Piper Jaffray Leads Banks Down; Ambac Takes Dive

By Geoffrey Rogow

October 9, 2008

Small caps slid for a sixth straight session as a tolerance for risk remained missing, even though central banks around the world unleashed a coordinated set of interest-rate cuts.

As the credit crisis has pushed into its latest stage, the U.S. government has been on the offensive with a $700 billion financial rescue plan, as well as a move to inject liquidity into the commercial-paper market. And with the squeeze on credit making waves overseas, central bankers lowered interest rates in an effort that had been called for throughout the market.

Still, the moves have had little impact, with small-capitalization stocks continuing to fall each session. For bankers, who are at the heart of the credit crisis, these moves have been seen as a step in the right direction, but many said it will be months before the moves have any real effect on business.

"The Fed hasn't started buying commercial paper in any real amount and, though the [Treasury Secretary Henry] Paulson plan was passed, nothing has happened there yet. Everyone is still hyperventilating," said Mark Sunshine, president of West Palm Beach, Fla., commercial lender First Capital.

Mr. Sunshine said those expecting instant gratification from the moves are mistaken, because the deleveraging has the same effect as a shrinking money supply, even though the Fed is trying to increase supply. For both investors and executives of banks, the biggest concern is a lack of confidence and trust.

In the small-cap sector, banks were among the most hard hit, including a decline of $5.47, or 15%, to $30, for Piper Jaffray and a drop of 3.10, or 11%, to 24.20, for Investment Technology Group, both on the New York Stock Exchange.

The Russell 2000 index of small-capitalization stocks declined 12.38 points, or 2.2%, to 546.57. It has fallen in 11 of its past 13 trading sessions for a loss of 27%. The Russell now stands 36% lower than its peak on July 13, 2007.

The Standard & Poor's SmallCap 600 lost 6.36, or 2.1%, to 295.84.

Among the biggest concerns cited by traders is that there hasn't been a positive reaction in the credit markets following the government's moves. And for many equities investors, credit markets have been at the forefront of driving sentiment and trading.

"The [credit-default swaps] market is still very elevated, and the appetite for writing protection in CDS is at an all-time low," said Gary Kelly, who analyzes the relationship between CDS spreads and the equity markets for broker-dealer Tradition Asiel Securities.

He said the areas with the most elevated spreads continue to be financials, though insurance companies "are at the height of concern." Insurer United Fire & Casualty (NYSE) fell 3.21, or 12%, to 23.71. Bond insurer Ambac Financial Group also declined, falling 52 cents, or 20%, to 2.08, on the NYSE.

Also weighing on small caps was another move lower for energy companies related to a decline of 1.2% in oil prices. Leading the drilling decliners, Pioneer Drilling slid 1.21, or 13%, to 8.23.

While the broader market slid, some small health-care companies were able to move higher. NuVasive tacked on 1.80, or 4.2%, to 44.91, after J.P. Morgan Chase said the San Diego medical-device company topped the list of winners in the emerging spine market and initiated coverage of the firm at "overweight."

Omrix Biopharmaceuticals rose 51 cents, or 3%, to 17.81, after it said a middle-phase study showed that its fibrin blood-clotting pad to control bleeding was superior to Johnson & Johnson's Surgicel.

On the deals front, Stewart Enterprises, the New Orleans operator of funeral homes and cemeteries, said it still is willing to talk to Service Corp. International as it looks at its options after Service Corp. on Tuesday pulled a $1.05 billion buyout offer. Stewart closed down 2.09, or 29%, to 5.00, while Service Corp. rose 32 cents, or 4.5%, to 7.51.

A unit of Enstar Group agreed to buy Unionamerica Holdings from Travelers Cos. for $343.4 million. Bermuda acquisition company Enstar closed down 6.49, or 7.3%, at 81.91.

Outsourcing-services provider PeopleSupport rose 2.09, or 23%, to 11.34. The Los Angeles and Mumbai firm said it expected its $250 million acquisition by a unit of diversified conglomerate Essar Group to close no later than Oct. 31.

A federal judge temporarily halted the sale of RealNetworks' new RealDVD program after Hollywood studios sued, saying the software illegally bypasses copy-protection measures intended to prevent duplication of DVDs. Seattle digital-entertainment company RealNetworks closed down 34 cents, or 8%, at 3.91.

Houston oil-and-gas property trust TEL Offshore Trust said it may not make a fourth-quarter payment to investors as damage from Hurricane Ike halted production at the two "most significant" oil-and-gas properties associated with the trust. Tel Offshore slid 6.62, or 51%, to 6.38.

Baird lowered its investment rating on hospitality companies Red Lion Hotels and Ashford Hospitality Trust to "neutral" from "outperform." Spokane, Wash.-based Red Lion closed down 1.35, or 19%, to 5.84, and Ashford, of Dallas, lost 79 cents, or 25%, to 2.36.