GDP report provides a mild lift to small caps

Kevin Pendley | Aug 28, 2008 10:18am EDT | Comment

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Small-cap stocks pushed higher in morning action, underpinned by a stronger-than-expected GDP report, which continued a string of recent bullish data surprises. However, gains were limited by a soft tone in the U.S. dollar and by climbing crude oil prices. At 9:52 a.m. ET, the Russell 2000 (NYSE:IWM) was up 1.74, or 0.24%, at 734.69.

The headline figure on GDP was at 3.3%, quite a bit better than the projection for a rise 2.7%, boosted by a 13.2% rise in export activity and by a bump in consumer spending from the release of tax stimulus checks. The latter is a temporary lift and it should be noted that this GDP report is for the second quarter, and we’re nearly two-thirds of the way through the third quarter now. Economic activity has slowed again … if the market wants to rally in the shadow of this GDP report, then there are probably other stories driving the push. The most likely story is that hedge funds are booking profits on shorts for month-end purposes, and that short-covering push is taking place at a time when volume is very thin ahead of the last summer holiday weekend in the United States.

In addition to the GDP report, weekly unemployment claims out this morning, and hit the forecast on the noggin at 425,000. While the headline number was in line with expectations, the continuing claims figure was at 3.42 million, which marks the highest point since November 2003. The number might not have been a surprise, but it also wasn’t anything for the bulls to get excited about either.

It is worth noting that economic data has been the story of late, starting with an upside surprise on consumer confidence Tuesday, continuing with durable goods orders Wednesday and then hitting another high note on GDP numbers this morning.

The morning focus on economic releases did manage to shuffle crude oil to the background, if only for a moment. That said, crude oil prices remain in rally mode, churning toward $120 dollars a barrel into the stock market open. Crude prices continue to climb as traders fret about the need for a risk premium as Tropical Storm Gustav is on a path that could threaten energy production in the Gulf of Mexico. As Gustav treks into the Gulf, it is expected to regain hurricane status; landfall is forecast about five days from now, which means the market will want to err on the side of caution ahead of the Monday holiday in the United States.

The U.S. dollar got an initial lift off the GDP report this morning, but moved back into negative territory against both the euro and the yen. With the dollar soft and crude oil up, commodities are on an upswing again this morning, which could weigh on stocks as the day progresses.

There were some positive signs on financial stocks overnight, with Fannie Mae (NYSE:FNM) extending recent gains on news of a management shake-up at the embattled GSE. In addition, MBIA Inc. (NYSE:MBI) jumped as the firm announced plans to reinsure $184 billion initially backed by FGIC Corp., which would pull in $741 million in premiums for the firm. Shortly after the open, FNM was up 8.5% and MBI was up 20.1%.

Looking at broad market sectors this morning, thrifts and mortgage finance firms topped the list of bullish performers. Also on the upside were specialty stores, casinos, forest products, oil refiners, construction materials and building products. Sellers were moving to distillers, soft drinks, home furnishing retail and biotechs.

Individual small caps on the move were highlighted by Origin Agritech Ltd. (Nasdaq:SEED), which was up 13%, gapping higher after posting quarterly results. Houston America Energy Corp. (Nasdaq:HUSA) was up 8%, tugged up on the cash market rise in energy products. Jo-Ann Stores Inc. (NYSE:JAS), rallied 13%, boosted by earnings news. On the downside, FuelCell Energy Inc. (Nasdaq:FCEL), was off about 8%, gapping lower in the wake of earnings news after climbing to recent move highs Wednesday.