Jitters about rescue plan tug market down

Kevin Pendley | Sep 22, 2008 10:13am EDT | Comment

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Small-cap stocks edged lower on the opening, weighed down by concerns over just how the financial rescue plan will play out, and by jitters that special-interest concessions to the bill could block passage. At 10:02 a.m. ET, the Russell 2000 (NYSE:IWM) was down 12.60, or 1.67%, at 741.15.

The bill also looks inflationary in nature, which carries a whole extra burden on the economy and consumers. Inflation talk has been shuffled into the background in recent days because of the financial crisis, but crude oil has been climbing, the dollar is sinking and fixed income investments are under pressure.

Crude oil prices were on the rise again this morning, and have been on the rise in the backdrop of all the commotion surrounding the government’s bailout plans for U.S. financial institutions. Meanwhile, the dollar was getting clobbered this morning, sinking some 1.1% against the euro and 0.8% versus the yen.

In addition, Treasury futures were sinking — not because of money flow into stocks — but because of concerns about the inflationary aspects of the rescue plan, and because of fears that credit instruments will battle against a mountain of new supply to pay for the government’s decision to mop up bad mortgage debt. Gold was also up some 2% this morning, and other commodity markets such as coffee and cocoa were also on the rise. Grains were seen trading sharply higher as well.

Back to the financial drama unfolding, the market will wait for more details on the rescue package and the Congressional take on things. Federal Reserve Chairman Ben Bernanke will speak about the financial markets Tuesday at 10:00 a.m. ET, which will likely be a key moment for market watchers. Earlier this morning, President Bush said that failure to act on the bill would have broad consequences beyond just the pain on Wall Street but that he was confident the legislation would move forward.

Amid the turmoil, Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS) announced over the weekend that they would shift into bank holding status, effectively ending Wall Street’s legacy of independent investment banks. The move will allow the firms easier access to credit and swing them under the Fed’s regulatory arm. MS shares soared some 14% early this morning amid news that Japan’s largest bank was set to take a stake in the firm.

At the same time, the SEC continues to add to the list of firms that are protected from short-selling activity, adding some 30 companies to the run of 799 financial firms that were under the temporary ban. General Electric Co. (NYSE:GE) and General Motors Corp. (NYSE:GM) were included in the latest short-selling ban.

Broad market sectors on the slide this morning were dominated by financial themes. Among the worst performers were thrifts and mortgage finance firms, diversified banks, regional banks, life insurers and asset management companies. On the plus side, commodities were clear early winners. The best-performing sector was gold stocks. Also attracting buyers were systems software companies, leisure products, tires and rubber, fertilizer, metals and mining and integrated oil companies.

Individual small caps of note were highlighted by MF Global Limited (NYSE:MF), which was off about 26%, giving back a large chunk of last week’s massive recovery rally. Omega Flex Inc. (Nasdaq:OFLX) was off about 16%, after jumping to new highs last week.

Looking at the chart picture, there is minor resistance at 748, 750 and then at 756. If the market can re-ignite the buying fury, then the key spot to watch is around 763, which marks the recent move peak. On the downside, support comes in today at 739, 734 and 726.60. The market created a dramatic bullish reversal on weekly charts last week, but still needs to pop through 763 to suggest a new range higher is underway.