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).

Photo Credit:  Chris Ratcliffe (Bloomberg)/Peter Foley (Bloomberg)

I think T-R-O-U-B-L-E is still brewing in Greece.  Greek Prime Minister George Papandreou raised the possibility of taking legal action against US banks, which he said bear “great responsibility” for Greece’s debt crisis.  The Greek parliament is currently looking into deals Greek authorities carried out in 2000 with help from Goldman Sachs that allowed them to mask the extent of Greece’s debts through the use of complex financial instruments. In my opinion, the risk that Greece will repudiate (a type of default) a portion of their debts is still very high. 

“One of the few things that can’t be recycled is wasted time.”
           –Sean Covey

1. One in four households with cell phone, no land line – One in 4 households has a cell phone but no traditional landlines, up 2 percentage points from the first half of the year, according to data reported by the federal Centers for Disease Control and Prevention. More than a third of people under age 35, including about half of those age 25 to 29, have only cell phones. Source: SFGate

2. Maiden Voyage For the First True Space Sail-  Japan’s aerospace exploration agency (JAXA) plans to launch the first spacecraft fully propelled by sunlight on May 18, piggybacking on Japan’s Venus Climate Orbiter.  Source: NewScientist

Photo:  The Harrisburg Incinerator at South 19th Street (which the production of incurred much of Harrisburg’s debt) Photo by PAUL CHAPLIN, The Patriot-News.

About 6 months ago, we warned you in The Weekly Commentary that Pennsylvania was heading for trouble with the current year’s budget and the budget shortfall might be so large as to result in a credit rating downgrade. Now, the Wall Street Journal has reported that this budget deficit forecast is becoming fact. The budget deficit widened significantly, from $720 million at the end of March to more than $1 billion on May 3, when the Pennsylvania Revenue Department disclosed that April income-tax collections were well below forecasts. Gov. Ed Rendell has proposed increasing taxes, cutting spending and shifting state funds to balance the budget. However, many reserves have already been consumed There is not much to fall back on. A credit downgrade is becoming more likely. Investors should avoid many Pennsylvania municipal bonds especially those with a maturity of more than 4 years.

Pennsylvania is only one example of the growing budget problem at the state level. Other examples are California (of course), Illinois, Florida, Nevada, Arkansas, Kansas, and Idaho – several additional states are suspected of having problems but have not yet released tax revenue data. The end result is that municipal bond investors can no longer sit back and simply collect their municipal bond interest. Municipal bond investors must now keep a very close eye on the fiscal distress signals of each of their issuers or sell their municipal bond holdings and wait on the sidelines until the uncertainty is reduced.

U.S. Stocks and Foreign stocks and Bonds all rose this week.  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.

“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 be joined by guest, Bob Bleiler of Bleiler Insurance Agency to discuss what you need to know about property and casualty insurance.

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. 

Imagine taking 4 plane flights over 3 days and arriving ON TIME 4 out of 4 times.  It happened for me last week on Air Tran, not exactly the buzz word for world famous airlines – but reliable nevertheless.  I travelled to an investment conference in Naples, Florida.  No golf clubs – it was work, really!