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With the first half of the year now past, and the second half in its infancy, it is time to review our current economic outlook for the rest of this year and beyond.

Greece, Italy and European Debt Issues

It is difficult to pick up the newspaper today without some mention of the Greek debt crisis. European leaders continue to seek a solution resolving Greece’s debt. Unfortunately, no single rescue plan seems to be gaining any traction, thereby creating mounting uncertainty about the potential solution sets for Greece. It is now being suggested that Greece could undergo a selective default as part of a broader debt rollover plan (CNBC). Fortunately, the commitment from the ECB, IMF, France and Germany to solve Greece’s debt problems should keep the situation from spinning out of control.

In the meantime, Italy’s debt problems have recently garnered international attention. Fortunately, Italy is running a primary budget surplus and has net foreign debt of only 21% of GDP compared to 80%-110% in other peripheral European countries (Credit Suisse). Nevertheless, Italy seems ready to address global concerns by accelerating debt reduction measures. On July 15th, 2011, Italy’s Parliament passed an austerity budget.

US Debt Ceiling

Here at home, the Democrats and Republicans have locked horns trying to resolve the debt ceiling before the August 2nd deadline. Despite early efforts at broad reform, neither party wants to anger voters by reducing Medicare, Social Security or tax write-offs. As a result, spending cuts and deficit reduction measures may be strung out over decades. On the short term, this may be good. Just now, economy is still too weak to withstand sharp reductions in federal spending. Longer term there is opportunity for growing our way out of the structural imbalances as our debt level is still an affordable 65% of GDP (The Economist).

Predicting A Housing Rebound

Over the next 12-24 months, the stock market is predicting a housing rebound. To illustrate this point, investors have already built a premium into the price of publicly traded residential construction firms. By comparison, the S&P 500 is trading at a meager 13.5 multiple times 2012 estimated earnings, while residential building firms sport a multiple of some 20 times 2012 earnings estimates. This assumptive rebound in the housing market also predicts, by implication, an improving jobs and banking picture.

Stocks

In spite of recent correctional market activity, the stock market remains relatively healthy. The S&P 500 is trading at a conservative price-to-earnings multiple, and according to Bloomberg analysts, is poised to establish profit patterns in line with its average growth over the last 51 years. Additionally, corporate balance sheets are strong and dividend yields on many stocks now surpass bond yields. Mergers and acquisitions activity is up 26% from the first half of last year (Credit Suisse). Many analysts, including Credit Suisse’s Global Equity Strategy team, now think the S&P 500 could reach 1450 by year end. Finally, a multiple of 15 times $96 in S&P 500 earnings would result in a 1440 price level.

Conclusion

We appear to be in the mid-cycle phase of this meager expansion. While economists in Europe and the United States continue to offer new strategies to resolve challenging debt issues, a pallid but growing improvements in jobs, housing and consumer debt is under way. A low-cost borrowing environment continues to give relief to institutions and individuals pressured by the obligation to repay debt. As this low-interest-rate-driven rebound continues to move forward, the markets should recognize the remarkable accomplishment of real deleveraging progress over time, an achievement that should accommodate higher earnings and multiples. People You Know For someone you know, the professional add-on service of an experienced certified financial planner and/or MBA business advisor may be extremely valuable. Sometimes people don’t even know where to start. A discussion of income and growth matters can be comple, requiring an understanding of unique needs. Retirement counseling can also be helpful. Financial planning can also recognize the need for risk management and estate planning. A caring, credentialed and experienced ear can help because everyone has a unique situation.

Contact Us to learn more about working with Vaughn Woods Financial Group.

Best Regards,

Vaughn L. Woods, CFP®, M.B.A.

*Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views off Delta Equity Services Corp. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0137

The following sources were used to research and write this newsletter:

- Marketedge.com, Pershing NetExchange Pro, Bloomberg, Credit Suisse, Briefing.com, Standard & Poors

- Europe Considers Greek Default, Lenders to Meet, CNBC.com, July 12, 2011

- Garthwaite A., Comments on Italy, First Edition, Credit Suisse, July 12, 2011

- Shame on them, The Economist, July 7, 2011

- Chen, H., et. al, Mergers & Expectations: First Half 2011 Scorecard, Credit Suisse, July 7, 2011

- Garthwaite, A. Global Equity Strategy, First Edition, Credit Suisse, Jun 14, 2011

- Nazareth, Rita and Lu Wang, Profits Climb to 51-Year Mean as S&P 500 P/E at Crisis Level, Bloomberg.com, July 11, 2011