Small Caps slip into red on profit-taking

Jennifer Schonberger | Oct 14, 2008 12:21pm EDT | Comment

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After initially spiking out of the gate on the government’s plan to unfreeze credit markets by directly injecting capital in banks and guaranteeing loans between banks, the Russell 2000 has steadily descended into the red midday, as traders locked in profits from Monday’s goliath rally.

At 12:21 p.m. ET, the Russell 2000 (NYSE:IWM) was down 7.05, or 1.23%, at 563.66. The Russell continues to lag the Dow; however, the tech laden Nasdaq remains down double fold.

Building on Monday’s colossal gains, small caps opened higher following news that the U.S. will take Europe’s lead and directly inject capital into troubled banks, while also temporarily guaranteeing newly issued debt by banks. The government said it will also provide insurance for all non-interest-bearing accounts.

Also under the Treasury’s voluntary Capital Purchase Program, the government will purchase $250 billion in preferred shares of banks who elect to participate in the Treasury’s program by November 14. Thus far, nine major banks have said they will participate in the program. Commenting on the direct investment in financial entities, President Bush Tuesday said, the administration’s steps were “not intended to take over the free market but to preserve it.”

Financial firms remain in the green midday, with Morgan Stanley (NYSE:MS) up 20%, Citigroup Inc. (NYSE:C) up 17%, Bank of America Corp. (NYSE:BAC) up 14% and Goldman Sachs (NYSE:GS) up 13% leading the way.

“I would caution that the world is not going back to where it was before September,” Andy Busch, global foreign exchange strategist for BMO Capital Markets, said in an email. “The freeze has meant that the outlook for the economy has soured and we're still not sure by how much. Call it the Z factor. This means that no one can be sure the impact on companies’ sales or earnings. The market was assessing a very negative outcome by selling equities down as far as they did prior to the US/global actions. Now, we have had a massive rally as the market anticipates brighter times ahead. Don't get too excited by the upmove. The Z factor will cap this rally as will the terrible economic numbers that will come out over the next 6 weeks.”

Treasuries are mixed midday after seeing broad selling pressure this morning, as investors moved back into equities. Short-term treasuries are up, with yields falling, while longer-term government bonds are down, with yields up, mid-session. The yield on the 3-month treasury is down to 0.401%, while the yield on the 2-year is up to 1.812% and the yield on the 10-year is up to 4.013%. However, the TED spread, an indication of perceived credit risk in the general economy, remains elevated at 436 midday. However; that’s down from 457 on Monday.

Oil is off only $0.82 to $80 a barrel, after gushing above $84 per barrel after jitters surrounding the impact of the financial crisis globally are easing with the government’s intervention. The dollar is mixed against the euro and the yen midday and gold is off $2 per troy ounce to $839.

Third-quarter earnings are beginning to trickle in. Looking at large cap headlines, food and beverage company PepsiCo Inc. (NYSE:PEP) posted third-quarter results that fell short of the consensus view on Wall Street and said it would slash 3,300 jobs. The souring economy, stronger U.S. dollar and diminished demand for its soft drinks is eroding the company’s results. On the flip side, Johnson & Johnson (NYSE:JNJ) said its third-quarter earnings bolted 30%, topping analysts’ estimates. The healthcare juggernaut benefited from robust sales of consumer products and medical devices.

In broader industry groups, renewable energy equipment, full line insurance and alternative electricity are gaining ground, while soft drinks, diversified REITS and real estate services are under pressure.

In small cap headlines, Domino's Pizza (NYSE:DPZ) is down 23.4% on weaker-than-expected earnings and economic considerations. EnergySolutions (NYSE:ES) has skidded 27% after reporting it expects lower-than-anticipated earnings for 2008 on the delay for nuclear power plant decommissioning.

On the upside, The Great Atlantic & Pacific Tea Company (NYSE:GAP) is up over 11% as it narrowed its third-quarter loss on higher sales. Shares of Intellicheck Mobilisa (Nasdaq:IDN) are up14% on expectations for a profitable third quarter.