Big drop for small caps

Alex Alexandrov
November 19, 2007

The Russell 2000 (NYSE: IWM) and the other major American indices fell hard today on news of more losses stemming from the subprime mortgage meltdown. The small-cap index lost 19.17 points, or 2.49%, to 750.33, its fourth consecutive decline. The Dow Jones Industrial Average (INDU) added 218.35 points, or 1.66%, to 12,958.44.

On a year-to-date basis, the Russell 2000 has retreated 4.71%, while the Dow has advanced 3.88% and the S&P 500 has gained 1.18%.

Futures were pointing down and trading began in the red following news that investment bank Goldman Sachs Group, Inc. (NYSE: GS) downgraded Citigroup Inc. (NYSE: C), the largest U.S. bank, to “sell” from “neutral” on fears that it could suffer up to $15 billion in write-downs on collateralized debt obligations over the next two quarters.

Many loans made to borrowers with poor credit histories were repackaged as securities and sold to financial companies, which is why the industry took a hit when U.S. housing prices started to stagnate in the second quarter of 2006 and delinquencies and foreclosures rose.

Today’s news scared investors and served as a reminder that the subprime mess is still working its way through the system and has the potential to inflict more pain. Adding to the uncertainty is the fact that no one knows how many more shoes are going to fall and what the size of the damage will be.

That news alone was enough to ensure that the bears would dominate trading, but there was more to come.

Mooresville, N.C.-based Lowe’s Companies, Inc. (NYSE: LOW), the nation’s second largest home improvement retailer, announced its third-quarter profit fell 10.2% and total sales increased a less-than-expected 3.2%.

“Many external factors contributed to the weak sales environment, including a continuing housing correction,” said chairman and CEO Robert Niblock in a statement.

Speaking of the U.S. housing sector, there’s still no light at the end of the tunnel.

The latest National Association of Home Builders/Wells Fargo housing market index showed that builder confidence for new single-family homes held at October’s upwardly revised level of 19. That’s the lowest reading since tracking started in January 1985. The trade association reported that builders are having trouble making sales and moving inventory despite offering incentives.

NAHB Chief Economist David Seiders said in a statement that he does not expect an upswing in market conditions until the second half of 2008.

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:

• The Aristotle Corp. (ARTL), up 14% to $12.65. Mr. Bill Smith, the company's general counsel, declined to comment.
• Micrel, Inc. (MCRL), up 12% to $9.20 on news it has signed a contract to supply commercial solar cells.
• Spire Corp. (SPIR), up 8% to $16.27. After the close, the company reported a rise in third-quarter profit.

Biggest percentage losers:

• Genesco Inc. (GCO), down 24% to $29.98 on news after the close on Friday that its merger with Finish Line Inc. (FINL) may be in trouble. Senior Genesco officials are being accused of intentionally misrepresenting facts in order to sell the company.
• Franklin Bank Corp. (FBTX), down 15% to $5.61.
• Somaxon Pharmaceuticals Inc. (SOMX) down 15% to $6.16. The company's investment relations representative could not be reached for comment.

Volume leaders:

• Micrel, Inc. (MCRL) 5,728,700 shares traded on news it has signed a contract to supply commercial solar cells.
• Genesco Inc. (GCO) 4,427,400 shares traded on news that its merger with Finish Line Inc. (FINL) may be in trouble.
• Canadian Solar Inc. (CSIQ) 4,226,800 shares traded on news that it will buy solar cells from China Sunergy Co. Ltd. (CSUN).