Small caps take a break from the red
After a brief pull back after the opening, small caps staged a welcome upward trajectory, breaking this week’s red streak as better-than-expected earnings from Wells Fargo (NYSE:WFC), the SEC’s initiation to taper the shorting the financial sector has experienced year-to-date and deflating crude served to lift the market.
At 1:51 p.m. ET, the Russell 2000 (NYSE:IWM) was up 14.65, or 2.21%, at 677, while the Dow is up 153.96, or 1.4%, at 11,116.50.
Federal Reserve Chairman Ben Bernanke was back on Capitol Hill for day two of his six-month economic progress report. Following a Q&A session in front of the Senate on Tuesday, the Fed Chair told the House a similar version. In testimony in front of the House, Bernanki told regulators that the central bank aims to attain price stability, as inflation in the United States “is too high.”
“Bernanke is stuck between a rock and a hard place right now regarding the economy,” said Bill Greiner, chief investment officer for UMB Asset Management and UMB Bank, and chief economist for Scout Investment Advisors. “The Fed’s priority has been trying to maintain stability in the financial system this year. The collateral damage of that focus now is that they’re going to try to keep the system liquid and not pay strict attention to what’s going on in the inflation world … I think they will be [hawkish] into 2009. They started jawboning about six weeks ago — trying to talk interest rates up, talking about the idea of tightening money supply by increasing interest rates some time in the not so distant future. But then Fannie Mae and Freddie Mac happened.”
As the Fed Chair again addressed slower growth coupled with inflationary pressures that confront the economy, his comments proved timely in the face of troubling consumer price index data.
The headline figure for CPI clocked in at plus 1.1%, which was the largest monthly advance in 26 years. What’s more, the year-over-year increase was at a whopping 5%, which is the largest rise in consumer prices since 1991. Today’s CPI figure, which was in line with the forecast, came on the heels of Tuesday’s unsettling PPI report.
“We’re starting to see signs that headline inflation — and what’s been driving headline inflation on the upside (i.e., transportation costs and food costs) are starting to bleed into other areas of the economy,” Greiner said. “We’re starting to see some serious contagion with energy and commodity price inflation into other segments in the economy. Now I don’t think it’s gotten to a point where we’ll see wage-price spiral inflation. [However,] … if we’re starting to see labor costs move up dramatically in relation to productivity gains then I think we have a much more serious problem on our hands than we do today.”
However, the market shifted focus away from the troubling inflation data and focused on a reverse in crude and financials — the typical areas that have dragged the indices down these past weeks. Crude oil slipped $4.52 in midday trading to roughly $134 a barrel, providing relief.
Financials are jumping in mid-afternoon action, led by better-than-expected earnings from Wells Fargo & Co. The bank said this morning that earnings skidded 21%, but bottom-line results managed to trump analyst expectations. Wells also increased its dividend by 10%, a sign of financial health amidst an anemic financial operating environment. Federally-backed mortgage juggernauts Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), which have been pummeled in recent sessions saw some 15% upside midday.
In other corporate news, within the commodities arena, mining company Cleveland-Cliffs Inc. (NYSE:CLF) said it will acquire Alpha Natural Resources Inc. for almost $10 billion in cash.
In broader industry groups, airlines, trucking, retailers and regional banks are all seeing sizable upward momentum, while computer storage devices, oil and gas and metal mining were among the few groups under pressure midday.
In small-cap headlines, Orion Energy Systems Inc. (Nasdaq:OESX) has plunged 34% midday after the energy management company said after Tuesday’s close that it would report lower-than-expected first-quarter earnings. The company was also downgraded today to “market weight” from “overweight” at Thomas Weisel.
On the upside, holding company Oneida Financial Corp. (Nasdaq:ONFC) is up 13% after announcing just after the opening that it would pay a cash dividend of $0.24 per share of its common stock. Automated voice response systems maker Intervoice Inc. (Nasdaq:INTV) is up more than 21% after the company announced it will be bought by Convergys Corp. (NYSE:CVG) for $335 million in cash.
Piper Jaffray Cos. (NYSE:PJC) is up 6% midday after the investment bank said this morning that its second-quarter loss totaled $3.6 million, or $0.23 per share, which was better than the expected loss of $0.24 per share. During the year-earlier period, the investment bank earned $9.3 million, or $0.55 per share. Quarterly revenue declined 23% to $94.9 million, from $122.6 million a year earlier. Analysts projected revenue of $82.5 million.
