Investors realized last week that a resolution to Europe’s financial crisis may be far more important to the future of the U.S. financial markets than just about anything President Obama can say or the Federal Reserve can do.

A rumor Friday morning that Greece would default on its debt over the weekend sent U.S. and European shares into a tailspin, despite the Greek government’s strong denial of such talk.

Contributing to the dour mood was the resignation of Jürgen Stark, Germany’s top representative on the European Central Bank’s executive board. His departure reinforced the impression that the ECB, like the U.S. Federal Reserve, suffers from internal disagreements about how to help the economy. The discord raises questions about the effectiveness of these institutions, and more immediately, whether Germany will support the funding of future euro-zone bailouts.

Problems across the pond overshadowed the $447 billion jobs program that President Obama unveiled Thursday night before a joint session of Congress. The Dow Jones Industrial Average fell 303.68 points, or 2.7% Friday, and 248.13 points on the holiday-shortened week, to finish the four days at 10,992.13, the Dow’s first trip below 11,000 since Aug. 22. The Nasdaq lost 0.5% to 2467.99.

Signs of distress were even more apparent in markets overseas. Yields on Greek two-year notes climbed as high as 48%, and 10-year Greek paper now yields 18%. Germany’s DAX index of stocks lost 4% Friday, and Spain’s stock market fell by a similar amount.

European bank stocks were clobbered, with Deutsche Bank (ticker: D falling 8.7%, or almost three points, to 31.14. UBS (UBS) slid 6% to 11.87, and Credit Suisse Group (CS) 6.12%, or 1.49, to 22.86. Investors are uncertain about just how much exposure banks have to the sovereign debt of Greece and other ailing European countries. If the weak European nations need to restructure their debt, the banks could need to raise new equity.

U.S. financials suffered less damage, but hardly emerged unscathed. Citigroup (C) and JP Morgan Chase (JPM) shares fell roughly 4%, and Bank of America (BAC) stock lost 3%.

IF EUROPEAN BANKS ARE ABOUT to be hit by a restructuring of sovereign debt, President Obama’s stimulus plan while helpful, will not insulate American companies from the pain that’s ahead. About half the companies in the S&P 500 break out details of how much in annual revenue they derive from Europe. This group reports that 14.6% of total sales are rung up on the Continent—a fact that ought to alarm Wall Street’s most upbeat analysts.

So far, analysts are standing by their rosy earnings forecasts for 2011. S&P 500 operating earnings are expected to total a record $98.59 this year and $112.35 in 2012, says Howard Silverblatt, senior index analyst at Standard & Poor’s. But the optimism embedded in those forecasts looks to be unwarranted.

Friday brought signs that expectations might be about to come down. McDonald’s (MCD)’s August same-store sales rose 3.9% in the U.S., missing expectations for a 4.4% jump due in part to the hurricane that hit the East Coast. The chain’s sales in Europe rose 2.7%, disappointing those forecasting a 5.57% increase. McDonald’s stock lost about 4%, or 3.58 a share, falling to 85.03. Janney Capital Markets reduced its earnings estimate for this year by four cents, to $5.19 a share, and cut its ’12 forecast by five cents, to $5.65.

SEPTEMBER HISTORICALLY is a tough month for the markets, but Bespoke Investment Group notes that it has been particularly weak when the first few days of the month produce losses. The Dow’s 4.08% decline in the first three days of September was its fourth worst three-day start going back to 1900. When the market declines by 2% or more in the first three days, it has averaged a 6.31% decline for the remainder of the month.

In the three other years when the market fell by 4% or more in its first three days of September trading (1931, 1946 and 2002), the results were even worse: an average decline of 13.5% through the rest of the month. In 1946 the loss over the remainder of September was 4.83%. In 2002 it was 8.35%, and in 1931, a stunning 27%.

The results in the rest of the year aren’t pretty, either. Bespoke reports that the Dow has fallen more than 2% in the first three days of September 13 times since 1900. In those years the index fell on average by 10.37% for the remainder of the year (Source: Barrons Online).

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

Returns through 9-9-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	.2	6.9	6.5	7.0	6.7	5.8
US Stocks-Standard & Poor’s 500	-1.9	-11.8	-1.1	-6.0	-5.6	0.1
Foreign Stocks- MS EAFE Developed Countries	-5.5	-15.2	-6.3	– 6.2	-5.4	2.1

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.

We first alerted you two and one-half years ago (TWC of 2-23-09) to sell all of your mutual funds with high European concentration.   In 2009, we feared the credit crisis would grow and engulf more countries.  This fear became reality.  The current status of Europe Union is highly fragile.  We recommend you continue to avoid mutual funds with high European concentration. 

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 three 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 will 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.

On Thursday evening, President Obama will outline his current thinking on job creation because we are clearly not coming out of the 2008 recession like we normally do. That is because what we just experienced was not a normal business-cycle recession, but a deleveraging/balance-sheet/debt-crisis recession. And the latter simply take at least 5-6 years to work through, after a country begins to deal with the problem, which we have not.

Even if somehow a Republican appeared in the White House tomorrow, there is no magic he (or she!) could bring with him/her to fix the unemployment problem. There are just some things the private sector will have to do for itself, and the sooner the government stops getting in the way, the sooner we will get things fixed. But it will take a long time, no matter what. That is just the way things are (Source, in part, Calculated Risk).

“An ounce of action is worth a ton of theory.”

– Friedrich Engels

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:





Personal Finance for Dummies
With author Eric Tyson




Laurie and Eric 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.

The U.S. stock market almost stretched its rebound through a second straight week, but evidence of stalling job creation and quieter factories tested buyers’ resolve, and challenged the assumption that economic momentum will pick up anew in the fall.

Stocks began September under renewed selling pressure when a key manufacturing index shrank to 50.6 in August from 50.9 in July. A reading above 50 still points to expansion, and was far better than the contraction economists were expecting. But the wilting momentum was a cause for concern, and the expanding roster of contracting industrial sectors now includes those in Australia, Brazil, China, France, Italy, Korea, Russia, Spain, Taiwan and the U.K., while Germany and U.S. are approaching stall speed. Then on Friday, the U.S. Labor Department said job growth in August has slowed to nil for the first time in nearly a year, while the unemployment rate was stuck at 9.1%.

Lately, bulls have made much of the divergence between economic cues and sentiment readings: While the data show economic expansion slowing, consumer and business sentiment measures are far more dire and have plunged to depths typically seen in recessions. The implication is that Americans have overreacted to this summer’s U.S. debt-ceiling squabble and European debt crisis, and the panic surely will pass once we see the economy clawing its way back from the abyss. What this overlooks, however, is how crowd sentiment can shape behavior, persuading corporations to put off hiring and consumers to hold off big purchases.

So has the stock market sufficiently considered any economic deterioration still to come? At their lowest point this summer, when the Standard & Poor’s 500 Index closed at 1119 on Aug. 8, stocks were off 18% from their 2011 peaks—roughly two-thirds of the way toward the average peak-to-trough slide of 26% seen near recessions. All 500 of the components in the index fell that day, and declining traffic was a whopping 589 times heavier than the trickle of advancers. Ned Davis Research also counted five days in August when the horde of decliners was at least 10 times greater than advancers, and another five days when the exact opposite happened, a sure sign the market is groping for a bottom.

But while stocks have rebounded 5% from that low-water mark, momentum isn’t yet on the bulls’ side, and the S&P 500 is nearly 6% below its downward-sloping 50-day average. Bespoke Investment Group also analyzed stocks’ latest pop, between Aug. 22 to Aug. 31, and the results were hardly encouraging. While the average stock jumped 9.9% during that stretch, the 50 smallest stocks in the S&P 500 gained 12.7%, while the 50 biggest rose just 7.9%. In fact, that rebound was largely egged on by stocks with the richest price-to-earnings valuations, the lowest dividend yields, the most short interest. It’s a picture of a reflexive bounce following rabid selling, and not of longer-term investors stepping in to buy quality stocks.

It helps consumers that Treasury yields have plummeted this year, which keeps mortgage rates and borrowing costs down. Gas prices have pulled back despite the summer driving season, and crude oil is down 24% from its April high. Individual investors are soured toward stocks, and have whittled down their holdings, and dismal job growth has increased the cry for monetary support when the Federal Reserve meets later this month.
 
Meanwhile, money managers have suffered through a cranky summer. According to JPMorgan strategist Thomas Lee, the crop of funds lagging their benchmarks by at least 2.5 percentage points has ballooned from 24% a month ago to about 47%, the worst underperformance since 1998. Those trailing their benchmarks by at least five percentage points have also jumped, from 10% to 25%. Whether this is good news will depend on your perspective: Performance chasing by money managers who can’t afford to miss any rallies might help lift the indexes. But is it buying borne of true conviction, and will rebounding stocks really signal a mending economy?

The Dow Jones Industrial Average absorbed its fifth loss in six weeks, and gave up 44, or 0.4%, to 11,240. The Nasdaq Composite Index eked out a half-point gain to reach 2480, while the Russell 2000 fell 8 points, or 1.2%, to 683. Gold notched its eighth gain in nine weeks, while the 10-year Treasury yield fell below 2% (Source: Barrons Online).