November's jobs report was more positive than expected for most sectors but a decline in manufacturing employment following a weak October manufacturing output report and a contracting November ISM PMI reading pushed manufacturing stocks down, with the greatest effect on the Dow Jones' Basic Materials sector.
In November nonfarm payrolls increased by 146,000, significantly higher than economists predicted due to less drastic affects from Hurricane Sandy than estimated. The unemployment rate also declined to 7.7 percent from 7.9 percent.
Despite the overall market improvement, manufacturing jobs decreased by 7,000.
The manufacturing sector's decline follows a weak October manufacturing report by the Commerce Department on December 5 which posted flat lining manufacturing output. Manufacturing shipments increased 0.4 percent to $482.3 billion. Manufacturing inventories increased 0.1 percent to $616.0 billion. New orders for manufactured goods were also up only slightly, increasing 0.8 percent to $477.6 billion.
Additionally, on December 3 the Institute for Supply Management stated a contraction in November manufacturing. The ISM's PMI fell to 49.5 percent, with a reading below 50 indicating contraction. Lower employment and inventories added the greatest drag on the PMI. The Employment Index component decreased 3.7 percent in November while the Inventories Index fell 5 percent.
The Dow Jones' Basic Materials sector has shown the greatest decline in response to the weakened manufacturing reports and appears to be the sector most vulnerable to weaker manufacturing growth. The sector fell 1.09 percent during the December 3 - 7 week pushing its year-to-date return to 2.66 percent. Additional sector return data is included in the table below.
In the Basic Materials sector, stocks to avoid include Molycorp Inc. (MCP), Alpha Natural Resources Inc. (ANR) and Cliffs Natural Resources Inc. (CLF). The three materials companies posted the greatest stock return declines year-to-date through December 7 and have also reported weak earnings outlooks for the near-term.
Molycorp Inc. recorded a 62.71 percent year-to-date decrease through Friday, December 7. The company's stock price is currently trading near $11.33. The rare earth materials producer has struggled year-to-date due to demand and pricing which has slowed sales and earnings growth. It reported a third quarter net earnings per share loss of $0.19. Regulatory investigations and executive turnover have also weakened the company's forward-looking outlook.
Alpha Natural Resources Inc. is another Basic Materials company that has struggled year-to-date. The coal mining company recorded a 59.42 percent year-to-date decrease through Friday, December 7. Acquisition related losses have devalued the company's stock pushing it to a current value of approximately $9.10. Sales and earnings growth for the company have also been lower due to decreased demand and unstable pricing in the industry sector. The company reported a third quarter net EPS loss of $0.21 with demand and pricing issues expected to continue weakening the company's near-term outlook.
Cliffs Natural Resources also topped the sector's list of worst performers. Year-to-date through Friday, December 7 the company reported a 52.67 percent decline in stock value. The company's core iron ore business has been affected by lower industry demand as well. Its coal production business has also suffered due to disappointing acquisitions and pricing pressures. These issues have pushed the stock price to $32.12 and will likely keep earnings growth at a minimal rate for the materials manufacturer which reported a lower than estimated third quarter earnings per share value of $0.59.
Overall, November's manufacturing reports showed the U.S. economy's fragile state. While GDP improved 2.7 percent in the third quarter, manufacturers have been reducing payrolls and output has been flat lining. Given a non-resolution scenario on the fiscal debates over tax increases and spending cuts, the U.S. manufacturing sector could be one of the hardest hit and warrants close scrutiny on investment in the months ahead.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.