What is the “Fiscal Cliff”? Find out in this week’s blog, which includes four articles about topics we’ve been following: the “Fiscal Cliff” which could cause a recession; European stock markets; Price/Earnings ratio trends; and John Carlucci’s market indicator.  These are some of the most interesting articles we’ve read this week concerning the markets and finance.

“Fiscal Cliff” Could Cause U.S. Recession:  CBO – As we mentioned in our quarterly letter, the U.S. is facing a combination of increased taxes plus Federal government austerity, effective January 1, 2013.  This is often referred to as the “Fiscal Cliff”.  According to the Congressional Budget Office, the U.S. likely will fall back into recession if scheduled spending cuts take affect and Bush-Era tax cuts are allowed to expire this year. http://www.reuters.com/article/2012/05/22/us-usa-economy-outlook-idUSBRE84L1D020120522

European Stock Markets Continue to Get Worse – Here is a brief but interesting article from Doug Shorts’ website about developments in the European stock markets.  As you might expect, the declines in Spain, Italy, and Greece have been very significant over the last few years. http://advisorperspectives.com/dshort/commentaries/European-Markets-120523.php

Crestmont Research P/E Report – We like to review Crestmont’s P/E Report each quarter.  There are numerous versions of the price/earnings ratio (“P/E”), but very few appropriately compare to the recognized long-term average of 15.  According to Crestmont, the reported P/E ratio for the S&P 500 at the end of March 31, 2012 was 15.4%. At the same time, the long-term adjusted average is more appropriately calculated to be 20.8%. http://www.crestmontresearch.com/docs/Stock-PE-Report.pdf

John Carlucci’s Market Indicator – There are numerous systems for monitoring trends in the market.  We like to read what others are thinking.  Here is an article by John Carlucci that is also on Doug Short’s website.  Carlucci uses a combination of charts and indicators to make his point.  His current advice is to be cautious in the market. http://advisorperspectives.com/dshort/guest/John-Carlucci-Best-Indicator-Ever-Update.php

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John R. Day and Bill W. Ennis