U.S. stocks, as measured by the S&P 500, fell for the first session in four, clawing back two-thirds of last week’s bounce, as the bloom is coming off the rose once again.  And as the risk-off trade has returned, the Treasury market was on fire as the yield on the 10-year Treasury is back down to 2.05% (prices up, yields down) -- after hitting 2.40% on Thursday.

Utilities and consumer staples were the session’s winners, although even these sectors closed the day lower.  Energy, basic materials and financials led the market down.

Last week was all about the EU finding a solution, the hope that their fumbling policymakers would this time get it right.  This week, however, has started off with skepticism that they’ll be able to implement even the vague and unofficial plan they laid out last week.   We’ve watched this scene before for sure.  The question is how many times will it play before we eventually figure out the EU has no plan at all – not one that works at least.

Not helping matters was the official bankruptcy of MF Global (a broker-dealer), doomed by wrongly betting European sovereign debt would rally.  The people responsible for taking these positions can’t be that stupid, rather their decisions were clearly influenced by repeated bailouts and backstops.  I’m sure they believed that Europe would implement a plan capable of making these trades money good; it didn’t work out.   How many more have made the same bet in this era of false security?   How many more will take the ultimate hit as they stretch for yield in an environment with which the Fed pushes traders and investors into riskier assets?

Market Activity for October 31, 2011

Sector Activity for October 31, 2011

Chicago PMI

The Chicago Purchasing Managers Index (PMI) came in at 58.4 for October, down from the 60.4 for September -- missing expectations, which called for a print of 59.0.

And while this measure of activity within the nation’s most vital region for manufacturing has been sliding from the robust level of 70 hit early in the year, it remains at a good level – a number above 50 marks expansion and so a reading that’s close to 60 is healthy.

What caused the overall reading to slip again was a four-point decline in new orders and a six-point slide in inventories – and those details will result in less production.  However, order backlogs improved (rising to expansion mode after two months of sub-50) and employment actually ticked higher to 62.3 (highest level since the spring when factory employment was averaging 34K/month).

So we’ll see if these pretty good numbers from Chicago PMI result in more manufacturing hiring, which has been on the slide since April, averaging just 8K/month.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900