Manufacturing worries capsize recent rally; largest 1-day loss of 2008

Kevin Pendley | Dec 01, 2008 4:30pm EST | Comment

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Small-cap stocks may have finished out November like a lamb, but they started out December like a lion, sinking hard and fast today in an abrupt about-face from last week’s strong upward surge. Slumping manufacturing reports around the world triggered today’s rout and the only safe place to park money was in credit instruments as financial, industrial, retail and commodity markets were in retreat mode. The Russell 2000 (NYSE:IWM) closed down 56.05, or 11.85%, at 417.09, snapping a string of five consecutive winning sessions with the worst daily loss of the year. The Russell is now down 46% for 2008, while the Dow is down 39% and the S&P 500 is down 44%.

Credit market safe havens were the preferred outlet of choice today, as investors fled stocks and sought refuge in Treasuries – especially after Federal Reserve Chairman Ben Bernanke said that the Fed could buy long-dated Treasuries and that the economy remained under considerable stress. He also said that the Fed’s scope for reducing rates to stimulate growth was limited at this point, but that the U.S. economy was now better equipped to deal with the credit crisis. Yields on benchmark 10-year notes went wild, sinking more than 7% at one point during the day to about 2.7% as strong demand for notes lifted the price and slashed yields. Treasury Secretary Henry Paulson said that recent bailout moves were making progress, that banks should increase lending habits and that he has more programs developing to boost lending. He also said that mortgage rates have not come down as much as hoped and that Americans know the economy is in recession. The market extended the afternoon sell-off as he spoke.

The market got off on the wrong foot today when manufacturing data out of China reflected a big drop in new orders. China is the world’s hub for labor, with widgets assembled there and shipped out around the globe. Then, manufacturing reports out of Europe were dour, setting the stage for a startlingly bad report on manufacturing activity here in the United States. The ISM Manufacturing Survey came in at 36.2, which was below the 38 forecast, and which was also the lowest reading in 26 years. What’s more, sub-index data on prices paid was the lowest in 59 years and the new orders sub-index was the lowest since 1980. This is a heavy week for economic data, and today’s numbers clearly sent an icy shudder through the market. As the week progresses, we’ll see data on vehicle sales, services sector activity, factory orders and weekly claims as we head toward Friday’s big monthly employment release. What’s more, we’ll also have weekly and monthly retail sales numbers to pour over, a critical exercise moving into the heart of the holiday shopping season – especially since the U.S. economy is driven heavily by consumer spending.

Speaking of holiday shopping, when the day started, most of the press reports about the Black Friday kick-off of the shopping season were fairly upbeat. Supposedly, sales and traffic were up from last year and the market was hoping for a surprisingly stout showing from consumers, willing to risk a tough economy for attractive discounts on wares. However, given a steep decline in retailer shares today and the jolting slide in equities, it’s difficult to take the supposedly “solid” start to the season stories at face value. It just didn’t pass the smell test as the day wore on. In the end, the S&P Retail Index tumbled 8%. Even big-cap stalwart Wal-Mart Stores Inc. (NYSE:WMT) was unable to stay in positive ground, and other household names like Target Corporation (NYSE:TGT) were hammered, with the latter off 12%. On the small-cap ledger, Liz Claiborne Inc. (NYSE:LIZ) tumbled 27%, powered not only by the shopping worries, but by news that LIZ would be dropped out of the S&P 500 because of a rapid erosion in market cap in recent weeks.

Energy and commodity stocks were a major part of the bearish story today. Crude oil prices plunged 9.4% to $49.28 a barrel, pulling down energy shares in the wash. Meanwhile, industrial and precious metals took a beating, with platinum off some 7%, palladium down nearly 10%, silver off more than 8% and gold down some 5%.

Individual small caps on the move today were highlighted Gulf Island Fabrication Inc. (Nasdaq:GIFI) which lost 26% as the offshore drilling platform specialist got caught in the energy undertow. Textainer Group Holdings Ltd. (NYSE:TGH) was off 27% as the world’s largest lessor of intermodal containers collapsed off a nice rally from last week. Back in late August, this company was one of the highest analyst rated Russell 2000 stocks, trading around $20 a share. Today it is trading around $7.30.

Bucking the overall downdraft, the biggest mover was Mentor Corp. (NYSE:MNT) as the maker of breast implants shot some 90% higher on news that the firm would be purchased by Johnson & Johnson (NYSE:JNJ) for $31 a share, nearly double the closing price from Friday. Also on the upside, Premiere Global Services Inc. (NYSE:PGI) rallied 29% as the on-demand communication technology firm benefited from analyst upgrades.

The dramatic reversal in fortune today for small caps clearly wiped out some of the bullish momentum from last week’s surge and the slide back through 442 was disheartening. Still, it would take a breach of 410 to suggest that the recent bounce was merely corrective and that a retest of the lows should be seen, so that will be a key focal point the next couple of sessions. On the upside, there will be token resistance on the recovery trail back at 433, 442, 452.50, 461 and 473 – but none of those are nearly as interesting as 491 – if the market can even get that kind of target back on the radar screen as the week progresses.