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They argued. And, debated. And, chastised. And, pleaded with the American voters…… when faced with similar circumstances in November, 1995. Back then, Newt and like minded Republicans refused to raise the debt limit. Their motive was to rein in spending as part of the “Contract With America” – the 1994 mid-term election slogan. The political process failed to bring both sides together. DOES THIS SOUND FAMILIAR?

The November, 1995 debt limit deadline came and went without Congressional action to raise it. In fact, the debt limit was not raised until March, 1996 – over 4 months after the original debt ceiling crisis deadline. The U.S. Treasury jiggled the books to avoid a default by moving money between different government funds. What happened to the stock market during this 4 month period? IT WENT UP! And, by a whopping 11.7%.

And, Bill Clinton was re-elected in 1996.

I think it is important to repeat last week’s view: lots of uncertainties exist with both the debt limit and potential downgrade of the U.S. Government debt. But, there is plenty to be optimistic about especially with improved corporate profits plus the FED’s stance on keeping interest rates low. My current view is the positives will ultimately outweigh the uncertainties. For this reason, I recommend that: (1) you maintain your long term asset allocation, and (2) if you have idle cash, invest it in this period of uncertainty at lower prices.

“Don’t let your victories go to your head, or your failures go to your heart.”

Major kudos to my daughter Erika who demonstrated outstanding intestinal fortitude by doing a full triathlon during yesterday’s HOT weather. It was hot merely watching her, let alone doing it. By the way, to do a full triathlon, the participant starts by swimming 1 mile, jumps out of the water, sprints to a bike located in a predetermined area, cycles 25 miles, returns the bike to the predetermined area, and in the last leg, runs over 6 miles in a cross country format.

I admire her willingness to take on the triathlon challenge. And, do it. Her finishing time?………it doesn’t matter. Like Sir Edmund Hillary said, “It’s not the mountain we conquer, but ourselves”.

Last week, negative developments far outpaced those considered to be positive. But, stock surprised by rising.  Here is a succinct summation of last week’s events:

Positives:
1) EU steps up with more help for Greece, Portugal and Ireland as EFSF becomes super TARP and Greek bond holders finally take a hit, but will it be enough?
2) July Philly mfr’g bounces back into positive land but still weak at 3.2 (was 43 in March)
3) MBA said refi’s bounce 23.1% off 10 week low, finally responding to low rates
4) Single and multi-family housing starts bounce, multi we need more of, single we don’t right now
5) NAHB home builder index bounces 2 pts to 15 but off very depressed level
6) Corporate earnings so far, so good but guidance mixed

Negatives:
1) Preliminary HSBC mfr’g index in China falls below 50 for 1st time in a yr
2) Euro zone mfr’g and services composite index falls to lowest since Aug
3) German IFO business confidence drops to lowest since Oct
4) French business confidence down to 7 month low
5) US initial jobless claims rise more than expected, now above 400k for 15th straight week
6) Existing home sales fall to lowest since Nov and month’s supply rose to 9.5, most since Nov
7) Still no US debt/deficit deal
8) After falling from $3.98 to $3.56 per gallon of gasoline May thru early July, it’s back to $3.70.

Relieved by progress made to contain the government debt crisis, the flip-flopping U.S. stock market rallied last week to move within 1.4% of a fresh 2011 high. But gold climbed, too, for a third straight week to a new record above $1600 an ounce, a hint investors aren’t yet ready to let down their guard.

Late last week, Europe approved a €109 billion bailout for Greece and vowed to finance weaker nations until they can borrow from private lenders. But stateside, Washington continued to debate conditions and proposals—including higher taxes and trillions in spending cuts—for increasing our $14.29 trillion debt ceiling.

A compromise before the Aug. 2 deadline that staves off interest payment defaults might placate the stock market and goose the Standard & Poor’s 500 above its late-April peak of 1364, up from the 1345 level where the benchmark closed Friday. But the longevity of any rally will ultimately depend on whether Washington can craft a plausible longer-term fiscal solution.

A last-minute or disappointing stop-gap deal to raise the debt ceiling could prompt rating agencies to cut the U.S.’ AAA credit rating, or the cut could come when politicians fail to devise a longer-term solution. “The former could have a more negative impact on stocks than the latter, as a delayed downgrade should give investors more time to digest the implications,” notes David Bianco, BofA Merrill Lynch chief U.S. equity strategist. But while a snap rating cut to AA could drive the S&P 500 down to about 1250, Bianco expects any selloff to be short-lived as Treasury bond yields are unlikely to surge much due to the downgrade.

Still, watch how long Europe’s respite lasts. Without interest rate cuts from the European Central Bank, “there’s nothing to counteract the grinding deflation that will have to occur in the periphery in order to equilibrate costs and prices with the rest of the eurozone,” says Michael Darda, MKM Partners’ chief economist. Chinese stocks also have rebounded in four of the last five weeks, adding to the expectation that inflation there will begin to ease and the Chinese economy coasts to a proverbial “soft landing.” But Darda thinks Asia’s largest economy could slow further, and earnings may not rebound swiftly once its central bank stops tightening, what with bank reserve requirements at the harshest level on record and short-term interbank lending rates at an 11-year high.

The Dow Jones Industrial Average ended last week up 201, or 1.6%, to 12,681. The S&P 500 snagged its third gain in four weeks. The Nasdaq Composite Index rallied 69, or 2.5%, to 2859, while the Russell 2000 added 13, or 1.6%, to 842.

IT HELPS THAT U.S. COMPANIES are reporting strong second-quarter profits. So far, companies’ profits are coming in 3.8% higher than analysts’ forecasts, while revenues are surpassing targets by 3%, notes Morgan Stanley. Just 7% of companies have missed their profit marks, and only 9% have fallen short of revenue targets.

It’s a measure of the market’s cowed neutrality—or ambivalence—that stocks rise or fall almost entirely in line with whether they surpass or miss forecasts. According to Bespoke Investment Group, companies beating their targets have seen shares rise an average 1.42% the next session, while those missing have fallen 3.72% (Source: Barrons Online).

Last week, US Stocks and Foreign Stocks increased. Bonds decreased. During the last 12 months, U.S. STOCKS outperformed BONDS.

Returns through 7-22-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	-.1	3.6	4.2	7.1	6.6	5.7
US Stocks-Standard & Poor’s 500	2.0	8.1	19.0	-1.3	-1.5	1.1
Foreign Stocks- MS EAFE Developed Countries	3.4	3.4	18.8	– 3.6	– .5	3.5

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 excluding dividends.

I have been closely monitoring the war of words in Washington on this potential crisis. I find the activities by both parties to be indefensible. Most Americans agree.

I have two observations: (1) the bond market does not believe the U.S. will default and the bond market has been a reliable forecaster in the past (this makes me optimistic), and (2) the Republicans in the House may have a “fix” that will avert a default – simply increasing the debt ceiling by $100 Billion and cutting the same amount from discretionary spending programs (how could the Senate or the President stand in the way of this last second tactic? This makes me optimistic short term but pessimistic long term because this tactic is simply kicking the can down the road).

Lots of uncertainties exist with both the debt limit and potential downgrade of the U.S. Government debt. But, there is plenty to be optimistic about especially with improved corporate profits plus the FED’s stance on keeping interest rates low. My current view is the positives will ultimately outweigh the uncertainties. For this reason, I recommend that: (1) you maintain your long term asset allocation, and (2) if you have idle cash, invest it in this period of uncertainty at lower prices.

“We cannot become what we need to be by remaining what we are.”

— Max Dupree

 The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®. This week, Laurie will discuss:

“Income tax planning for 2011 – start now before it’s too late”

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.