“A stumbling block to the pessimist is a stepping stone to the optimist.”

– Eleanor Roosevelt

I DID find THE solution to beating this atrocious weather by vacationing in sunny south Florida. The weather was perfect with highs in the upper 80’s each day even in Key West. Unfortunately, the wind kicked up on the day we were to take a Dry Tortugas fishing trip to eat what we catch. The winds forced us to cancel the trip due to rough seas. We ended up eating what someone else caught.

My most vivid memory of the trip was the close-up view of my younger daughter Jennifer’s diamond engagement ring. Life’s little pleasures. She is engaged to marry Nicholas Patton Ward. They intend to marry sometime in 2012 and reside in the Arlington, VA area.

My second most vivid memory is the Atlantis space shuttle sitting on Launch Pad #39A at NASA’s Kennedy Space Center preparing for launch in July for the last space shuttle blastoff ever. The space shuttle program is being shut down after July. Then, the USA will depend upon the RUSSIANS to launch its payloads to the International Space Station. Can you believe that – the RUSSIANS! It leaves me with a kind of empty feeling because I grew up with the space program (and the USA vs. the USSR) and to think we are handing this responsibility to the RUSSIANS because we don’t have the money to do it ourselves is simply @%^&!

This is the first of three articles discussing the urgent need for the US to get its financial house in order or face the consequences. The last two articles will appear in future issues of The Weekly Commentary. Our task is to help you understand the implications of this ominous trend and provide the strategy to protect your wealth.

The size of the projected federal deficits is so ENORMOUS that the U.S. will be forced to borrow HUGE sums from foreigners. When you owe as much as we will owe in 4 years to foreign creditors, sooner or later they will call the tune and we will be obliged to dance.

If you think this is far-fetched, then it is important for you to understand when the United States, the big money center at the time, forced Great Britain to give up its demands upon the Suez Canal during the crisis in 1956 by using Great Britain’s huge debt burden against them.

The United States put financial pressure on Great Britain to end its Suez Canal invasion. President Eisenhower warned the British that unless they withdrew, he would order the sale of the United States’ currency reserves of British Pounds and Sterling Bonds; thereby precipitating a collapse of the British currencies’ exchange rate. Eisenhower in fact ordered his Secretary of the Treasury, George M. Humphrey to prepare to sell part of the US Government’s Sterling Bond holdings. The Government held these bonds in part to aid post war Britain’s economy (during the Cold War), and as partial payment of Britain’s enormous Second World War debt to the US Government, American corporations, and individuals. It was also part of the overall effort of Marshall Plan aid, in the rebuilding of the Western European economies (Source: Wikipedia).

Last week there were more NEGATIVE than POSITIVE developments, and short term investors sold stocks as a result.

Below is a succinct list of last week’s events:

Positives:
1) US exports hit record high in April (somewhat old news) and lower than expected deficit will help Q2 GDP
2) AAA said gasoline prices fell another $.05 to the lowest in two months
3) ECB says they will raise rates again to further adjust relative to inflation
4) Canadian unemployment rate falls to 7.4%, the lowest since Jan ’09

Negatives:
1) Initial Jobless Claims disappoint again, staying above 400k for the 9th straight week
2) May Import Prices rise at the fastest pace since Sept ’08 with the help of the growing cost of doing business in China
3) Germans vs. the ECB, Schaeuble vs. Trichet in a “smackdown” showdown has European credit markets fast losing patience, CDS in Greece, Ireland and Portugal reach fresh record highs
4) ECB says they will raise rates again when some in the region certainly can’t handle it, euro reverses lower due to this concern and #3 above
5) The Hang Seng index in Hong Kong closes at 12 week low as property worries spread.

As the stock market’s slide extended into a sixth straight week, its longest since the financial crisis, one question emerged among investors hoping to begin browsing for bargains: Are we there yet?

After all, the market looks oversold. More than half the stocks within the S&P 500 are plumbing 20-day lows. The crop of stocks still holding above their 50-day averages has swiftly shriveled to less than 25% from more than 75% just two months ago. The roster of issues vexing the market—slowing global growth, $4 gasoline and the impact of European debt restructuring on banks—hasn’t changed much. How long before drab economic data loses the sting of surprise?

But the problem with stocks’ orderly decline—with a loss totaling just 6.8% over six weeks—is the absence of the kind of concentrated selling that points to exhausted negativity and that draws buyers en masse. On Thursday, for example, stocks rebounded to snap a six-day losing streak, only to skid anew Friday. Option traders also seem reluctant to bid up puts to hedge their portfolios, and the risk forecast as quantified by the VIX volatility index hasn’t budged much above its four-year low.

The Dow Jones Industrial Average ended last week down 199 points, or 1.6%, to 11952. The six-week slide is the blue chips’ longest since 2002. The S&P also slid for a sixth straight week, its longest swoon since July 2008. It’s still up 1.1% this year, but both the Nasdaq Composite and the Russell 2000 have slipped into the red. The NASDAQ lost 89, or 3.3%, to 2644 last week, while the Russell fell 29, or 3.5%, to 780.

For now, investors might take solace in steady credit markets and stocks’ unthreatening valuations. But without capitulation, equities may enjoy a short-term bounce, although a more lasting recovery may not occur until the economy accelerates again, or until companies convince investors they will weather this soft patch just fine. And that could take time.

Also, Wall Street analysts haven’t tempered their estimates much despite waning economic data, and still expect profits to expand more than 20% in 2011 for a record third straight year. “The disconnect between economic, sales and earnings expectations appears to have widened in the last two months,” notes Ed Clissold, Ned Davis Research’s global equity strategist. “We aren’t saying that earnings are heading toward a hard landing,” he adds, but the risks to profit expectations are gathering to the downside.

Over the past four quarters, U.S. nominal gross domestic product has increased $564 billion, while our federal debt has expanded by $1.36 trillion. “It has taken $2.40 in fresh federal borrowing to generate $1.00 in U.S. GDP growth,” says Douglas Cliggott, Credit Suisse’s U.S. equity strategist. Still, the gain stretched profit expansion into a 10th straight quarter. But because the average expansion since 1949 has lasted 14 quarters, this cycle “is now the rough equivalent of a 57 year-old human being in America—still pretty healthy, but not as strong or energetic as it was a while back,” he argues.

There were, of course, cycles that lasted 32 quarters in the 1960s, 31 quarters in the 1990s and about 20 in the mid-2000s, but those saw either robust job growth or strong private-sector credit creation. A “meaningful acceleration” in the next six months in either private debt or employment would make Cliggott more optimistic. But, “unfortunately, neither one of these normal demand engines has been running with very much intensity so far” (Source: Barrons Online).