It’s all about the durables for small caps

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Small caps spiked out of the gate and remain in at their highs mid-session, as durable goods orders came in stronger than expected, overshadowing crude’s assent and new layers uncovered for the credit crunch.

At 12:24 p.m. ET, the Russell 2000 (NYSE:IWM) was up 9.91, or 1.31%, at 733.42.

Durable goods orders increased a robust 1.3% in July, clocking in substantially above economists’ projections for a skimpy increase of 0.1%. Transportation orders accounted for the bulk of the increase, which was expected to prop up the number. However, the welcoming surprise was that sans transportation orders, durable good orders still managed to eek out a 0.7% increase, while the consensus was looking for a decline. Excluding the transportation number yields a clearer picture of business spending.

Non-defense capital goods orders excluding aircraft and non-defense capital goods shipments were up for a second straight month, up 2.6% and 1.6% respectively. Both are positive indications for current and future capital spending.

“This is two months in a row of decent strength,” Andy Busch, foreign exchange strategist for BMO Capital Markets said. “And for July, the strength was across the board. The third quarter is starting off on a very positive note, and suggests upside risk for tomorrow's revision to Q2 real GDP.”

Also in positive news, Atlanta Fed President Dennis Lockhart gave a speech on inflation this morning, stating that headline CPI will peak near the July level and that the current Federal Reserve monetary policy approach is consistent with an easing in overall inflation, hinting that rates will most likely remain at current levels for some time.

While the spotlight shinned on durable goods orders, crude has silently crusaded to $117 a barrel midday, after the Energy Information Administration reported this morning that crude stock piles surprisingly slid from last week. Analysts had projected stockpiles to increase 1.5 million barrels. Though up, crude has deflated from its highs on the session of around $119 a barrel. News of Hurricane Gustav’s whereabouts was also swirling through the oil market.

Crude’s rise has pushed the dollar lower, selling off to $1.4682 against the euro, but remaining in the green versus the yen.

In the latest chapter of the credit crisis, Federal Deposit Insurance Corp. (FDIC) told The Wall Street Journal that it may have to borrow money from the Treasury to work through bank failures. The newspaper also carries a story on how U.S. and European banks will have to pony up to pay off hundreds of billions of dollars coming due in 2009. Additionally, the level of troubled banks is at the highest point in five years.

In broader industry groups, mortgage finance, home construction, and exploration and production are gaining ground while forestry, airlines and auto parts are under pressure.

Individual small caps on the move include, Borders Group Inc. (NYSE:BGP) whose shares gained a quarter of its value after reporting a narrower-than-expected second-quarter loss. The company cited a focus on expense reduction, inventory management and improved gross margin for the results. Shares were up 21% midday.

SI International, Inc. (Nasdaq:SINT), a provider of information technology for the federal contracting sector, said this morning that it will be acquired by Serco Group, sending shares bolting 35% midday.

Serco will acquire SI International for $32 per share in cash, or an aggregate price of $423 million. The per share purchase price represents a 40% premium over SI International’s closing stock price on Tuesday. As part of the deal Serco will also assume SI International's debt, which, at June 28, 2008, was $87.3 million, net of cash.

On the downside, shares of Solarfun Power Holdings Co., Ltd. (Nasdaq:SOLF) have slid 11%, as the silicon ingots and photovoltaic cells manufacturer this morning said that tight supply and higher costs for polysilicon and wafers constrained both top and bottom line growth, as well as gross margins. Gross margin decreased to 13.7% from 15.8% in the second quarter of 2008.

However, despite these challenges, second-quarter results did manage to trump the consensus on Wall Street. Additionally, going forward, the company stated that gross margins for the second half of 2008 are expected to improve from levels seen in the second quarter.

About the Author
Reporter Jennifer Schonberger is based in SmallCapInvestor.com's Washington, D.C. bureau. Read More

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