Dow Skids 300 Points, Taking Stocks to 10-Month Lows on Lousy Housing, Manufacturing Reports

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By Mike Caggeso
And William Patalon III

Money Morning Editors

U.S. stocks plunged yesterday (Thursday) – with the Dow Jones Industrial Average plummeting more than 300 points to reach a 10-month low – as yet another round of downbeat economic reports fueled investor fears.

Key among yesterday's reports:

  • The U.S. Commerce Department said that building permits, housing starts and housing completions plunged in December.
  • U.S. Federal Reserve Chairman Ben S. Bernanke urged Congress to enact a temporary economic stimulus plan to help the United States dodge a recession.
  • And the Federal Reserve Bank of Philadelphia said that its index of manufacturing activity in that region for January skidded downward to its lowest point since October 2001 – which was just after the 9/11 terrorist attacks on New York and Washington.

U.S. stocks fell for the third straight day. The blue-chip Dow careened downward 306.95 points – or 2.46% – to close at 12,159.21. The broader Standard & Poor's 500 Index slipped 39.95 points, or 2.95%, to close at 1,333.25.

And the tech-laden NASDAQ Composite Index dropped 47.69 points, or 1.99%, to close at 2,346.90.

"The huge slowdown in manufacturing activity does not bode well for an economy trying to stay afloat," Joel L. Naroff, chief economist for Naroff Economic Research in Holland, Penna., told Money Morning. "This report was ugly."

Art Hogan, chief market strategist at Jeffries & Co., was equally downcast, telling news service MarketWatch.comthat "when reminded about how bad things are, the market remembers it should go down.  And it is going to take more than just [some] monetary policy to clean up the mess we've made with this economy."

Bad News for Builders

Building permits issued in the month fell to 1,068,000, an 8.1% drop from November's revised estimate and a 34.4% drop from the number of permits – 1,628,000 – issued in December 2006.

The number of housing starts in December decreased to 1,006,000, 14% below November's revised estimate of 1,173,000 and 38.2% below the number of starts in December 2006. Most strikingly, the figure is the lowest since May 1991. 

Housing completions also dropped to an estimated 1,302,000, a 7.7% decline from November's revised estimate and 31% lower than completions in December 2006.

On top of that, the National Association of Home Builders' Housing Market Index – a gauge of builders' sentiment – sits one point higher than its historic low of 18 registered in December, The Wall Street Journal reported.

"The magnitude of the housing bubble was unprecedented, and the corrective process promises to be a long and painful one," MFR Inc. chief U.S. economist Joshua Shapiro told The Journal in reaction to the NAHB report. "Hence, it is hardly surprising that builder sentiment remains as low as it has ever been."

The housing figures were released the same week the Department of Labor reported that inflation in 2007 rose at the sharpest rate [4.1%] in 17 years and Citigroup Inc. (C) and Merrill Lynch & Co. Inc. (MER) both reported steep quarterly losses and billions in write-downs, fanning economic concerns across the country.

Bernanke Urges for Fiscal Stimulus

That was the context surrounding Fed chair Bernanke's testimony before the House Budget Committee in Washington, where he said fiscal stimulus would be temporarily beneficial for the economy, but warned it could backfire if not properly timed or planned. 

He said the economic outlook for 2008 "has worsened" and "the downside risks to growth have become more pronounced," Bloomberg News reported. On top of that, banks have tightened their lending practices, and even though that's strengthening the quality of credit available, it's also adding an additional strain to short-term growth.   

Bernanke said a financial stimulus package should be "implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so," CNNMoney reported.

The Fed chief didn't mention or recommend specific measures. Any package that comes of his testimony is expected to include tax rebates, which is one step further than President Bush's rate freeze for afflicted subprime borrowers.

Most analysts predict that the Fed will lower the key interest rate by 50 basis points at the next Federal Open Market Committee (FOMC) meeting slated for Jan. 29 and 30. Interest rate futures are currently pricing in a 90% probability of a half-point rate cut.

Manufacturing Slumping

 The Philly Fed manufacturing index contracted so sharply in January, according to yesterday's report, that many economists now say that a recession may be fait accompli.

The Philly Fed diffusion index fell from a negative 1.6 in December to a negative 20.9 in January – the worst showing since October 2001. An aggregate reading below zero means that most of the manufacturing firms in the Philadelphia region that were surveyed are reporting worsening business conditions.

Analysts had actually expected the index to remain in negative territory, but to improve slightly – reaching a negative 1.0. But that didn't happen.

"In other words, this was a rout," said Naroff, the Pennsylvania economist. "Looking forward, pessimism seems to reign as the expectations index hit its lowest point since 2001 as well."

Tony Crescenzi, chief bond market strategist for Miller Tabak & Co., wrote in a research report that it's been rare for the Philly survey to present this weak a reading without the U.S. economy actually being in a recession.

Earlier Thursday, the U.S. Labor Department reported first-time jobless claims declined last week, although it also noted that the continuing claims continued their recent upward trend to reach their highest level in more than two years.

Miller Tabak's Crescenzi wrote that investors can expect to see still more "rally killers" – economic reports on manufacturing, jobs and other important elements of the financial system that are providing downbeat signals.

Money Morning Managing Editor Jennifer Yousfi contributed to this report.

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