U.S. stocks fell for the first session in four as optimism that Europe will right its ship waned yet again, 3M became the first major company to miss earnings estimates in several quarters and the most-watched gauge of consumer confidence continues to slide.

Consumer staples and utility shares outperformed, as the increasingly mercurial investor shifted back to safety once again.  Financial, consumer discretionary and basic materials led the market lower.

3M Co. reported earnings results and became the first major to miss estimates in many quarters; firms have handily beat estimates for about eight quarters now as profit growth is much easier to achieve with significantly lower payroll expenses.  Is this miss by 3M the start of something?  My own expectation is that profit growth will turn meaningfully weaker by Q1 2012.

The ugliest aspect of yesterday’s trading activity was to watch crude power higher, hitting $93.17/bbl, even as stocks lost steam.  The crude market anticipates more Fed action (and why shouldn’t traders have this expectation after the comments from Tarullo, Dudley and Yellen over the previous days).  Stocks would normally rally too on this more-QE-is-coming news but the expectation reversal regarding Europe had an offsetting effect.

We mentioned yesterday that hoping the EU’s latest and greatest bailout plan would prove to be a success (and even a short-lived delay in this crisis is defined as success these days) was more a pipedream than anything – EU policymakers have shown themselves to be quite the fumblers.   Well, that analysis looks to be correct.  First EU officials issued a statement that today’s scheduled announcement of that plan was canceled.  Then just minutes later, and after European bourses summarily tanked on the news talks were canceled, they stated the “summit” was back on.  What will occur is the respective country leaders will meet but the finance ministers will not be involved.  I think it’s safe to say they don’t really have a plan at all.   More below the click…

Market Activity for October 25, 2011

Sector Activity for October 25, 2011

In the meantime, Spain and Italy join Greece and Portugal in missing their deficit targets.  The euro-zone economy is on the verge of recession and that’s before serious austerity measures have even been implemented.  What I find most interesting to watch is EU finance minister walking around all high-browed, as if they’re the masters of the universe, when in reality they’ve got nothing.  Sure, they’ll eventually come up with a short-term salve, but they’ve proven to have no capability to enact the true reforms that offer a way out of their debt problems.  I should watch my words I guess, as we’ve chosen the same path.

CaseShiller HPI

The CaseShiller Home Price Index reported that home prices slipped a seasonally-adjusted 0.05% in August (expected to rise 0.10%) and the July data was revised down to show a decline instead of the increase initially estimated.  This marks four-straight months of decline and even though the recent price drops are minimal, they come on top of a year of more substantial decline.   Fourteen of the 20 cities/districts tracked showed prices fell.

On an unadjusted basis, the measure showed prices rose 0.15% for the month, extending the streak to five months.  Half of the 20 cities tracked posted an increase.   Frankly, I think the unadjusted data is more accurate.  This is backed up by price increases via the National Association of Realtors’ (NAR) data – that organization reported that prices rose in the spring/summer from the low hit in February.  This CaseShiller (CS) data is a three-month average, so it makes sense that CS posted an increase for August as it includes price activity for June and July.

Things may change when the CS numbers for September are reported as both seasonally-adjusted and unadjusted numbers should show a decline.  The NAR data for September showed a 4% decline in prices and since July and August were basically flat, the September weakness will show up in a three-month reading such as CS provides.

Consumer Confidence

The longest running and most widely-watched gauge of consumer confidence showed a much worse-than-expected drop as it printed 39.8 for October (expected at 46.0) – a decline of 6.6 points from the September result.

This is the lowest reading since the financial crisis hit its crescendo in early 2009 and lower than at any point prior since the measure was created in 1967.

Both the present situation and expectations measures declined.  (The overall measure captures consumers’ views of their financial position currently and what they believe it will be six months out.)

Present situation:

Expectations six months out:

And even with these sorry results on confidence, consumers still believe that inflation will remain high at a 5.8% rate over the next year.  This is a function of the elevated prices for those consumer items with which we cannot escape in our everyday lives – food and energy.

Richmond Fed

The Richmond Fed manufacturing index came in at -6 for October (expected to increase to +1), unchanged from the September reading.  Just about all of the sub-indices remained in negative territory, most improved to show that activity declined at a slower pace than the previous month, but the shipments took a turn for the worse (a function of negative new order and backlog), so it kept the overall index unchanged month-over-month.

This marks the second of the three regions factory surveys we’ve received for October to print a negative reading.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900