Standard & Poor’s Ratings Services Inc. cut its outlook on the United States of America to negative, increasing the likelihood of a potential downgrade from its triple-A rating, as the path from large budget deficits and rising government debt remains unclear. “More than two years after the beginning of the recent crisis, U.S. policy makers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” S&P credit analyst Nikola G. Swann said. He said the rating agency puts the chance of a U.S. downgrade within two years at least one-in-three.

S&P said “We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible,” S&P added. Source: S&P.

S&P’s time line is very much in line with my past comments projecting a financial crisis that may occur in 2015 (plus or minus two years).

“Plans are only good intentions unless they immediately degenerate into hard work.”

— Peter Drucker

This weekend, my wife Jo Anne and I visited Washington DC to visit my daughter Jennifer. We attended Easter church services at the National Cathedral. If you have the opportunity to attend a church service or visit, I strongly recommend it. The National Cathedral is a true treasure and the 6th largest cathedral in the world. My most vivid memory, other than the immensity of the building: the procession at the beginning. It lasted at least 7 minutes comprising of the symbols, relics, and local heads of two different churches, two choirs, banners and two groups of assistants.

There was something else I noted in my trip to DC. The trees there are FULL and all flowering bushes are in full bloom. I returned home to the Lehigh Valley to find the trees here still mostly barren and harsh looking. We are at least 3 weeks behind at this point.

Relishing the present instead of fretting about the future, the U.S. stock market snapped out of its recent indifference, snagged its first gain in three weeks and climbed toward its highest level of 2011.

Living in the now is easy when General Electric (GE) and Intel (INTC) are reporting surging profits. Apple’s (AAPL) income jumped 95% as it overtook Nokia (NOK) as the largest handset provider by revenue, while companies ranging from Qualcomm (QCOM) to United Technologies (UTX) told investors to expect even better earnings this year.

Of the 137 companies in the Standard & Poor’s 500 that have reported first-quarter results, three out of four have beaten profit forecasts—better than the 17-year average near 62%—while just 14% have missed their marks, says Thomson Reuters. Profits are coming in 8% higher than analysts expected—well above the longer-term average outperformance of 2%, though less than the 9% margin by which they were trumping targets the past four quarters. An impressive 69% also beat revenue expectations, with sales coming in 2% better than forecast.

So, the market barely flinched when S&P cut its outlook on U.S. debt from “stable” to “negative,” which paves the way for a future downgrade. Is it because we now see rating agencies as toothless and belated staters of the obvious? Traders expect Washington to take a token—though showy—stab at slowing the rise in our national debt, but not making a real dent for years. That would still favor equities versus government debt. Says Jan Loeys, JPMorgan’s global head of asset allocation: “Governments’ muddle-through approach is a negative for their bonds, but is not bad enough to destroy economies and equity markets.”

So where does that leave us? Money managers love proclaiming that they’re long-term investors and not market-timers, but lately that’s a lie. Anyone sitting on stock-market gains and angling for more are, like Cinderella, dancing with their eyes on the clock. We want to wring the most out of this party, but leave before the bill for this revelry comes due. So we scour the credit markets for signs of a loss of confidence and economic-momentum gauges for the first whiff of a turn, while we watch commodity costs climb toward the day when the crowds might cringe.

With the stock market closed for Good Friday, the Dow Jones Industrial Average ended last week up 164, or 1.3%, to 12,506, its highest finish since June 2008. The S&P 500 added 18, or 1.3%, to 1337, the highest since Feb. 18. The Nasdaq Composite Index jumped 56, or 2%, to 2820, while the Russell 2000 added 11 points, or 1.3%, to 846. Crude oil also rebounded, while gold rose to a new record at $1,503 an ounce.

A year ago, the stock market began a 16% correction, as our central bank wound down its quantitative-easing campaign, dubbed QE1, and as Europe’s debt crisis flared and business confidence plunged. The consensus now believes our economy is on a stronger footing and thus better able to withstand the end of QE2 this June. It helps that employers are hiring anew, and the rush to pay down debt has started to slow, which will allow consumers to spend more of what they earn. But we’re still keeping our eyes peeled for the first sign of trouble, just in case.

Today, cash in money-market mutual funds stands at 17.4% of what Ned Davis Research reckons is the market value of all common stocks, down from 47% in March 2009. “That still leaves a lot of savings the Fed perhaps wants to force into the stock market,” Davis writes, “but I think it’s fair to say the really anxious buyers of stock have already acted.” While Main Street seems vexed by $4.00 gasoline and creeping food inflation, the latest Conference Board survey shows that CEO confidence at the highest in seven years. At these levels, it’s hard to argue that corporate confidence isn’t increasingly priced into the market. So if CEO confidence starts to flag, watch out. Until then, Davis argues, the overall evidence “continues to lean bullish”—no doubt for now (Source: Barrons Online).

“The first one gets the oyster, the second gets the shell.”

– Andrew Carnegie

QUESTION: I want to gift my son $5,000 for him to contribute to his IRA. Does it matter when I give him the money to do this?

ANSWER: Yes, there is an advantage to making the IRA contributions as early as possible, and thus lengthening the deferral period. This point is best demonstrated by an example. It should be noted that, although the following example assumes a traditional IRA, the principle of tax deferral on earnings also applies to the Roth IRA. Further, the Roth IRA has the advantage that qualified distributions will be tax free.

Example:
Ed begins to make annual contributions to a traditional IRA when he is age 30. He invests $5,000 each year until he reaches age 60. The IRA grows at 8 percent each year. If Ed makes these contributions at the beginning of the year, the IRA will equal $611,729 at age 60; if made at the end of the year, the IRA will equal $566,416. The difference is substantial, $ 45,313.

Rates of return are for illustration purposes only. No guaranteed result is implied. Feel free to contact me if you or someone you know has this type of situation. Financial Planning and tax planning advice presented here is general in nature, and individual circumstances make applying these general rules tricky; thus, the above answer cannot be applied to all circumstances because the slightest variation could cause a different outcome.

Yesterday, my wife Jo Anne continued our tradition of assembling family and friends for a traditional Italian dinner on Palm Sunday. Jo Anne’s version: homemade (durum semolina flour) pasta with her own meatballs with plenty of good red wine. I applaud her energy. She made many pounds of pasta and dozens of meatballs for a total of 32 people. And, there were no leftovers – a sure sign of a success in the eyes of an Italian cook.

Last week there were many more NEGATIVE than POSITIVE developments, and the many stock markets around the world declined.

Below is a succinct list of last week’s events:

Positives:
1) Retail Sales in March were good, notwithstanding rising gasoline and food prices
2) NY mfr’g survey in April rises to 1-year high
3) Apr Univ. of Michigan confidence bounces 2 pts from lowest level since Nov ’09 with still elevated 1 yr inflation expectations
4) China reports stronger than expected Q1 GDP, retail sales and IP

Negatives:
1) US CPI rises 2.7% y/o/y, most since Dec ’09 and Import Prices rise 9.7% y/o/y
2) Initial Jobless Claims rise back above 400k for the 1st time since early March
3) Higher than expected trade deficit and lower than expected rise in business inventories send Q1 GDP forecasts down to around 2%
4) NFIB small business optimism index falls to 5 month low as price pressures rise, and plans to hire, expectations of better economy and better sales fall. Cap ex component did rise
5) Soft start to Q1 earnings season as seen with AA, JPM, GOOG and BAC
6) Yields in Greece, Portugal, Ireland and Spain all rise as clock ticks on inevitable timing of Greek debt restructuring. Greek 2 yr yield up 225 bps on the week and CDS goes to record high
7) Gold at record high, direct indictment of Fed policy
8) China reports stronger than expected higher than forecasted CPI and PPI.

Source: The Big Picture

U.S. stocks fell for a second straight week, although the shallow decline suggests increasing skepticism, but not yet a repudiation of the market’s central assumption that the global economy will continue to grow and inflation will stay tame in the developed world.

The pause shows that the trading world has quickly modulated its once-unbridled zeal for risk. Economists now think that the U.S. economy might have expanded just 1.5% or so last quarter, down from the more than 3% they thought likely when the year began. And the latest survey of global fund managers by BofA Merrill Lynch shows 51% fretting about too-loose monetary policy—the highest number in seven years—while the throng that had anticipated better profits over the next 12 months has shriveled to 19% in April, from 32% in March and 51% in February.

So far, companies have been reporting first-quarter profits that are nearly 5% better than analysts were expecting. That pales by comparison with some recent quarters, in which U.S. corporations were beating forecasts by double digits, but it still presents a triumph on paper. Too bad stockholders seem to be counting on more: Companies beating profit targets have been rewarded with a mere 0.6% gain in the following session, while those that dared miss were walloped 4%, according to preliminary data from Bespoke Investment Group.

Among the latter: Alcoa (ticker: AA) swung to a first-quarter profit, but fell short of its revenue target, and its stock was clipped by 6%. JPMorgan Chase’s (JPM) biggest quarterly take ever and a 67% profit jump has brought only a flat finish. Google’s (GOOG) profits increased 18%, while revenue grew 27%—but is a 54% jump in operating expenses a sign of an increasingly cavalier attitude toward pay and spending? The company lost $15.3 billion in market value Friday, as the stock fell 8.3%.

What matters more, of course, is whether higher commodity costs and government belt-tightening will start to crimp the confidence of both companies and consumers. Disruptions to supply chains in Japan also may have a lagged effect that won’t be fully felt until later this spring. Thomas Lee, JPMorgan’s U.S. equity strategist, trimmed his forecast for second-quarter profits for the Standard & Poor’s 500 Index to $23 from $24, and cut his full-year profit forecast by $1, to $96.50. But he noted that five of the seven macroeconomic indicators he watches have continued to improve, and that the crop of companies with net margins surpassing their prior peaks has grown to 30% from 22% a year ago. He thinks revenue growth of 9% will help net margins expand above their prior peak of 9%, toward about 11% by 2012.

“Fear is making a comeback, but the usual cycle-ending hallmarks remain absent,” notes Myles Zyblock, RBC Capital Markets’ chief institutional strategist. “Crowded long positions are being cleared rather quickly, characteristic of a world dominated by low-conviction optimists.” Main Street also remains underinvested in stocks, he adds, while the business cycle is buttressed by a healthy spread between the return on and cost of capital, and the yield curve points to earnings gains stretching into 2012.

Last week, the cost of insuring against a Greek default climbed further, amid speculation of a restructuring of Greece’s debt. But crude oil broke its three-week rise, dropping by 2.8% after Goldman Sachs suggested that prices might have gotten ahead of fundamentals. While the firm sees further upside in the long run, it argues that nascent signs of demand destruction in the U.S., elections in Nigeria and a potential ceasefire in Libya could weigh on prices in the next three to six months.

Companies continued browsing for growth, and reports surfaced Friday that Johnson & Johnson (JNJ) was in talks to buy Swiss medical-equipment-maker Synthes for about $20 billion. Even before this, merger volume had surpassed $934 billion so far this year for the biggest start since 2007, says the research firm Dealogic.

The Dow Jones Industrial Average snapped a three-week ascent, falling by 38 points, or 0.3%, to 12,342. The S&P, despite a two-week retreat, it is just 1.7% off its mid-February peak. The Nasdaq Composite Index fell 16, or 0.6%, to 2765, while the Russell 2000 Index of small stocks slipped by 6 points, or 0.7%, to 835(Source: Barrons Online).