Up, then down as cautious tone prevails despite Fed news

Kevin Pendley | Oct 07, 2008 10:08am EDT | Comment

Rating: Unrated [rate it]

Small-cap stocks slipped back into the red after opening solidly higher. The opening brush into the green was powered by news that the Federal Reserve would open a commercial paper window that should help businesses fund operations. Additional support was tied to oversold conditions and bottoming patterns on daily chart studies after Monday afternoon’s recovery bounce that attracted some cautious bargain-hunting. At 10:00 a.m. ET, the Russell 2000 (NYSE:IWM) was down 1.24, or 0.21%, to 594.67.

The Fed’s announcement on commercial paper appeared to be the punch that truly packed power this morning, sparking some thought that this move could help unclog credit lines. Those concerns remained very much in play into this morning’s trading when inter-bank lending rates were still tight overnight. In addition, the commercial paper facility could take some of the edge off the calls for an emergency rate cut, which already seemed unnecessary at this stage since Fed funds have been trading below the target 2% level often in recent days anyhow.

That said, central bankers in Australia announced a stunning 100-basis-point decline in rates overnight, which did spark optimism for hefty coordinated rate cuts in the West as well. PIMCO, which manages the largest bond fund in the world, has already been calling for the Fed funds target to be slashed by 100 bps, preferably in concert with cuts by other worldwide central banks.

Price gyrations in futures markets right before the opening were volatile and extreme, with S&P 500 futures soaring 12 handles, tumbling 14 handles, then jumping 20 handles in the 30 minutes before the real opening. At first the market was underpinned by oversold conditions, then pulled down on disappointment when the Fed simply announced the timing for auctions already planned, then it roared back again when the Fed said they would start a new commercial paper facility. Tossed into the wacky seesaw trading were headlines that Iran forced down a U.S. fighter jet, then counter headlines from the Pentagon that Iran’s claims just weren’t true.

Among large-cap stocks in the news this morning, Bank of America Corp. (NYSE:BAC) released earnings early last night, announcing plans to slash dividends and raise $10 billion capital, which sparked a 10% slide in the bank’s stock overnight. BAC shares were off about 9% shortly after the regular opening this morning.

Broad market sectors on the rise this morning were highlighted by fertilizer, coal, specialized finance, farm machinery, metals and mining stock, consumer finance, industrial conglomerates, oil exploration and gold shares. On the downside, retail automotive firms, Internet retailers, insurance brokers and investment banks were attracting sellers.

For the first time in awhile, commodities were on better footing this morning. Crude oil futures were up some $3 a barrel, and the U.S. dollar was actually lower against the euro, which takes some of the pricing edge off commodities for a change. Commodity stocks have been hammered for weeks on end, powered by a big money shift out of short dollar/long commodity trades and extended by huge hedge fund redemptions, which have forced the funds to liquidate stock holdings in commodity names.

Individual small caps of note this morning included G&K Services Inc. (Nasdaq:GKSR), which tumbled some 16% as the firm announced measures to cut expenses, with the firm’s CEO saying “On-going economic softness continues to pressure our overall performance.” Also, Landrys Restaurants Inc. (NYSE:LNY) was down 11% on news that a merger deal was in jeopardy. PeopleSupport Inc. (Nasdaq:PSPT) was down 12% as the firm said a request to delay a merger with Essar Services has been made. On the upside, Cantel Medical Corp. (NYSE:CMN) was up about 19% on solid earnings news.