Financial pandemic fears spark rout as House shoots down rescue bill

Kevin Pendley | Sep 29, 2008 4:26pm EDT | Comment

Rating: Unrated [rate it]

Small-cap stocks started out the week on a sour note, resuming the downward spiral in jolting fashion to post the largest one-day decline of 2008 as fears of a global financial pandemic triggered wave after wave of selling. The Russell 2000 (NYSE:IWM) shed 47.07, or 6.68%, to 657.72, the lowest daily close since March 17. For the year, small caps are down 14.1%, while the Dow is off 21.5% and the S&P 500 is down 24.1%.

The market woke up to news that Europe is now being forced to bail out financial institutions, as Fortis became the first eurozone bank to sag under the weight of global debt issues. European shares slumped to the lowest daily close in 3 ½ years, which set the tone for difficult day in U.S. stocks. When lawmakers in Washington shot down the $700-billion rescue plan for financial firms by a vote of 228 to 205, it extended the decline, with the S&P 500 plunging more than 8% at the intraday lows. The S&P 500 tumbled to the lowest point since October 2004 with dramatic declines in financial shares leading the way lower.

Within financials, Bank of America (NYSE:BAC) was off some 12%, and American Express Co. (NYSE:AXP) lost nearly 13%. Wachovia Bank (NYSE:WB) collapsed about 80% as the bank was forced to slough off most of its banking operations to Citigroup Inc. (NYSE:C), as Wachovia became the latest shocking failure in the on-going saga. The small-cap arena is heavily layered with mid- to small-tier banks, and even though the big-name firms are dominating the national headlines, these smaller firms are not immune to the financial contagion, which is reflected in the slide in the Russell 2000.

Technology shares struggled Friday on fears that political wrangling could jeopardize the financial rescue bill, and today’s rejection of the plan extended the woes for tech stocks as the Nasdaq 100 dropped more than 10%. Among tech stocks, Apple Inc. (Nasdaq:AAPL) was off some 16%, while bellwether Microsoft Corp. (Nasdaq:MSFT) was down about 4%.

Broad market sectors on the decline today were paced by financial, tech themes and even commodity firms. The biggest losses were seen in coal and steel stocks, but metals, asset management companies, oil refiners, regional banks and investment banks all posted double digit declines. In a scary side note, there were no broad sectors in positive territory — not even gold stocks, which should attract safe-haven flows amid turbulent times for banks.

Speaking of safe-haven ports in today’s storm, money flow clearly favored Treasury instruments. The yield on benchmark 10-year notes tumbled nearly 6% (yields move inversely to price), which is a massive one-day run for yields. In addition, the yield on the long bond slumped about 5% as investors frantically press for some kind of a safe spot to park money and wait out all the relentless credit crisis that is now threatening to grip financial firms around the world.

Airline stocks were hanging tough most of the session, but eroded sharply in the afternoon. Air carriers stood to benefit from a massive downward thrust in crude oil prices, which tumbled 9% back below $97 a barrel. In fact, commodity markets in general were hammered today, which reflected the panic for investors – there are very few safe places to available right now. The slide in commodities combined with fears about the financial crisis triggered a 13% collapse in Latin American stocks today. The U.S. dollar was up against the euro, but got hammered against the Japanese yen, which showed that eurozone worries were simply an even bigger issue for the FX market.

Individual small caps of note were highlighted by Thornburg Mortgage Inc. (NYSE:TMA), which tumbled 51% and is now trading near $1.35 a share. Back in July 2007, TMA stock was over $270 a share. Cal Maine Foods Inc. (Nasdaq:CALM) ruffled some feathers as the egg producer slumped 27% following soft earnings numbers.

The chart picture for the Russell 2000 looked bleak before today’s collapse; it looks even worse now. If you’re looking for some kind of silver lining in these brutal storm clouds, it is worth noting that the market has repeatedly rallied off the 660 zone in the last 10 months, and also back in the summer of 2006. It’s worth noting that if this were Friday instead of Monday, we’d be looking at the lowest weekly close of the year — just two weeks after setting the highest weekly close of the year. The stock market has become so insanely volatile in recent weeks that it makes pork belly futures look tame. Lofty volatility has also accompanied market bottoms, so that is another potential positive to keep in mind, but there is no point in searching for a bottom to this malaise without first seeing a dynamic reversal pattern. If we start to trade convincingly below 660 this week, then it opens the door to yet another leg down for the move.