TARP jitters, consumer spending fears, commodity slide ignite freefall

Kevin Pendley | Nov 12, 2008 4:29pm EST | Comment

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Small-cap stocks went into freefall mode Wednesday, burdened by new plans for the troubled asset relief program (TARP), ongoing worries about corporate profitability, money flow out of equities into credit markets, further downside probing in commodities to 5-year lows and renewed concerns about consumer spending in a difficult economic environment. The Russell 2000 (NYSE:IWM) closed down 29.49, or 6.12% at 452.80, the second-lowest daily close in more than five years. For 2008, the Russell is now down 41%, while the Dow is off 38% and the S&P 500 is down 42%.

We’ve all become somewhat numb to mind-boggling daily volatility since the collapse kicked into gear, but to give some perspective, if you went back before the stock market crash began in mid-September, today’s slide would have been the largest one-day swoon of the year. Including action since mid-September, this was the eighth session sporting a loss of 5% or more.

The market was already in a fragile frame of mind this morning after Best Buy Co. Inc. (NYSE:BBY) lowered its outlook, which stirred worries about consumer spending heading toward the key holiday season. With two-thirds of the U.S. economy driven by consumer spending, a picture of rising unemployment and a dreary outlook for next year make for a troubling brew. BBY shares lost 8% on the day, while the S&P Retail Index was off 5.7%.

Then after the BBY scare, investor confidence seemed to be shaken even more by the Treasury Department’s decision to scrap the original rescue plans of using $700 billion in TARP funds to buy up toxic debt and instead divert money into more capital injections. Those investor concerns appear to be two-fold: first, there is a perception that the government still is bouncing back and forth trying to put out fires instead of having a deliberate plan of attack to help restore financial solvency. Second, there is a chance that if the government funnels billions of dollars into these financial firms it will dilute share-holder equity. The PHLX KBW Banking Index was off 6.1%.

When the TARP was first approved by Congress back on Oct. 3, the Russell was at 619.40. After putting $350 billion to “work” to rescue the market out of the credit crisis, the Russell is now at 452.80. Clearly, there is still work to be done. And the longer the market struggles the more likely it is that public frustration over the government’s approach to the problem will rise. With political winds changing quickly into the New Year with a new administration, it makes for a volatile situation.

Energy and other commodity values remain a bearish element for many stocks right now. Crude oil prices in the U.S. tumbled $3.17 a barrel to $56.16, the lowest closing price since January 2007. Meanwhile, copper and aluminum prices slumped to three-year lows in overseas trading (although copper did close slightly higher in U.S. trading) and the Commodity Research Bureau Index of 19 physical markets fell 2.6% to the lowest point since November 2003. Energy shares were a drag on the market, with the Energy SPDR Fund off 8.1%.

Interestingly, even airline stocks couldn’t mount a rally on the decline in energy prices. Several airlines fall under the small-cap universe and they were clearly not airborne today. The AMEX Airline Index was off 12.8% and familiar names like UAL Corp. (Nasdaq:UAUA), US Airways Group Inc. (NYSE:LCC) and Continental Airlines Inc. (NYSE:CAL) all suffered double digit losses for the day.

Other individual small-caps of note included American Apparel Inc. (AMEX:APP), which tumbled 35% as the company responded to a lawsuit filed by a former employee. APP reported earnings two days ago and saw a 22% rise in same-store sales earlier this month and was in a minor rally mode, but today collapsed to 52-week lows. Gaylord Entertainment Co. (NYSE:GET) slumped 38% as the hotel and resort operator (including the famed Grand Ole Opry) also set fresh 52-week lows.

Wimm-Bill-Dann Foods OJSC (NYSE:WBD), Russia’s largest dairy company, tumbled 31% on news that ratings agency Moody’s downgraded the firm’s debt. The Russian stock market has been closed since Tuesday in an effort to stem panic selling on Russian equities. Live Nation Inc. (NYSE:LYV) fell 26%, snapping important support from the recent bottom while joining the cavalcade of stocks setting new 52-week lows amid analyst downgrades. Winners were harder to come by today, but ATA Inc. (Nasdaq:ATAI) rallied 19% as the Chinese computer testing firm reported earnings. Imperial Sugar Co. (Nasdaq:IPSU) jumped nearly 15% as the sugar processing firm extended a recent upside push from the October lows. Embattled Dow component General Motors Corp. (NYSE:GM) was up 5.4% on talk that legislators are warming up to ideas to help provide financial assistance to U.S. automakers.

From a technical analysis perspective, today’s swoon wipes out equity from the bounce off the late-October lows and severely hampers the chance for a bullish inverted head-and-shoulders formation to fit perfectly with the symmetrical move from the previous Oct. 10 low. If this formation has a prayer, then Thursday is the spot, otherwise all attention will be formulating new downside targets if the market sinks to fresh lows. The Russell sliced through important support today at 462, but held at a minor spot near 456. Below there is token support at 450, but the big spot now back on the radar screen is the bear market bottom at 442.10.