Small caps rise on rate cut hopes

Alex Alexandrov | Jan 10, 2008 5:06pm EST | Comment

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The Russell 2000 (NYSE: IWM) and the other major U.S. indices rallied and ended the day in the green on news that the Fed may move to lower interest rates. The small-cap index added 8.09 points, or 1.14%, to 720.21, its second consecutive rise. The Dow Jones Industrial Average (INDU) advanced 117.78 points, or 0.92%, to 12,853.09.

On a year-to-date basis, the Russell 2000 has retreated 5.98%, while the Dow is down 3.10% and the S&P 500 has shed 3.27%.

Stocks small and large began the day in negative territory but rallied in the second half of the session and closed with solid gains.

“In light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary,” U.S. Federal Reserve chairman Ben Bernanke told an audience at the Women in Housing and Finance and Exchequer Club this afternoon.

Those words sparked speculation that the Fed is preparing to lower the federal funds rate at its two-day meeting starting Jan. 29. The bulls took charge of the session and pushed stocks higher.

The federal funds rate, the rate at which commercial banks make overnight loans to each other, currently stands at 4.25%.

An easing of the target interest rate would encourage lending and thus give a boost to a slowing U.S. economy that has been negatively affected by a stagnating housing market and rising fuel costs.

Trading started on a bearish note following news that U.S. retailers reported disappointing December sales.

“It is undeniable that a softening economy and high oil prices are the main culprits here,” said Arun Raha, vice president of Economic Research and Consulting for the North American operations of reinsurance company Swiss Re, in an email.

But Raha does not believe that the data indicate a decline in consumption, which makes up about 70% of U.S. gross domestic product.

“Overall consumption expenditures have held up,” he commented. “What we are seeing is people cutting back on holiday shopping, because they are spending more on gas and heating oil.”

While consumption appears to be holding up, the labor market is showing some signs of weakness.

The U.S. Labor Department reported that for the week ended Dec. 29, the 4-week moving average of insured unemployment claims increased 17,000 to 2,701,750, compared with 2,684,750 the preceding week.

“The labor market is slackening, although unemployment insurance claims are not at recessionary levels yet,” said Raha.

Here are the day’s biggest percentage gainers and losers, along with top volume leaders, among companies with a market cap between $100 million and $750 million:

Biggest percentage gainers:

• Eddie Bauer Holdings, Inc. (EBHI), up 35% to $6.19 on news of a rise in same-store revenue.
• IndyMac Bancorp, Inc. (IMB), up 23% to $5.78.
• Hovnanian Enterprises, Inc. (HOV), up 19% to $5.70.

Biggest percentage losers:

• Electronics for Imaging, Inc. (EFII), down 31% to $13.22 on news it expects a decline in fourth-quarter earnings and revenue.
• Nanometrics Inc. (NANO), down 27% to $6.08 on news it plans on cutting 7% of its workforce.
• Orion Marine Group, Inc. (OMGI), down 16% to $11.75.

Volume leaders:

• The PMI Group, Inc. (PMI) 6,895,600 shares traded.
• Pier 1 Imports, Inc. (PIR) 6,181,600 shares traded on news of a 1.3% rise in December same-store sales.
• Ruby Tuesday, Inc. (RT) 5,787,000 shares traded on news it has lowered its fiscal 2008 profit forecast.

The day saw 53 small-cap stocks set 52-week lows, while seven caps established 52-week highs.