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 seven 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.

Yes. The FOURTH QUARTER (the months of October, November and December) is often good for stock investors. How frequently? 16 out of the last 20 years. And, last year, the stock market’s advance in the FOURTH QUARTER was spectacular – up 10.7%. In other words, a good surprise.

But, it’s no guarantee that the stock market in 2011 FOURTH QUARTER will be up. Only 4 years ago the S&P 500 hit its highest level ever of 1,565 before starting its 17 month long plunge to 660.

NOTE: The performance statistics are that of the Standard & Poor’s 500 Index which is an unmanaged index of 500 U.S. stocks. This index is widely considered to be representative of the total U.S. stock market. An investor cannot purchase this index as an investment although surrogates exist that possess similar perform characteristics.

The show airs from 6-7 PM Wednesdays on 88.1 FM and online at www.wdiy.org

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The show is hosted by Valley National’s Laurie Siebert CPA, CFP. This week Laurie welcomes a very special guest Dean Wegner. Dean is an author and a Personal Finance Expert of WeTV’s acclaimed series “Downsized”. We will discuss his latest book, “Life After Foreclosure”

This show 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 visit check the show’s website www.yourfinancialchoices.com

This last weekend I visited my brother Jim and his wife Colleen in Brush Valley, Pa (9 miles east of Indiana). They hosted family and friends for an old-fashioned Apple Cider fest. It was great cider from apples they bought from the Amish who live around the hill from them. The hill, by the way, was in flames – the vivid flaming leaves of autumn.

The brilliance of the leaves increases as one travels west on the Turnpike. I noticed the biggest change when I emerged from the Tuscarora tunnel. Mostly green on the east side to brilliant color on the west side. Pennsylvania is an amazing place.

Last week the number of POSITIVE developments easily exceeded NEGATIVE developments, and the stock markets increased as a result.

Positives:

1) Sept Payrolls surprise to upside but monthly ytd avg is still only 119k
2) ISM mfr’g up 1 pt from Aug and better than expected
3) ISM services hangs in a touch above estimate
4) Initial Jobless Claims rise to 401k but 9k less than thought
5) Sept retail comps above forecasts as were vehicle sales
6) Canada adds jobs in Sept 4x expectations
7) ECB as expected adds loan facilities as lender of last resort and only resort for some, euro basis swap falls below 100 bps to 2 week low and euribor/ois spread down to 5 week low
8) EU finally focusing on further Greek debt haircut and bank recap but execution and Germany and French participation extent in question
9) BoE embarks on another round of QE to help economy
10) China mfr’g in Sept up from Aug, Services PMI up by 1.7 pts to 59.3 and HSBC non state weighted services index also up
11) Japan’s Q3 Tankan mfr’g # rises to +2 from -9, although as expected

Negatives:

1) Bank of England turns printing press power back on even with CPI running north of 4%. When will this cost of money price fixing and currency debasement experiment end?
2) Dexia, Belgium’s largest bank with tentacles in many places, on financial precipice
3) Fitch downgrade of Spain’s credit rating puts them below both S&P and Moody’s. Italian downgrades by Moody’s and Fitch have them in line to notch higher vs S&P respectively (Source: The Big Picture).

A search on the Website of the DSM-V, the abbreviation for the bible of psychological disorders, reveals no entry for “volatility fatigue,” but given its growing prevalence on Wall Street, there soon might be one.

The stock market again zigzagged through the week, in keeping with its schizophrenic nature since early August. Shares finished about 2% higher on the week, sandwiching a poor Monday and Friday around a strong midweek showing.

Money managers we spoke with, almost to a man and woman, threw their hands up in surrender and fatigue. This isn’t a fundamental market to pick stocks. The complaint goes along these lines: I can make confident picks about earnings, but not about whether or not there will be a full-blown euro-zone sovereign-debt collapse.

But we are only being partly facetious. As an anecdotal measure of the kind of volatility suffered since the market’s gyrations began Aug. 2, consider that in three of every four trading days since then, the Dow Jones Industrial Average has produced either a negative or positive triple-digit close. Roughly that translates into almost a 1% daily move.

Last week, the Dow closed at 11,103.12 up 1.7%, while the Nasdaq Composite finished at 2479, up 3%.

The Standard & Poor’s 500 index, in the way of technical analysis, did fall as low as 1075 briefly Tuesday, more than 20% down from its 2011 high of 1363.63, set April 29. It turned higher by the end of the day, thereby avoiding the technical definition of a bear market.

“We are getting into a pattern of seeing negative Mondays after troubling weekend news out of Europe,” says Brian Belski, the chief investment strategist at Oppenheimer.

In the main, the U.S. economic data were decent this week, supporting a move upward from mid-Tuesday on, he adds. On Friday, the U.S. Labor Department said employers added 103,000 jobs in September, above consensus. The nation’s unemployment remains at 9.1%.

Perhaps some semblance of normality—that is, where corporate fundamentals matter—will return this week as the third-quarter earnings season kicks off, with the first big report due from Alcoa (ticker: AA) on Tuesday.

A bullish Belski says that, with the market in a funk, the stage is set for an upside surprise from better-than-expected earnings. Consensus earnings have been dropping of late on concerns about the global economy.

When you see the heavy investor concentration in utilities, staples, telecoms and health-care stocks that has taken place recently, he says, a good earnings season could make for a “pretty decent” upward move.

Indeed, one of the more interesting contradictions investors face is that the outlook from corporate executives seems downright enthusiastic compared with the market’s gloom.

“The macro fundamentals have been overwhelming.” says Lloyd Khaner, who runs Khaner Capital Management, “Yet company fundamentals are not that bad. The market has been anticipating that things will get worse and pricing things quickly.”
It’s not as if there’s been a parade of third-quarter negative pre-announcements. Maybe investors will soon start to worry about the micro instead of the macro. That will seem like a relief.

THERE’S BEEN MUCH COMMENTARY about how U.S. stocks seem to be following the European sovereign-debt saga. With so many European government talking heads making almost daily comments, often contradictory ones, about how Greece’s debt problem will be handled, it’s no wonder investors are confused.

Investors know it’s been a case of the tail wagging the dog. Historically, it’s been the U.S. stock market that has led other world markets, but the extent of how closely the U.S. has followed Europe might come as a surprise.

The correlation seems extraordinary. While many S&P 500 companies get a big chunk of sales from Europe, you have to wonder if perhaps the U.S. broad market moves are exaggerated, given that it’s the European banks that are likely to be the most exposed to this issue.

Through Friday, Sept. 30, the S&P 500 had declined just over 16% from 1353 on July 7. Most European stock markets close by 11:30 a.m. Eastern time, and the performance of stocks in the U.S. when Europe has been open versus when Continental markets were closed has been striking, according to Bespoke Investment Group (Source: Barrons Online).

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

Returns through 10-7-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	-.6	6.0	4.0	7.4	6.4	5.5
US Stocks-Standard & Poor’s 500	2.2	-6.7	1.8	1.1	-6.3	.4
Foreign Stocks- MS EAFE Developed Countries	2.0	-15.5	-13.0	– .6	-5.9	2.3

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.