U.S. stocks retreated as a market that bounced on the hope (or the fear from a short-seller’s perspective) that the next bailout plan was the one to make all of the eurozone’s debt woes magically disappear has once again fallen flat.

In the latest from the European circus, German Chancellor Merkel stated that the new bailout proposal (the old one was just ratified on Thursday) won’t meet the October 23 deadline that EU finance ministers had ignorantly set for themselves.  In fact, Merkel’s spokesman stated the search for an end to the crisis “surely extends well into next year.”   Well, that throws a bit of a wrench into the benighted idea that this crew would suddenly come together and provide their “fix.”  In addition, the vaunted EFSF (bailout fund) looks to be in a bit of trouble as it is backed by the supposedly stable credit ratings of France and German – and France’s rating is in jeopardy of getting cut per Moody’s.

To no one’s surprise based on the degree of yesterday’s pullback, the areas of safety outperformed – utilities, telecoms and staples all held their ground relative to the market with less than 1% declines.  (It can be debated whether telecoms are really an area of safety, but for the current environment, in which the Fed has driven rates to nothing, this high-dividend sector remains a “block home” – for those who grew up Catholic.)

Conversely, financials, basic materials and industrials led the market lower.

Even with a 2% loss on the S&P 500, the price of crude failed to follow suit as it fell only 40 cents to remain above $86/bbl.  This is the problem with the aggressive nature of monetary policy.  For those with the resources there’s at least some benefit as the stock market is well above the 13-year low hit in early 2009 (although even affluent investors are also extremely frustrated with the way things have played out).  However, for those without the resources, and I’m not talking about the poor but vast swaths of the middle class, they continue to get beat by several key commodity prices that remain elevated.  But the Fed will undoubtedly continue to “experiment,” as Bernanke has stated in past speeches.

Market Activity for October 17, 2011

Sector Activity for October 17, 2011

Empire Manufacturing

The first manufacturing gauge for the month showed no sign of a bounce as the New York-area factory activity remained in contraction mode.

The survey known as Empire Manufacturing improved only slightly as it came in at -8.48 for October after the -8.82 hit in September.  This marks the fifth-straight month of contraction.

The internals of the report remained pretty ugly.  New orders did bounce back to positive territory (but just barely at +0.16) after four months of contraction. However, unfilled orders remained in contraction and the average workweek sank deeper into negative territory.

We’ll see how the other major regional factory gauges turn out for October over the next two weeks.  Three of the four majors have been in contraction mode for four of the past five months, but the largest region (Chicago) continues to hold up and the national index (via ISM) remains in expansion mode.  But with Asia slowing and Europe so close to recession, this latest manufacturing up-cycle is likely to be close to an end.

I’ve stated this for a year now, first estimating that factory activity was set to contract in October 2010. Over the next couple of months, we’ll see if my call was just premature, or I’m very much missing something.

Industrial Production

Industrial production has begun to show the slowdown as the figure rose just 0.2% for September – that’s in line with expectations but the previous month was revised down to show no gain (previously reported as a 0.2% increase).

The utilities component dragged on the overall number, which isn’t unusual for this time of year as temperatures turn mild.  However, the manufacturing component has decelerated to just a 3.9% increase over the past year, down from a 6.0% rate as recently as March.  This figure continues to get support from auto production (which undoubtedly has helped that Chicago factory gauge hold up), but the machinery segment (the other major segment for the manufacturing category) has seen no growth over the past three months.

Capacity utilization (the percentage of plant and equipment that’s being used) continues to run below average.  This is the second-largest stretch with which facility usage has yet to return to the   long-term average – it’s been 40 months now.  The record is the 47 months that ended December 2004.  However, during that cycle, the trough was much shallower.  Point being, we should have bounced back much more abruptly this time if things were normal.  As everyone surely knows by now though, the economic status is not normal.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900