The equity markets had little to be thankful for during the U.S.’s holiday-shortened week.  The S&P 500 dropped by 4.7% through the normally bullish Thanksgiving week.  Other commonly watched indexes fell even more.  Not affected by our holiday, world markets likewise fell precipitously.

Expectations that Europe would cobble together a plan to prevent imminent economic collapse led to a spectacular October rally in stock markets around the world.  However, as persistent bickering among heads of state decreased confidence in that outcome, markets sagged throughout most of November.  Markets still go hour by hour waiting for a positive rumor from Europe.  A plausible plan to “kick the can down the road” will likely lead to a substantial rally, especially with markets as oversold as they are today.

Nonetheless, the longer-term picture is getting darker by the day.  Rating agencies downgraded sovereign bond ratings en masse last week.  Moody’s cut Hungary to junk levels and Fitch did the same for Portugal.  Belgium was downgraded.  S&P warned that it may cut Japan’s rating.  Fitch said that France’s triple-A was at risk.  Investors also downgraded bonds on their own, independent of the rating agencies.  The Italian ten-year bond reached 7.3%, and the two-year climbed over 8%.  There is no realistic prospect that Italy will be able to grow its way out of this debt morass with debt service burdens at such levels.  Even Germany, the financial engine of the Eurozone, saw its bond rates surge last week.  In just over two weeks, German ten-year rates climbed from 1.72% to 2.25%.  By way of comparison, the U.S. ten-year stayed at 1.96% over the same period. Fear is creeping in with respect to all of Europe.  And Europe is a giant piece of the world’s economic and market composite.

As I write this on Sunday evening, a report is circulating that the International Monetary Fund is preparing a $794 billion rescue package for Italy.  The rumor has overnight futures markets in rally mode.  With markets as oversold as they have become over the past few weeks, snap-back rallies could be powerful if it looks likely that some sort of rescue package will defer a near-term debt collapse.  On the other hand, long-term investors must remain conscious of the rapidly spreading deterioration of underlying fundamentals.  Massive debt problems don’t cure themselves.  Left to their natural outcomes, they unwind in a deflationary spiral.  Rarely through history, however, do governments and central banks allow natural outcomes.  More often than not, money printing becomes the defense of choice, resulting in a debt burden reduction through inflation.  In extreme situations, runaway inflation eliminates all debt but introduces economic chaos.  The last example of such an outcome for a major industrial country was in Germany in the 1920s.  In any inflationary environment, varying only by degrees, lenders (bondholders) are penalized and borrowers are rewarded.

Today’s investors are by rights in a serious quandary.  The financial system, at least in Europe, is in danger of collapse. Perhaps investors will believe in a rescue plan that will defer the pain for a few years, and equity prices may rise in celebration.  Holders of sovereign bonds in perceived safe-haven countries (the U.S., Germany and Canada, for example) may profit if a disinflationary or deflationary recession unfolds.  On the other hand, such bondholders may be beaten up badly if central banks resort to the printing press to alleviate the debt pressures.

Eventual outcomes will be politically determined.  Successful investors may succeed more by their ability to anticipate political outcomes than by a deep understanding of investment fundamentals.  In such an environment we rely on our underlying philosophical guideposts, which have stood us in good stead in this extremely dangerous century-to-date.  In a high-risk environment, reduce risk exposure.  Buy risk-bearing assets only when you can acquire them at extremely attractive valuation levels.  Never lose sight of the fact that there will always be another opportunity to make significant gains.  You will not be able to take advantage of that opportunity, however, if you lose a substantial amount of your assets when markets decline.

Tom Feeney is Chief Investment Officer for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more, you are invited to email your interest to Tom@missiontrust.com or call (520) 577-5559 to speak with one of the Portfolio Coordinators.

This has been mostly a business travel week, capped by a New York visit in time to witness the University of Arizona’s thrilling basketball win last night over St. John’s at Madison Square Garden. Tonight I’ll be able to see the tournament championship game against Mississippi State before heading back to Tucson. Go Cats!

This week the stock market repeated the past few months’ pattern, characterized by tremendous daily price volatility. In fact, triple-digit daily moves in the Dow Jones Industrial Average have become the norm, not the exception. The week closed with the S&P 500 down by nearly 4%.

Both stocks and bonds bounced back and forth with each new headline about European or U.S. debt crises. As we have noted previously in these posts, current markets are responding to rumors, hopes and speculation far more than to investment-worthy data. With stock trading volume low and volatility high, it is apparent than the indexes are in the hands of hedge funds and high-frequency traders rather than true investors.

As has been the case for months, European bankers and heads of state are long on plan announcements and short on committed cash. It’s apparently far easier to pledge than to pay.

As its first deadline nears, the congressional supercommittee is increasingly in the news. The committee’s bipartisan recommendation and the subsequent congressional vote are due next week. Most political analysts believe there to be substantial risk of failure to agree on even the minimal $1.2 trillion deficit reduction over ten years. It’s impossible to know how investors will react to various degrees of success or failure to agree on the mandated reductions. Nonetheless, based on recent market performance, it is highly likely that reactions will be violent in one direction or another–or both.

Realistically, the debt problems in many European countries and the United States cannot be solved, only deferred. At present, deferral is all that investors are hoping for. It is impossible to forecast when the intractability of the debt condition will force itself upon investor consciousness. The only realistic alternatives in the long run are partial default or inflating away the problems by money creation. Which of the alternatives unfolds over time will subsequently induce bond market reactions that are polar opposites. The threat of default would penalize any suspect bonds but induce a flight to safety into perceived “safe haven” paper. The prospect of inflation could decimate bonds of all credit quality levels.

Equities could experience virtually opposite reactions. The threat of any consequential level of default would likely lead to severe economic contraction and a resultant stock market decline. Moderate inflation for an extended period of time might be beneficial for equities. On the other hand, rampant inflation would introduce huge economic uncertainty. Some companies would benefit; others would suffer. Historically, periods of powerful inflation have generally produced weak stock markets. Ironically, returns on short-term cash have outperformed stocks in periods of severe inflation.

Such uncertainty reinforces the advice we have given for well more than a decade: investors will be better served by maintaining a flexible asset allocation rather than the traditional fixed allocation with periodic rebalancing. The worst of all worlds for the fixed allocation approach would be a declining stock market induced by rampant inflation, which in turn produces negative bond returns – certainly a realistic possibility.

Tom Feeney is Chief Investment Officer for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more, you are invited to email your interest to Tom@missiontrust.com or call (520) 577-5559 to speak with one of the Portfolio Coordinators.

In last week’s entry I pointed to the U.S. stock market’s daily Pavlovian responsiveness to stories and rumors coming from Europe. That action continues this week with the focus shifting from Greece to Italy. Greek Prime Minister Papandreou’s government has collapsed, and opposing parties are scrambling to find enough points of agreement to coalesce around a unity candidate. Virtually no one expects such a government to last. The desperate hope is that the politicians can simply assemble a sufficiently credible coalition in support of the promised austerity measures, so that the next tranche of bailout money will be released before Greece runs out of funds.

Despite the immediacy of that concern, the 800-pound gorilla that has taken its place in the middle of the room is Italy. Italy’s economy and debt levels are many times larger than those of Greece.

Last week I lamented that Italy’s ten-year bond yield had risen to 6.4%, a level that strongly called into question the government’s ability to service its debt and grow its way out of financial distress. Conditions have since worsened. On Wednesday, fear pushed that yield up to 7.25%. It is noteworthy that reaching the 7% threshold was a red flag warning that preceded the necessary bailouts of Greece, Portugal and Ireland. Italy’s political situation is in obvious disarray, and there appears to be no compelling voice strongly advocating the severe austerity measures needed to bring the country into compliance with Eurozone financial standards.

Italy’s growing crisis dramatically compounds the rescue problems that have so far bedeviled Eurozone finance ministers and heads of state. Italy’s failure to roll over its maturing debt at a manageable rate of interest would send shock waves through the European economy. On the other hand, in a weak economic environment, there is virtually no chance that the combined Eurozone members will provide enough rescue money to get Italy over this hurdle.

If the markets push Italy to the wall, there is no European entity (as currently funded) capable of coming to the rescue. The European Central bank could be further capitalized, but that is unlikely given the already-existing financial pressure on its members. Or the Eurozone could agree to permit the ECB to print enough money to paper over the problem. Such a solution, however, runs painfully against the grain for Germans, who retain in their DNA an abhorrence to inflation that decimated the value of their currency in the 1920s. If Germany doesn’t want it, it isn’t going to happen.

That leaves a coordinated worldwide solution as the only realistic possibility. Getting the International Monetary Fund (17% U.S. funded) and the U.S. Federal Reserve on board with the ECB appears to be the only option for pooling enough financial firepower, should Italy need rescue. Could you imagine getting approval of such a monetary commitment if it were put before voters in the United States? Inconceivable in today’s tough times. Should Bernanke, Geithner and the boys pledge U.S. money to such an effort, it would be yet another example of “We know better than you do.”

If you oppose the parade of financial bailouts, as I do, I urge you to let your voice be heard in any way you can. Don’t allow our government officials to reward the profligate at the expense of the prudent.

And if Italy is temporarily rescued, Spain is waiting in the wings. And how are we going to solve our own debt crisis here in the United States?

Tom Feeney is Chief Investment Officer for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more, you are invited to email your interest to Tom@missiontrust.com or call (520) 577-5559 to speak with one of the Portfolio Coordinators.

Another very volatile week! Friday’s mere 61-point loss on the Dow Jones Industrial Average on very light volume brought a frenetic week to a relatively calm conclusion. Reacting to a possible unwinding of the Greek rescue plan, the Dow lost 573 points on Monday and Tuesday. Fed Chairman Ben Bernanke’s reassuring words that the Fed retained numerous options to shore up a flagging economy prompted a 386-point recovery on Wednesday and Thursday. The net of all action was a 2% loss for the week.

This week demonstrated conclusively the market’s responsiveness to headlines and rumors. The Dow rose and fell 100 points or more several times during the week as rumors circulated about prospects for the Greek bailout. Clearly, traders–not investors–had control of the buy and sell levers.

Trading closed for the week with the Greek parliament debating the fate of the Papandreou government and, in turn, with the European debt rescue effort hanging in the balance. It is remarkable that while the heads of state of Eurozone member nations have been meeting repeatedly for months, they have yet to agree on a concrete plan of action. Given the dire consequences that would flow from one or more sovereign defaults and from the resulting damage to the banks holding such bonds, it is hardly a surprise that individual investors are leaving the stock market in droves. It may take years for many of them to return. However, notwithstanding this week’s market decline, traders have been pushing prices up for several weeks with apparent confidence that governments and central bankers will prevent defaults from leading to a banking system failure. Whether or not that confidence will be rewarded is an open question.

Longer-term stock market price patterns still look negative. Ned Davis Research’s study of 45 world markets shows 41 of the 45 with stock indexes trading below their respective 200-day moving averages, a line viewed by many analysts as the demarcation between bull and bear market conditions. Additionally, 40 of those 45 moving averages have turned down, serving as confirmation of a bear market in the eyes of many.

Further disagreement with traders’ recent confidence comes from the bond markets. A vast amount of money has fled to risk-free U.S. treasury bills, which yield effectively nothing. Money has likewise poured into the bonds of safe-havens like the United States and Germany, each of which can borrow for 10 years for a mere 2%. In contrast, despite substantial supportive buying by the European Central Bank and the promise of further support from the block of Eurozone nations, Italian 10-year bond yields have soared to about 6.4%. Most analysts fear that yields over 6% will preclude distressed countries like Italy from servicing their debts and growing out of their current financial distress. The bond market is casting a powerful vote of no confidence in the efforts of politicians and bankers to cobble together a viable solution to the growing European debt crisis.

If Eurozone problems cannot at least be deferred, the consequences for the world financial system could be severe. When ongoing financial success depends upon programs crafted by politicians and self-interested bankers, we are not looking at a normal investment landscape, but rather a casino in which the standard rules of investment only minimally apply.

Tom Feeney is Chief Investment Officer for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more, you are invited to email your interest to Tom@missiontrust.com or call (520) 577-5559 to speak with one of the Portfolio Coordinators.

The third quarter was painful for stock market investors with the S&P 500 losing 13.9%, leaving that index down 8.7% over the first three quarters of 2011. In a very difficult environment we are pleased that where we have complete asset allocation responsibility, client portfolios are up slightly both for the quarter and the year-to-date.

Investors read the news daily to learn whether Greece will soon join the ranks of countries currently in default on their debts. The bigger story surrounds speculation about whether much larger countries like Italy and Spain will also be unable to pay their bills. Greece is almost universally acknowledged to be incapable of financial survival without further bailout assistance. Spain’s debt rating was just downgraded. The problems are growing.

In the United States, the situation has become severe enough to warrant a third-quarter downgrade of our formerly sacrosanct AAA debt rating. Further downgrades are possible if Congress does not quickly craft a credible debt reduction program.

Fundamental conditions throughout the developed world are extremely weak. In the U.S. a few recent economic readings have improved slightly, but remain at depressed levels. Many economists, those from Goldman Sachs among them, have argued strongly that the U.S. will skirt a recession. Other economists contend that, while we may not be in recession today, the economy could easily slip into negative territory. The highly respected Economic Cycle Research Institute states boldly that its readings are at levels that have always forecast a recession. In ECRI’s view, a recession is inevitable.

Many contend that Europe is already in recession. At the very least, Europe is expected to be in recession soon. For years, emerging market economies have provided the bulk of world economic growth. These economies are slowing perceptibly and are unlikely to be able to carry the worldwide economy absent much greater support from the developed world.

A minority of analysts voice serious concerns about China, the leading engine of emerging economies. Some foresee an imminent collapse in the Chinese real estate market. Others point with alarm at dangers they perceive in the Chinese banking system. While growth figures remain substantial, something must be wrong in China. Its stock market is still more than 60% below its 2007 peak. A Chinese crisis would be disastrous for the world economy.

The global economy remains weak despite a record amount of on-going multi-country stimulus. Resulting debt levels now stand in the way of a continuation of such stimulus. Banking systems and sovereign debt structures are so precarious, however, that further government rescue money is seen as necessary to prevent imminent collapse, notwithstanding the long-term damage such additional rescues may cause. Current politicians are determined not to allow economic collapse on their watch. Defer the calamity to the future, even if it makes debt problems worse. Let our children and grandchildren deal with them.

Long-standing clients know that we began warning about an approaching long weak cycle at the end of the 1990s. We pointed to two primary reasons: 1) extremely extended stock valuations and 2) excessive debt (long before debt became a four-letter word). In the first decade of the new century, valuations have become less extreme, although in the aggregate they remain well above average. The debt issues, however, are far worse today than they were a dozen years ago, and there is no credible solution in sight. We pointed out that over the two prior centuries, long weak cycles averaged about a decade and a half in length and ended only after they had expunged the excesses of the prior long strong cycle. Unfortunately, we will not eliminate the problem of excessive debt for several more years at the very least. The persistent debt crisis doesn’t preclude intermittent rising equity markets. It does make it less likely, however, that we will have sustained rising equity markets until debt problems are solved. So far in this century we have experienced two historic market collapses and two powerful rallies. The net of all that action is that stock returns are negative for the century-to-date and prices today are where they were in the late-1990s. With banking systems and numerous countries on the edge of failure, great danger remains in the equity markets.

In the long weak cycle to-date, we have protected portfolios extremely well through the declining phases. We have attempted to find low-risk opportunities in the rising periods. We have found some opportunities, missed others. Net of it all, our client portfolios are up 65% before fees, which vary based on portfolio size. For the remainder of the long weak cycle with its huge potential for losses, our operating philosophy will be that it is far better to miss an opportunity than it is to lose any appreciable amount of money. There will always be another opportunity if capital is intact.

Through the twenty-first century so far, bonds have been the premier financial asset category. As a result, investors have recently flocked to bond ownership. At interest rates very close to all-time lows, however, bonds have become a high-risk asset class. They could do relatively well in the years ahead if the economy remains weak, especially if it falls again into recession with a deflationary bias. On the other hand, a stronger economy would almost certainly lead to higher interest rates and bond price losses. Should the monetary authorities attempt to solve the country’s overwhelming debt problems by printing large volumes of money, interest rates could skyrocket. One can make a plausible case for either rising or falling interest rates over the next few years. At today’s extremely low rates, however, the potential gains from steady or declining rates are far smaller than the potential losses from rising rates. It is instructive to remember that when interest rates last began a long rising cycle, bond returns trailed risk-free cash for four decades from the early-1940s to the early-1980s. At these interest rate levels, even top quality bonds can be a very high-risk investment.

We are pleased to have been able to avoid the equity market’s losses in 2011. We will continue to look for low-risk profit opportunities as the ongoing long weak cycle continues.

Tom Feeney is Chief Investment Officer for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more, you are invited to email your interest to Tom@missiontrust.com or call (520) 577-5559 to speak with one of the Portfolio Coordinators.

Watching CNBC’s pre-market commentary one morning this week, I heard the ever-opinionated, always-loud Jim Cramer insist that the International Monetary Fund must come to the rescue of the stumbling, bumbling countries of Europe. They can’t possibly agree among themselves, he contended, so an outsider–presumably with a clearer overview–is needed to effect the necessary rescue. This view, of course, presupposes that a further rescue is the correct solution to the ongoing and growing European debt crisis. It reminded me of Cramer’s now famous “They know nothing” rant that CNBC insists on reprising. In that tirade he berated monetary authorities for failing to recognize the need for rescue, so that, among other calamities to be avoided, friends with 25 years of Wall Street experience would not see their careers destroyed. It mattered little that such Wall Streeters were integral to the crises of the day nor that most non-Wall Street employees would not be similarly bailed out. Such is the sense of entitlement deeply ingrained in the denizens of Wall Street and their financial cohorts. Their view: We are too important to fail, and some central planning entity must make sure that we don’t.

Occupy Wall Street and its multi-city imitators clearly resent both this sense of entitlement as well as the government facilitators who assure that rescue money is available first to the wealthy and powerful who have cowed legislators and regulators into believing that the world as we know it will end if they are not rescued. If such protesters are looking for a specific entity against which to protest, let me suggest the IMF. As donors of more than 17% of IMF funding, U.S. taxpayers have a real financial interest. Having already been forced to bear huge risk in bailing out financial miscreants in this country, we should find abhorrent any commitment of taxpayer funds to prop up governments or banking systems elsewhere. Those who care must make their voices heard now.

Tom Feeney is Chief Investment Officer for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more, you are invited to email your interest to Tom@missiontrust.com or call (520) 577-5559 to speak with one of the Portfolio Coordinators.

On Monday, October 3, the S&P 500 closed at 1100, the low close for the year and down about 20% from the 2011 market high six months earlier. The news, both domestically and worldwide, was almost universally bad and deteriorating. A growing number of analysts began to forecast a global recession. The following morning opened down another 2% on a continuing lack of progress with the European debt situation.

Suddenly prices turned and began a remarkable march upward through today’s S&P close at 1224, a gain of over 11% in nine trading sessions. Only two of those days produced even small declines, with most yielding gains of more than one percent. The powerful recovery rally leaves the S&P down only slightly more than one percent year-to-date.

The critical question now facing investors is whether this is the first up leg in a new bull market or merely a dramatic correction in an ongoing major decline. There are arguments in both directions.

The speed and persistence of the rise and the strong breadth that has accompanied the move argue for more to come. Negative sentiment (a contrary indicator) was fairly high when the market turned up two weeks ago. While the sentiment level suggested that some sort of rally was imminent, the readings fell short of those that typify major market bottoms. The market has been extremely responsive to news stories recently. Leaks and rumors of possible rescue efforts for Greece and European banks have provided mighty support for the rally-to-date. There is certainly potential for more of the same over the next two to three weeks.

Negative factors, however, abound. Notwithstanding occasional mildly positive readings, most economic conditions are poor and weakening. Major European banks and governments are seriously overextended. Whatever the resolution of the European crisis, the debt burden will remain dangerously large. While U.S. and European markets have surged over the past two weeks, major Asian markets have failed to demonstrate the same level of enthusiasm. Somewhat ominously, the Chinese market remains 60% below its 2007 peak, despite that country’s economic surge since then.

Additional negatives exist on the technical side. Most noticeably, volume has been weak and diminishing as prices have rocketed upward–normally warning that the rally is not the start of a major move. Firms that analyze fund flows indicate that very little true investment demand exists in this rally. So far demand has come almost exclusively from hedge funds or other short-term trading entities. Rallies rarely persist for long without true investment demand. Perhaps most discouraging is the analysis of supply and demand forces coming from Lowry Research Corp. Their measurement of buying power and selling pressure– a valuable tool since the 1930s–indicates that the broad trading range in place since early-August shows the characteristics of distribution, not accumulation.

No single factor is a perfect forecaster of future market direction. We believe, however, that the preponderance of evidence points to a major market decline having begun six months ago, which has yet to reach its bottom. The current rally is now extremely overbought on a short-term basis and will likely soon begin to decline. Whether that decline becomes simply a brief correction of a rally that will contain a second up leg or whether it marks the beginning of a major leg down to new lows is open to question. In either case, we think it unlikely that the current rally will kick off a new bull market.

Tom Feeney is Chief Investment Officer for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more, you are invited to email your interest to Tom@missiontrust.com or call (520) 577-5559 to speak with one of the Portfolio Coordinators.

Dramatic volatility characterized the equity markets again for the ninth straight week. One hundred or multi-hundred-point moves in the Dow Jones Industrial Average took place every day this week–on most days in both directions. On balance, most stock indexes gained about 2% for the week.

To anybody watching the markets carefully, it is apparent that large short-term trading interests have come to dominate the action. Today’s price movement was a perfect example. Heading into the end of the day, the market was progressing quietly until traders took over, pushing the Dow up by 115 points in about 50 minutes, with volume swelling as prices reached their peak. Then it was time to take profits, and traders pushed prices down by almost 130 points in the last half hour on the biggest volume of the day. Clearly this wasn’t the action of investors. There is nothing inherently wrong with trading, but there is a danger to markets if investors feel threatened by apparently unexplained volatility. According to insiders, the large high frequency trading operations now account for roughly half of New York Stock Exchange volume and clearly accentuate price moves in both directions. While such activity provides significant revenue to the exchanges, it may undermine their long-term profitability by chasing away real investors, who are understandably withdrawing from what increasingly looks like a casino.

Over the past two months traders are taking their cues from headlines, most of which revolve around the expanding European debt crisis. This week they followed the script to a T. Going into the last hour Tuesday, prices on the Dow were down by nearly 500 points for the week. A report out of Europe sufficiently excited traders that they then pushed the Dow up by almost 400 points in less than an hour. What was that momentous report? European financial officials were going to “talk” about recapitalizing European banks. They hadn’t agreed to anything substantive. They merely indicated that they would talk about something that, almost certainly, they have been talking about for months. These price moves are not coming from long term investors but from traders playing with rumors.

Such frenetic activity is not likely to end soon. New rumors emerge from Europe each week as the fundamental condition worsens. There is no easy answer to the overwhelming debt problem, and to get unanimous agreement from nations with very different financial and cultural makeups will prove extremely difficult at best.

Tom Feeney is Chief Investment Officer for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more, you are invited to email your interest to Tom@missiontrust.com or call (520) 577-5559 to speak with one of the Portfolio Coordinators.

The stock market sold off hard into the close of a bad day, week, month and quarter. A 2.5% decline in the S&P 500 today contributed to a costly decline of 13.8% for the third quarter. Going into the fourth quarter, the S&P is down 8.5% year-to-date, and the index is ten points below its level at the end of the third quarter, 2010.

While most world stock markets are already down 15-30% from their recent highs, the vast majority of analysts and strategists remain adamant that the United States is not heading into a recession. With housing and unemployment continuing as intractable problems, and most economic statistics at or near recession levels, a bullish economic forecast seems increasingly untenable.

More important to the health of the economy and the securities markets than ordinary business conditions is the fate of the European banking system. Can it emerge in reasonable health from the European debt crisis? Should monumental debt burdens overwhelm the best efforts of Eurozone governments and central bankers, the free movement of credit through the world financial system could come to a screeching halt. World GDP would plummet with recession affecting most of the world.

Whether or not we enter recession is important to equity markets. Over most of the past century, stocks have logically fallen far more deeply when the economy contracts than when it avoids a formal recession. And while averages are not forecasts, they lay out potential paths. Since the early-1900s, stocks have typically fallen almost three times more after a recession starts than in the period leading up to the economic decline. Assuming we are not yet in recession, that past pattern presents an ominous possibility should economic conditions weaken further.

Having forecast repeatedly that we have not yet emerged from the long weak cycle that began in 2000, Mission has maintained a risk-averse posture for its client portfolios. As a result we are up slightly for the disastrous (for most) third quarter and for 2011-to-date as well. Even our relatively modest allocation to equities has produced some appreciation in a very tough environment.

The danger of a precipitous decline is certainly a real possibility should we experience some form of European debt default. If a true “get me out at any price” capitulation results, we would be looking for an opportunity to add significantly to our equity position for at least a short-term recovery rally. Whatever unfolds, the next few weeks and months should prove interesting. Be careful and stay flexible.

Tom Feeney is Chief Investment Officer for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more, you are invited to email your interest to Tom@missiontrust.com or call (520) 577-5559 to speak with one of the Portfolio Coordinators.

With a week to go, the equity market is facing severe losses for the third quarter. The S&P 500 is down 13.5% quarter-to-date and a negative 8.2% so far in 2011. Today’s fractional increase was a calming respite to a week that saw the index reduced by 6.5%. Wednesday and Thursday alone saw a combined loss of 6%, one of the most destructive two-day periods in years.

It would be nice if today’s calm were a forecast of the weeks and months ahead, but that is highly unlikely. Political tensions are extremely high in this country at a time when cooperation is necessary to avoid mandatory, formula-based budget cuts. Whatever the long-term benefits of such cuts might be, almost certainly they will further retard a rapidly stalling U.S. economy.

While still robust, economic growth rates in emerging countries are clearly declining. Ominously, stock prices throughout the world are falling hard. Technicians can appreciate the danger of negative trends. Ned Davis Research pointed out this morning that stock prices in all but one of 45 world markets were trading below their respective 200-day moving averages. And 78% of those moving averages were declining. Problems are clearly not local in nature.

The most acute and immediate problems are quite obviously in Europe. Bad as stock performance was in the U.S. this week, prices fell even more precipitously in the major European markets, including Germany, the Eurozone’s industrial giant. EU finance ministers will be negotiating furiously again this weekend in an attempt to cobble together a plausible rescue plan, most immediately for Greece, but ultimately for several other potential insolvency candidates as well. The success or failure of those negotiations could lead to dramatic market moves in one direction or the other in the days immediately ahead.

For the past six weeks, stocks have risen and fallen sharply within about a 10% range. Prices successfully tested the bottom of that range again on Thursday of this week. The bounce from that so-far successful test has been tepid, however, which leaves stocks still vulnerable to a break below that recent trading range. Recent price behavior has demonstrated clearly that traders are trading the headlines, which are, needless to say, plentiful given the potential for sovereign defaults and the attendant danger to banks that hold those sovereign bonds. This weekend’s negotiations, therefore, hold the potential for market-moving headlines.

Notwithstanding the likelihood of occasional sharp news-related rallies, we believe that both technical conditions and underlying fundamentals argue strongly for an ultimate, if not immediate, decline below current prices. Investors should be very careful about their levels of risk assumption.

Tom Feeney is Chief Investment Officer for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more, you are invited to email your interest to Tom@missiontrust.com or call (520) 577-5559 to speak with one of the Portfolio Coordinators.