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Last week showed an improving economy where the number of POSITIVE developments outnumbered NEGATIVE developments. And, the value of well-run companies moved higher.

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

Positives:
1) EU summit that actually accomplishes something, that of codifying greater fiscal hand holding amongst its members
2) ECB cuts rates 25 bps, adds 3 yr lending facility, lowers its collateral standards, and cuts RRR to 1%
3) Eurozone banks take advantage of Fed swap line price cut with massive uptake from ECB to ease yr end $ funding stress
4) Monti gov’t in Italy announces 30b euro/3 yr budget reduction plan
5) Univ of Michigan confidence best since June, almost 2 pts better than expected, now back in line with avg ytd
6) Initial Jobless Claims at 381k, lowest since Feb
7) MBA said refi’s rise 15.3% from lowest since July and purchases jump to most since April
8) CPI and PPI in China moderates, retail sales stronger than expected
9) RBA cuts interest rates

Negatives:
1) S&P threatens downgrades for all 17 Euro zone countries
2) Euro basis swap flat on week, remaining still very elevated notwithstanding swap line price cut
3) Shanghai index falls to lowest since Mar ’09, IP gains at slowest since Aug ’09 and HSBC PMI services falls to 3 month low
4) Australia jobs figure disappoints
5) US ISM services index falls to lowest since Jan ’10
6) TXN, ALTR, LSCC, and DD all preannounce negatively with still 3 weeks left in the year, collateral economic damage from European slowdown and more to come?
7) Brazil’s economic growth slows to 2.1% y/o/y, the slowest pace since a contraction in Q3 ’09 (Source: The Big Picture).

U.S. Stocks moved up about 1% last week, amid conflicting and uncertain signals from European officials on the Continent’s sovereign-debt problems. In traders’ parlance, this looks like a market that wants to go up, with investors choosing to focus on the good news.

Thursday was the week’s only down day, with stocks falling on comments from European Central Bank President Mario Draghi, who poured cold water on investor hopes that the ECB might start to buy a lot of bonds. There’s a sense among investors that the ECB head might be bluffing until there is clearer action from the European Union. Well, that’s going to be a bit of a wait.

Still, the central bank cut interest rates and announced some three-year loan programs to banks that should improve their liquidity issues. That doesn’t do much for their solvency problems. Again, the market took what it could from that.

And the EU agreed Friday to draft a new treaty for deeper economic integration that envisions a tougher budget discipline regime with automatic sanctions for deficits. That’s right, it’s an agreement to eventually draw up a treaty that will take many months to finalize and still needs approval from the various countries that will take part.
ANY OF THOSE countries could eventually reject the final plan. It’s tentative and no enforcement rules were announced and no new policies aimed at improving growth came out. Oh, and the U.K. isn’t taking part. The market still took what it could from all that anyway.

The Dow Jones Industrial Average rose 1.4% to close at 12184.26. The S&P 500 index was up a bit under 1% to 1255.19 while the Nasdaq Composite added 0.8% to 2646.85. Trading volume wasn’t particularly heavy.

The market has been assuaged, despite the slow, steady and sometimes prodigal moves by policymakers, says Quincy Krosby, market strategist at Prudential Financial. “But that’s how policymaking works….They [the EU] bought some time.”
Krosby likes Draghi’s moves even if they don’t make traders’ Christmas wish list. Couple that, she adds, with the central banks’ indications last month that they are ready to step in with liquidity, and it lends confidence to markets. “It remains a traders’ market and one that can turn on you quickly.”

At least the U.S. news was unambiguously positive. Friday, the Michigan consumer sentiment index rose to 67.7 from 64.1, above the consensus forecast. It’s the highest reading since June though still weak by historical standards. And jobless claims fell to 381,000 from 404,000, below the consensus.

Another ignored signal that isn’t particularly bullish was the market’s failure Friday to close above its 200-day moving average.

We’re guessing that investors are looking with great anticipation to the next big euro zone meeting. On Jan. 23, there will be a regularly scheduled gathering of the group’s finance ministers. To quote a famous line from the New York Jets linebacker Bart Scott: “Can’t Wait!” (Source: Barrons Online).

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

Returns through 12-9-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	.2	7.1	7.5	7.3	6.3	5.8
US Stocks-Standard & Poor’s 500	.9	1.8	3.9	14.7	–  .2	2.8
Foreign Stocks- MS EAFE Developed Countries	-.9	-13.9	-11.8	6.7	-6.9	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.

The U.S. economy is, in a word – “better”. But the stock and bond markets are not paying attention. Instead, their attention has been diverted to the mess in Europe.

I am very concerned about a domino effect melt-down in Europe. I am NOT calling for a “SPECIAL ALERT” to sell, yet. But, I am close. I carefully monitor Italian, Spanish, and French government bond rates. Higher interest rates there are very bad for Europe and the U.S. Click here for more information.

The stock markets have already dropped in the possibility of an economic slowdown AND uncertainty in Europe. 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. And it is very difficult to predict the actions of European central bankers and politicians. 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, gather more information, and carefully watch European interest rates.

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.

“Before you act, listen. Before you react, think. Before you spend, earn. Before you criticize, wait. Before you pray, forgive. Before you quit, try.”

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 a pre-recorded show will discuss:

Lafayette/Lehigh – the most played game in college football. I attended the game and, as always, my alma mater won. GO LEHIGH! The national play-offs are next. Let’s continue to build respect for the Patriot League and non-scholarship college football.