Two important questions are weighing on investors: (1) WHEN, not if, Greece defaults, will some other country or mega European financial entity be dragged into default/bankruptcy? (2) Will the U.S. economy slip into a recession?

The importance of the first question is markets usually do a pretty good job of coping with default problems one at a time. When one default occurs, analysts analyze and investors reach conclusions and calmly adjust their portfolios. But when more than one defaults occur close to each other, the markets can become overwhelmed and lose their ability to function (this state of affairs could result in a large drop in the equity markets). The probability of this occurring is difficult to compute. But, I can tell you that I am hearing more and more experts say it is likely.

As to the second question we have stated in past issues of The Weekly Commentary that changes of a recession in the U.S. are approximately 50%. For this reason, we have continued to recommend the Action Plan for your portfolio described below.

 The FED and other Central Banks have not yet followed through with coordinated efforts to support their economies and restore confidence. Meanwhile, last week’s economic reports indicate the economy has slowed more than economists expected. These reports coupled with last week’s drop in the stock market, will diminish American’s confidence even further. And, as I reported in The Weekly Commentary weekly during each of the past five weeks, a continued crisis in confidence will probably result in further economic slowdown, and maybe a full-fledged recession. I believe the probability of a recession has grown dramatically.

The stock markets have already dropped in anticipation of the economic slowdown. There is a possibility the forecasted downturn is now fully factored into stock prices. If true, this would not be the time to sell. On the other hand, the economic downturn could be long-lasting and severe. It is very difficult to predict its severity. There is no exact, 100% sure-fire way to time recessions or markets. Due to the lack of clarity in my crystal ball, I recommend the following, depending upon which category fits your unique circumstance:

1. Aggressive investors, moderately aggressive investors, and investors who do not intend to touch their investments for 10 years or longer – continue to hold the current allocation of core investments, and wait to gather more information, and carefully watch central bank activities especially from FED Chairman Bernanke later this week.

2. Investors who need to withdraw from the investment portfolio – “park” any amounts you expect to withdraw within the next 5 years in a short/intermediate term bond fund.

3. Conservative, moderately conservative, preservation minded investors and investors who with start withdrawing from their portfolio in 5 to 10 years– reduce exposure of the more volatile stock and stock mutual fund holdings in your portfolio.

Author Unknown

“As a nation we still continue to enjoy a literally unprecedented prosperity; and it is probable that only reckless speculation and disregard of legitimate business methods on the part of the business world can materially mar this prosperity.”

Teddy Roosevelt
December, 1906

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 welcomes Patricia Peoples, CERTIFIED FINANCIAL PLANNER ™, ChFC, Vice President and Financial Advisor with Morgan Stanley Smith Barney and from Northampton Community College’s Institutional Advancement Department for the Northampton Community College Foundation, Sharon Zondag. They will discuss:

“Charitable giving strategies including those that you can use in your community.”

This show is pre-recorded but will be broadcast at the regular time. 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

On behalf of the Leukemia & Lymphoma Society, Donna Young, Betty Adam, Andrea Schumann, Caroline Kohler, and Valley National, I THANK YOU for all of your support. Your contributions, participation in the Chinese auction and/or attendance at the Apollo Grill Thursday evening resulted in over $5,500 of contributions to fund research for a Leukemia or Lymphoma cure. This blew out our goal of $2,000!

Laurie Siebert and I debuted for our bartender role at the Apollo Grill, and it was a pleasure to serve you – for the first 30 minutes, then it became work for the next hour and one-half. Serving several hundred people at a bar is hard work! I have new appreciation for bartenders working a loud & thirsty crowd.

U.S. equity markets rallied all five days last week, bolstered in part by news that five of the world’s central banks would provide dollar-denominated loans to the European Central Bank, which would then lend the dollars to Europe’s banks.

The move lifted—for now—the threat that European banks would have liquidity issues. The Dow Jones Industrial Average gained 4.7% on the week, or 516.96 points, to catapult over the 11,000 threshold to 11,509. Nasdaq enjoyed the largest improvement, jumping 6.25% to end the five days at 2622.31.

News of the central-bank support for Europe fueled a rally in financial shares both domestically and in Europe. JPMorgan Chase (ticker: JPM) rose 4% and Citigroup (C) added 8%. Europe’s banks improved the most, with Deutsche Bank (D shares gaining 12% and Credit Suisse Group (CS) tacking on 14%. The exception to the rule: UBS (UBS), whose shares were flat on the week after news that a trader lost $2 billion of the firm’s capital on trades gone wrong.

But the gains—both in bank stocks and the broader market—may be short-lived. The liquidity the central banks are providing Europe doesn’t make Greece any less indebted nor does it take loans to the PIIGS (Portugal, Ireland, Italy, Greece and Spain) off of European bank balance sheets. The central banks “pushed the problem out into early next year,” says Wayne Nordberg, head of New York City-based Hollow Brook Associates. “The only way you can solve the problem is to write off the bad debts.”

His forecast: The stock market will continue to fall as the European drama plays out, as earnings estimates get cut and as the political drama in the U.S. unfolds.
More immediately, the Federal Reserve Open Market Committee will meet this week, and is expected to announce Operation Twist—the purchase of longer-dated Treasuries to bring long-term interest rates down further (Source: Barrons Online).

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

Returns through 9-16-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	-.5	6.3	5.8	7.0	6.7	5.7
US Stocks-Standard & Poor’s 500	5.2	-7.2	2.7	-3.7	-4.9	0.6
Foreign Stocks- MS EAFE Developed Countries	2.2	-13.4	-5.8	– 3.7	-5.0	3.0

The FED and other Central Banks have not yet followed through with coordinated efforts to support their economies and restore confidence.  Meanwhile, last week’s economic reports indicate the economy has slowed more than economists expected.  These reports coupled with last week’s drop in the stock market, will diminish American’s confidence even further.  And, as I reported in The Weekly Commentary weekly during each of the past four weeks, a continued crisis in confidence will probably result in further economic slowdown, and maybe a full-fledged recession.  I believe the probability of a recession has grown dramatically. 

The following is a succinct summation of week’s events:

Positives:
1) Indonesia, South Korea, Philippines and Malaysia back off from further rate hikes
2) Aug ISM services index unexpectedly rises
3) July Trade Deficit shrinks by $7b, exports rise to record high, Aug though likely different
4) China economic data eases pressure on PBOC to tighten further

Negatives:
1) Short term fiscal stimulus only lasts short term, we need permanent policy changes
2) Greece on verge of outright default as having difficulty meeting Bailout conditions. If were to occur, can it be contained? Likely not at first
3) European bank stress intensifies, euro basis swap widest since Dec ’08, 3 month euribor/OIS spread back at Mar ’09 levels
4) Canada and Australia both report unexpected job losses in Aug
5) Initial Jobless Claims 9k higher than expected at 414k
6) Even with a mortgage rate of just 4.23%, refinancing apps fall 6.3%, lower for a 3rd straight week and purchases rise just .2%