than previously thought, businesses cut investments and the credit crunch became deeper ingrained. The University of Michigan’s consumer sentiment index increased to 70.3, though slightly lower than the forecasted increase to 70.9 from 63 in August.

Oil remains in the red today, easing $2.92 to $105 a barrel, while the greenback is mixed against the euro and the yen.

In corporate news, Europe’s largest bank HSBC Holdings said it is slashing 1,100 jobs due to the credit crunch. The financial downturn is also taking its toll on NBC’s local television stations, according to NBC’s president Jeff Zucker. While the local level is feeling the brunt, the national level has yet to see a slowdown in advertising, he said.

On the housing front, KB Home said today that it posted a hefty third-quarter loss that fell short of the consensus on Wall Street due to lofty inventory levels and lower revenues.

In broader industry groups, footwear, asset managers and mortgage REITs are heading higher, while full line insurance, aluminum and coal are under pressure.

In small cap headlines, shares of Perfumania Holdings, Inc. (Nasdaq: PERF) have plunged after the designer perfumes retailer lowered its same store sales and October 2008 net income projections. The company lowered its outlook, as sales continue to decelerate and Perfumania perceives a difficult retail environment will persist.

Shares of Savient Pharmaceuticals, Inc. (Nasdaq: SVNT) are also under pressure after the biopharmaceutical company said that it continues to evaluate strategic business development options for its product, pegloticase, but that nothing had materialized. The firm further stated that nothing may come to fruition period. Shares slipped 10%.

On the upside, Old Point Finnancial (Nasdaq:OPOF), LNB Bancorp (Nasdaq:LNBB) and Dearborn Bancorp (Nasdaq:DEAR) were among small banks that were higher this afternoon.