The Wall Street Journal-20080129-Flagstar Sets Pace With Surge

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Flagstar Sets Pace With Surge

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Financial stocks paced gains for small caps, as expectations rose for an aggressive rate cut at the midweek meeting of the Federal Reserve and investors brushed off weak data on new-homes sales.

The Russell 2000 index of small-capitalization stocks rose 13.79 points, or 2%, to 702.39,its first gain in three trading days. For the year, the Russell is down 8.3%. The Standard & Poor's SmallCap 600 rose 7.40 points, or 2.1%, to 367.55, while the Nasdaq Composite Index added 23.71 points, to 2349.9.

Among the leaders for financials, Flagstar Bancorp surged 1.41, or 19%, to 8.97 on the New York Stock Exchange, while South Financial Group climbed 1.22, or 8.3%, to 15.85.

"Financials seem to be bouncing back, though it doesn't look like the worst is behind us," said John Kvantas, portfolio manager for the BB&T Small Cap Value Fund.

After listening to quarterly conference calls from many small banks, Mr. Kvantas said he expects charge-offs to get worse in the upcoming quarters, though he said small-cap financials are significantly down from lastyear across the board, which could mean there is room to rise.

Buoying the financials, fed-funds futures -- a prediction market for rate changes -- raised the odds of a rate cut of half a percentage point tomorrow, with many holding out hope that further rate cuts will stave off a recession.

Early in the session, the Commerce Department reported that December new-homes sales fell to their lowest mark in 12 years, though stocks remained in the black.

Neil Hennessy, president and portfolio manager for Hennessy Funds, said part of stocks' resilience to the weak housing data was attributable to a respite from recession fears thanks to some recent quarterly reports. "Corporate earnings have been strong, which means you aren't going to see the big layoffs. When you start laying people off, that's when you get into a recession that really hurts people," he said.

One of the areas most closely linked to concerns over the recession is consumer-discretionary stocks, and it was one of the strongest sectors yesterday. Brown Shoe rose 1.53, or 11%, to 15.25, and Lithia Motors soared 1.25, or 9.5%, to 14.44, both on the NYSE.

Two other consumer-discretionary stocks rose on the heels of possible acquisitions. Kellwood (NYSE) jumped 3.20, or 19%, to 20.20, after the St. Louis company said it will remove all impediments to Sun Capital Securities' $21-a-share cash tender offer for the apparel maker.

And Landry's Restaurants sky rocketed 3.78, or 23%, to 20.45 on the NYSE. Chairman and Chief Executive Tilman Fertitta offered to buy the Houston restaurant and casino company for $23.50 a share.

In other merger-related activity, Matria Healthcare slid 2 cents to 30.67 after the Marietta, Ga., health-services firm agreed to be acquired by Inverness Medical Innovations for $1.18 billion, or $39 a share in cash and stock. Large-cap Inverness fell to 47.97, down 8.2%.

Following a week in which many transports led much of the stock- market gains, YRC Worldwide fell 2.78, or 15%, to 16.08. The Detroit trucking company swung to a fourth-quarter loss and said it expects a difficult first quarter.

Acorda Therapeutics rose 5.50, or 25%, to 27.28, after the Hawthorne, N.Y., biopharmaceutical-drug developer said a study quelled safety concerns for its late-stage candidate for treating multiple sclerosis.

Earnings were mixed for some international companies. Ceragon Networks declined 1.75, or 17%, to 8.58, after the Tel Aviv wireless- communications company reported that it swung to a fourth-quarter profit, but investors may have been disappointed that the results weren't better than expected. Research firm Pacific Crest said the company had a history of posting better-than-expected results and raising guidance.

Rediff.com India slid 1.90, or 18%, lower to 8.80. The Mumbai, India, online-content provider posted 34% lower fiscal third-quarter earnings compared with a year earlier.

SiliCom vaulted 2.06, or 17% higher, to 13.92, as the Israeli computer-hardware maker posted higher fourth-quarter earnings on a 49% jump in sales.