Oil’s drop causes spike in small caps

Jennifer Schonberger | Aug 08, 2008 12:50pm EDT | Comment

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Small caps spiked out of the gate and remained at lofty levels as oil slumped and the dollar climbed, taking the limelight off Fannie Mae’s staggering loss and lower-than-expected productivity gains.

At 12:47 p.m. ET, the Russell 2000 (NYSE:IWM) soared 16.35, or 2.29% at 729.76, while the Dow crusaded 235.55, or 2.06%, to 11,666.98.

Oil has pulled back on the session as the dollar continues to stage a rally initially triggered by the ECB’s dovish comments Thursday. Talk that a damaged pipeline in Turkey could be fixed sooner than anticipated also pushed down crude. A barrel of crude oil slumped $3.58 to roughly $116 at midday. Oil has dropped as low as $115 during the session.

Today’s slide in crude is welcome as oil’s rise has zapped so much of consumers’ spending power, which accounts for two-thirds of the economy.

The greenback continues to make major strides against the euro and the yen. The dollar was roughly $1.50 versus the euro, marking major appreciation from the greenback’s close of $1.53 Thursday.

“This is a global race to the economic bottom,” Andy Busch, global foreign exchange strategist for BMO Capital Markets, said in an interview. “Whoever gets there first is going to see their currency appreciate. Clearly the major change that’s occurred in the last month and a half has been that the rest of the world has slowed down markedly. We’ve already hit bottom and are bouncing the other way—I say this because this week we saw the jump in pending home sales and that’s significant. …so as we start to see an improvement, the expectations and the psychology of the market is that the U.S. has done much more for their country to aid their economy and therefore we’re less likely to continue to keep a very soft monetary policy going forward. So that’s the shift in the psychology going forward.”

Though oil and the dollar are the major catalysts driving the market, Fannie Mae is today’s daily reminder that the overleverage previously employed and the anemic housing market, a symptom of that, remain shattered. The government-sponsored mortgage lender reported a ghastly $2.3 billion loss, or $2.54 a share, and said that it will lacerate its dividend by $0.30 to $0.05 from $0.35. After gapping lower on the open, Fannie Mae shares have recovered some ground but remain 8% under water.

In economic news, the productivity report out from the Labor Department this morning clocked in worse than expected, hinting that the rise in unemployment is insidiously beginning to take its toll. Productivity slipped to 2.2% in the second quarter from 2.6% in the first, falling below the forecast for an edge down of 2.5%.

“Productivity was less than expected, but it’s still 2.2%,” said Busch. “Where it’s positive is that the unit labor costs were lower than expected at only 1.3%. That means we’re not seeing costs for corporations go up and we’re still seeing some pretty decent gains in productivity that would lead one to believe that would enhance their earnings going forward. The crux of the problem is that we know we’re going to see some increases in unemployment and decreases in the non farm payroll and that’s pretty much cooked in the books.”

In other economic news, wholesale inventories were up 1.1%, well above the forecast of 0.6%.

Broader industry groups seeing upside today include retail technology services, auto and truck parts, airlines, and casinos and gaming; while gold and silver, oil and gas and coal are among the few groups under pressure this afternoon.

Individual small caps making waves today include PowerSecure International, Inc. (Nasdaq:POWR), whose shares are rocketing on high volume after the energy management provider reported healthy second-quarter results after Thursday’s close that bested the consensus on Wall Street. The company posted a profit in the quarter compared to a loss in the same period last year and revenues surged 86% as the firm experienced strong gains across all business units.

Shares of Eddie Bauer Holdings Inc. (Nasdaq: EBHI) are up 24% mid-session after the retailer reported after the close on Thursday that it had significantly narrowed its second quarter loss despite a tough retail climate.

On the downside, shares of Guidance Software (Nasdaq:GUID) have plummeted some 37% after the firm reported an unexpected second-quarter loss and lowered full year guidance after Thursday’s close. Adding to the lackluster news surrounding this stock, both Roth Capital and Wachovia downgraded the stock, respectively cutting their ratings to “hold” and “market perform” from “buy” and “out perform.”