Profit woes, unemployment data sparks early slide

Kevin Pendley | Feb 12, 2009 10:39am EST | Comment

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Small-cap stocks plunged early Thursday, dismissing an upbeat retail sales report to focus on dreary corporate profit reports and another somber reading on the employment picture. At 10:02 a.m. ET, the Russell 2000 (NYSE:IWM) was off 9.39, or 2.10% at 438.55, while the Dow was down 2.70% and the big-cap barometer was now at the lowest point since November.

The retail sales report came in at plus 1.0%, which was quite a bit better than the forecast for a slide of 0.7%. Although the upside surprise did help lift stock index futures off the pre-market lows and might have had a brief supportive tone into the regular stock market opening, the general perception of the retail sales report was that it was a “head-scratcher.”

“This increase broke a record six-month string of declines during which spending fell at a 21.1% annualized rate,” Steven Wood, chief economist with Insight Economics, said via email. “However, both November's and December's earlier estimated declines were revised to be modestly deeper. Despite this month's gain, retail sales have fallen at a 16.3% annualized rate over the past three months. Over the past year, retail spending has decreased by a near record 9.7%. Spending at motor vehicle dealers jumped by 1.6% despite a 7.1% decline in unit sales, which is puzzling,” Wood said.

The rise in retail sales also didn’t seem to fit with anecdotal reports on store traffic and consumer retrenchment amid a deepening recession and rising unemployment. Speaking of unemployment, the weekly claims report showed that 623,000 Americans were forced to file for unemployment benefits last week, which was a mild dip from last week’s 26-year peak, but still a larger number than forecast. The number of workers forced to remain on unemployment rolls rose to a new record high and the four-week moving average on claims was at a 26-year high. Simply put, historically large numbers of workers are getting laid off, and they are struggling to find new jobs.

Today’s economic reports might allow investors to shift focus away from Washington’s bank rescue and stimulus news for a brief period of time, but there is still a visible overhang in the air from Tuesday’s collapse when the roll out of the Treasury Department’s bank plan failed to inspire market watchers. Treasury Secretary Timothy Geithner is slated to meet with President Obama to discuss options to reduce foreclosures. Earlier this morning, RealtyTrade reported that foreclosures in January fell from the previous month, but was still up 18% from the previous year. The firm said that one of every 466 U.S. households was under a foreclosure filing. And the final piece of economic data this morning came from the 10:00 a.m. ET business inventories report, which came in at minus 1.3%, which was a bigger drop than the forecast of minus 0.7%.

Crude oil futures tumbled some $1.30 dollars a barrel after the stock market opening, pulled down by spillover selling from equities, which only serves to stoke worries about energy demand destruction. The Energy Select Sector SPDR Fund was off 2.2%.

Small-caps on the slide early today include Transcontinental Realty Investors Inc. (NYSE:TCI), which collapsed 48% on light volume. Pacer International Inc. (Nasdaq:PACR) tumbled 40% as the freight transport firm took a beating after releasing earnings. comScore Inc. (Nasdaq:SCOR) fell 30% as the video researcher was another victim of sloppy quarterly results. Terex Corp. (NYSE:TEX) fell 31% as the construction equipment manufacturer warned that it might violate a credit covenant by quarter’s end.

On the upside, Buffalo Wild Wings Inc. (Nasdaq:BWLD), gapped higher and shot up some 25% as the restaurant chain topped the forecast; a theme also seen at Chipotle Mexican Grill (NYSE:CMG) and at P.F. Chang’s China Bistro Inc. (Nasdaq:PFCB). CMG was up 7% early, but PFCB was actually off about 0.9%.

Looking at the chart picture, the market is quickly careening toward the recent range lows at 431.25, snapping minor trendline support off the January 23 low in the process, which only heightens the risk for a hard retest of those lows. The Dow today tumbled to the lowest point since the market bottom back in November, which will clearly spook investors; that said, both the S&P 500 and the Russell 2000 remain above the January lows (at least so far). As the day progresses, look for support for the Russell at 437.50, then down at 431.50. If the market can mount a bounce, then resistance will be approaching 450, then at 454 and 461.