AND, THE WINNER IS……BY DEFAULT…… THE AMERICAN DOLLAR.  The Dollar has returned to its position as the world’s currency of choice; and, the U.S. stock market is clearly more appealing to global investors and institutions than the European markets.  Money will probably flow into the American stock and bond markets supporting its recovery after the sentiment turns more positive.  See the next article for more information about what needs to happen to improve investors’ sentiment.

The stock market is a type of control system which is a combination of components that act together to maintain actual system performance close to a desired set of performance specifications.   The flash crash of 5/6/2010 was a terrible black eye for the U.S. stock market because that day’s volatility has not yet been adequately explained – raising the question as to whether the stock market is out of control.   This question leads to uncertainty in the minds of investors.  Uncertainty similar to the Greece/Europe situation is magnified.  The result is heightened market volatility.

Two announcements are needed in order to reduce uncertainty and calm the markets:

1. The U.S. Securities & Exchange Commission (the SEC) must announce new rules on how the U.S. stock exchanges transact and operate – effectively putting the system back into control.

2. The member countries of the European Union (the EU) coordinate with the United States, Japan, and other majority economic powers to support the Euro and the European banking system.

In my opinion, both announcements will occur.  But, I am unsure of the timing.  If the announcements occur in the next week or two, the Greece/Europe situation will not derail the global economic rebound – and, the stock markets will probably rebound from their recent sell-off.

QUESTION:  I am an employee and I do not itemize.  How can I reduce my income taxes?

Answer:  Be aggressive if your employer offers a medical reimbursement account — sometimes called a flex plan. These plans let you divert part of your salary to an account which you can then tap to pay medical bills. The advantage? You avoid both income and Social Security tax on the money, and that can save you 20% to 35% or more compared with spending after-tax money.

Feel free to contact me if you or someone you know has this type of situation.  Tax laws can be tricky; thus, the above answer cannot be applied to all circumstances because the slightest variation could cause a different outcome.

“If everything seems under control, you’re just not going fast enough.”
                                                                            
                                                                            –Mario Andretti

1. The most important breakthrough ever? – Artificial life, the stuff of dreams and nightmares, has arrived. Craig Venter and Hamilton Smith, the two American biologists who unraveled the first DNA sequence of a living organism in 1995, have made a bacterium that has an artificial genome. This step created a living creature with no ancestor. The new biological science has the ability to do good as well as harm. (Source: The Economist )

2. New evidence caffeine may slow Alzheimer’s disease and other dementias, restore cognitive function- Caffeine may be protective against the cognitive decline seen in aging, Parkinson’s disease, dementia and Alzheimer’s disease, a group of international experts has found. (Source: PhysOrg.com)

3. Air Force Treating Wounds With Lasers and Nanotech- The Air Force is funding scientists who are using lasers to seal up wounds at a molecular level. The process would replace the sutures and staples traditionally used to repair wounded skin. A patient’s wound would be coated in a dye, then exposed to green light for 2-3 minutes. The dye absorbs the light and catalyzes molecular bonds between the tissue’s collagen. The bonds instantly create a seal that’s watertight, which prevents inflammation or risk of infection, and speeds up the formation of scar tissue (Source: 

Wired.com)

“Your Financial Choices” airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®.  This week, Host Laurie Siebert, CPA, CFP® will discuss estate planning and the PA Tax Amnesty Program.

Laurie will take your calls on this subject and other financial planning topics at 610-758-8810. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton/Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville/Macungie area – or listen to it online from anywhere on the internet.  For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org. 

The Lehigh Valley seems to be in a perfect location!  Two weekends ago, my wife Jo Anne and I drove 1 hour, 15 minutes to Manhattan to visit my daughter Erika.  Yesterday (Sunday), we drove a little over 1 hour to have brunch with my younger daughter Jenn who came into Philadelphia to a celebration.  And while at home between the two dates, we enjoyed living in an area that has a perfect combination of openness, access to the urban centers, and a high level of services.  PS:  the brunch in Philadelphia was fantastic and very reasonably priced–

Farmicia Restaurant, 15^th South 3^rd St. www.farmiciarestaurant.com

of this 14-month-old bull market, although buyers stepped in when the market fell to its lowest level of 2010 and helped stocks rebound Friday from a harrowing three-day slide.

Investors’ apprehension can be traced to escalating concerns about Europe’s belt-tightening, China’s credit constriction and the still-fresh memory of the synchronized market meltdown in 2008. An uptick in weekly U.S. jobless claims, a downtick in leading indicators and renewed tension in the credit market only exacerbated the worry that our recovery may have peaked.

The flight from risk pummeled all assets, sending crude oil down 7.2% last week. Not even gold was spared, as the precious metal retreated 4.2% to snap a four-week winning run. The exception was Treasuries, with safety seekers lowering the yield on 10-year Treasuries to 3.2%.

The Dow Jones Industrial Average absorbed its third loss in four weeks, closing down 427, or 4%, to 10,193. The steady, almost methodical selling drove the Standard & Poor’s 500 below its 200-day average, and the breach of that threshold brought more selling. Buyers surfaced as the benchmark approached its early-February low of 1057, and Friday’s 1.5% rebound cut last week’s loss to 48 points, or 4.2%. At 1088, the S&P 500 has pulled back 10.7% since April 23, meeting the technical definition of a correction. The Nasdaq Composite Index ended last week down 118, or 5%, to 2229, while the Russell 2000 gave up 45, or 6.4%, to 649.

Is the market overreacting? The stronger greenback makes American exports less competitive and eats into foreign profits that are translated back into dollars, but U.S. exports to Europe make up just 1.4% of our gross domestic product. Even if the euro were to fall to $1, the direct hit to our GDP is less than 0.5%, notes Société Générale. Meanwhile, the pressure on manufacturing and the inconvenient surge in the dollar exchange rate can only encourage our already benevolent central bank to hold interest rates down longer.

Before Friday’s rebound, only 6% of stocks in the S&P 500 were trading above their 50-day average — the most oversold level since March 2009. Deutsche Bank chief strategist Binky Chadha thinks the market “is pricing in too high a probability of the worst-case scenario” — assigning a 37%- 48% likelihood to a tail risk when it should be less than 10%.

Europe’s fiscal crisis also should prove less opaque than the subprime crisis that triggered the prior recession. Among other things, “Europe’s toxic assets haven’t been buried into blind pools of collateral debt obligations, so there should be less collateral risk in the current turmoil,” notes Ed Yardeni of Yardeni Research. Core inflation is already increasing at the slowest pace since the 1960s, and crude oil’s 19% decline in the past three weeks should give consumers another break.

Stocks are trading at roughly 13.5 times projected profits, below the median 16 multiple in the past decade. It may be damning praise, but “the U.S. economy, stock market and currency are all likely to remain the best of a dodgy breed,” Yardeni says (Source: Barrons Online).

Bonds rose this week while U.S. Stocks and Foreign stocks both declined.  During the last 12 months, STOCKS have substantially outperformed bonds. 

Source: Morningstar Workstation. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  Three, five and ten year returns are annualized.  Assumes dividends are not reinvested.

HAVE THE ECONOMY’S BOOM-TO-BUST CYCLES shortened appreciably, or does our mood just make it seem that way? One minute we’re basking in the glow of job growth and reawakened consumerism, and the next we’re pondering a slowdown brought on by Europe’s spending cuts and China’s credit constriction.

The stock market celebrated Europe’s $1 trillion bailout plan with its biggest one-day jump in nearly 14 months, rebounding 4.4% Monday from the selloff in early May, only to cede half that gain by Friday.

Suddenly perception is reality, and we’re back to selling on Fridays. The specter of slowing global growth worried holders of materials stocks, while a widening federal probe into Wall Street’s marketing of mortgage securities hurt financial companies. Crude oil has pulled back 17% in just two weeks, notwithstanding all that oil spewing into the Gulf, while copper is down for a third straight week. The lone standout is gold, burnished to a blinding gleam by investors defecting from paper currencies. Now, those in Abu Dhabi can even withdraw gold bars and coins from an ATM machine. The machine updates prices every 10 minutes, the better to track gold’s surge to an all-time high. It settled Friday at $1,227 an ounce.

The euro slumping to a four-year low against the buck raises concerns about the competitiveness of U.S. exports, even though the four biggest buyers of American goods are Canada, Mexico, China and Japan. In fact, Europe absorbed just 19.6% of our exports this year, versus 32% for North America and 25.8% for the Pacific Rim. “This is not to say that a slowdown in the European Union is not a concern,” says a well known economic strategist. It’s just that Asia looms larger.
Too bad China wasn’t sending out more helpful signals. Last week its government said inflation in April was up 2.8% as food prices surged 5.9%, increasing pressure on the central bank to raise interest rates. Chinese stocks halted, just barely, their five-week slide. The Shanghai Composite Index has slipped 22% since early August, into official bear-market territory (Source: Barrons Online).