Small caps soar; energy shares, Bernanke in the spotlight

Kevin Pendley | Oct 20, 2008 4:29pm EDT | Comment

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Small-cap stocks started out the week with an impressive rally, riding the crest of climbing energy stocks, signs that the credit crisis is on the improve and talk from Federal Reserve Chairman Ben Bernanke that additional fiscal stimulus could be needed. The Russell 2000 (NYSE:IWM) closed up 20.40, or 3.88% at 546.83. The Russell is now down 29% for the year, while the Dow is off 30% and the S&P 500 is down 33%. Small caps lagged large caps today even on the rally, which is a little bit of concern as the same pattern was evident on the recent collapse.

Crude oil futures climbed 3.3% today as energy traders anticipate OPEC will cut production to counter soft demand and sinking prices. However, while the energy story was the dominant theme today, the move was powered by more than gains in the physical market. Oppenheimer analysts announced upgrades for several stocks in the sector and merger news also played a supportive role, which powered buying in beaten down energy stocks across the market capitalization spectrum. As for the M&A news, NRG Energy Inc. (NYSE:NRG) received an unsolicited bid of $6 billion from Exelon Corp. (NYSE:EXC) and the firm would not rule taking this hostile status if need be. The general rule of thumb is that if there are deals to be made in the large-cap world, then there are probably even more attractive deals to be found in the small-cap spectrum.

Interestingly, the rally today in crude oil and energy stocks was not a general push for commodities. In fact, the U.S. dollar gained about 0.6% versus the euro, which makes dollar-denominated commodities more expensive, and despite the rally in crude oil, the Commodity Research Bureau Index of 19 physical markets was basically flat.

The stock market was already on solid footing overnight on news of another steep decline in the inter-bank (or Libor) lending rate, which suggests that frozen credit lines are starting to thaw and that banks are beginning to trust each other more. Still, the Libor value is spread out relatively high, and further declines would likely be welcomed by financial market watchers. Equity markets around the world were basically higher overnight, which also bolstered the investor psyche coming into this morning’s action.

Then, at 10:00 a.m. ET, Bernanke testified on the economy and financial markets before the House budget committee, raising the possibility that another stimulus plan might be a good idea. The market embraced that thought, hoping that would help ease the recession and bolster consumer spending through several months of difficult job losses that appear to be on the horizon. In a weekend research report, analysts at Goldman Sachs said that “With job availability an even more sensitive subject than wages or home prices, U.S. voters are likely to pressure their government representatives to take further action to stimulate the economy and limit the extent of the economic downturn.” Goldman is already forecasting unemployment will reach 8% by the end of 2009, up from a five-year peak of 6.1% right now.

The Bernanke hoopla completely overshadowed a nice upside surprise on the leading indicators report, which topped the forecast handily, coming in at plus 0.3% versus the forecast for a dip of 0.2%. However, the leading indicators report ironically is seen as a “lagging” batch of dated data, and this nice surprise wasn’t expected to be a forerunner of data down the road.

Throughout most of the day, tech stocks were a lagging force on the stock market, pulled down by worries over global spending on technology and a sharp drop in the stock of BlackBerry gadget maker Research in Motion Ltd. (Nasdaq:RIMM). RIMM shares shed about 8% on the day amid reports that early sales for the smartphones haven’t been as dynamic as hoped and on talk that RIMM earnings could be scaled back a touch. If the money to invest in technology is choked off, then the risk appetite for smaller-cap stocks is likely to suffer as well.

Individual small caps of note today included Landrys Restaurants Inc. (NYSE:LNY), which jumped 31% on news that the company’s CEO would buy the firm at a 49% premium to its close on Friday. Also, WebMD Health Corp. (Nadsaq:WBMD) was up 22% as HLTH Corp. (OBB:HLTH) terminated a merger deal with WebMD. McMoRan Exploration Co. (NYSE:MMR) rallied 22% as quarterly results showed a narrower-than-forecast loss.