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.

Photo courtesy of ArtsQuest

My wife Jo Anne and I attended a great concert at the SteelStacks. We loved the performer, Marc Cohn, and we were totally impressed by the MusicFest Café venue. We had dinner with wine during the concert – I give high marks for both. The sound system is top shelf – a rating bestowed by an independent sound expert I happened to meet there. All this was topped off by the impressive background of the accent-lighted Bethlehem Steel blast furnaces. And, what amazes me more than anything else is that this facility is right here in Bethlehem, Pa – my home. For more information go to: www.steelstacks.org

Last week, negative developments far outpaced those considered to be positive. And, stock prices dropped as a result. Here is a succinct summation of last week’s events:

Positives:

1) Three very successful Treasury auctions with longer term maturities in particular drawing buyers, reflecting no concern of not getting interest payments
2) Initial Claims fall to just above 400k, lowest since April
3) Headline PPI and CPI moderate on decline in energy prices
4) China’s Q2 GDP, Industrial Production and Retail Sales all surprise to upside- points toward a soft landing

Negatives:

1) June Retail Sales mediocre
2) Core PPI and CPI surprise to upside, makes monetary policy that much more difficult
3) Trade Deficit jumps to highest since Oct ’08, trims Q2 GDP by up to .4%
4) Refi’s fall to 10 week low, low interest rates losing its influence
5) Bernanke whips market around with QE3 talk followed by ‘not now’
6) Univ of Mich confidence drops sharply to lowest since Mar ’09
7) IP less than expected, continued drag from auto’s
8) NFIB small biz index falls to lowest since Sept ’10
9) Debt of Italy, Spain, Greece, Ireland and Portugal continue lower with yields jumping and CDS much wider, Greece moving closer to being forced into a default (would actually be good long term)
10) China CPI rises 6.4% y/o/y, most since June ’08.

The vacillating U.S. stock market turned negative last week, pulling back 2.1% as investors worried anew about the sprawling debt crises on both sides of the Atlantic. But this downward lurch could have an upside.

With credit agencies threatening to slash Uncle Sam’s debt rating, and traders shunning government bonds from Ireland to Italy, investors have been selling into stock-market rallies with renewed zeal. The Standard & Poor’s 500 closed more than 1% below its intraday high in each session last week from Monday through Thursday, a buckling streak not seen since a similar nine-day spell in March 2009 that immediately preceded this bull market. Such persistent determination to sell into strength eventually exhausts the selling pressure, and in 14 such prior instances, the stock market has gone on to average gains of 4.3% a month later and 11.7% after six months, notes Bespoke Investment Group.

But any progress likely will be choppy. The drama queens in Congress debating our debt ceiling will milk the limelight for all it’s worth, and won’t reach any deal before the 11th hour. But they know full well the consequences of even a momentary default on our ability to borrow at hospitable rates.

It also helps that market sentiment is noncommittal, even pessimistic. A crowd bracing for—all together, now—”a soft patch” lowers short-term expectations for the second-quarter results that companies are starting to report, even if they could prove bearish in the longer run when the consensus starts to demand evidence of a reaccelerating economy. Analysts also have been revising estimates lower for 11 straight weeks, creating what Paul Hickey of Bespoke calls “a crisis of confidence among analysts.” Meanwhile, the Chinese economy grew by a stronger-than-expected 9.5% in the latest quarter, although runaway pork prices pushed core inflation in June 6.5% higher than a year ago. The Shanghai Composite Index has rebounded for four straight weeks.

Will second-quarter profits give the U.S. market a lift? Wall Street expects Standard & Poor’ 500 companies’ earnings to grow 11.8% from a year ago. In the past three quarters, companies have surpassed estimates by a median 4%, so anything less than 3% could spell trouble, notes Lance Stonecypher, Ned Davis Research’s senior sector strategist. But he is siding with the bulls in the short term, even as longer-term concerns have him watching for signs of a bull-market peak.
So far, companies’ earnings reports have been mixed. Alcoa’s (ticker: AA) second-quarter profit more than doubled, but merely met analysts’ lowered forecasts. Yet Google (GOOG), flagged here positively three weeks ago when shares were near 475, pushed above 600 as revenue rose 36% and net income surged 37%. It closed the week at 597.62.

The Dow Jones Industrial Average snapped a two-week gain and finished last week down 1.4% to 12,480. The Nasdaq Composite Index ended its three-week winning run and dropped 2.5% to 2790, while the Russell 2000 fell 2.8% to 829 (Source: Barrons Online).

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

Returns through 7-15-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	.3	3.7	4.5	6.6	6.6	5.7
US Stocks-Standard & Poor’s 500	-2.3	2.7	16.0	.8	-1.8	.9
Foreign Stocks- MS EAFE Developed Countries	-2.7	.2	14.6	– 3.6	-1.0	3.1

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.