Making Money Alert: The Final Days Before the Real Action Begins

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It’s the tail end of what has been a hot and dry summer throughout most of the country. In the equity markets, we’ve seen the dog days play out in a lazy nap on the front porch, with stocks basically stuck in a holding pattern until events take off again after the Labor Day holiday.

Here in sunny Southern California, the crowds at the beach are dwindling, and the kids are headed back to school. On Wall Street, the pros still are on vacation, but that’s going to change next week. In fact, we may see that change start to take place as soon as this Friday, as Fed Chairman Ben Bernanke will be delivering a highly anticipated speech at the central bankers’ conference in Jackson Hole, Wyo. If “Big Ben” gives the market a hint of what’s to come on the quantitative easing (QE) front the way that he did a few years ago at Jackson Hole, the markets will be poised to make a big move come Tuesday.

Now, next month all eyes will be on the Federal Open Market Committee’s (FOMC) meeting, where we will know for certain what, if anything, the U.S. central bank decides to do about stimulating the economy. We’ll also get official word from the European Central Bank (ECB) about what precise measures it is planning on putting into place to make sure the euro remains intact, and to make sure the European Union (EU) remains a viable entity.

The news of late out of Europe continues to be bad, with Spain seeing an unprecedented capital flight with bank deposits virtually fleeing the country. In Italy, Prime Minister Mario Monti is trying to push the country towards the reforms needed to be competitive, but he is receiving harsh criticisms for not focusing on growth. And then there’s Greece, which continues to request more time to get its act together, and continues to be the EU’s biggest problem child.

We also are seeing one of the world’s biggest stock markets continue to rollover. China’s Shanghai Composite Index continues to fall to new lows, and one glance at the chart below tells the tale of China’s equity woes.

There is serious concern in the global economy about growth in the world’s second-largest economy, and the prices of stocks in Shanghai reflect just that.

Here at home, it’s a different story, as the S&P 500 continues to trade near multi-year highs. The chart below of the broad measure of the domestic market shows just how strong stocks have been since falling below their 200-day moving average in June.

So, why is there such a divergence between U.S. stocks and Chinese stocks? The simple answer is that U.S. investors are expecting another round of quantitative easing from the Fed in September. Will they get what they want? I’m not too sure, and any major disappointment on this front will likely trigger a big sell-off in stocks.

The potential for such a big disappointment in stocks is why I continue to warn investors about not being overweight in equities. I also think that there are serious, fundamental problems in the economy and the markets that are not currently being reflected in U.S. equity prices. When problems such as anemic growth, high unemployment, massive debt and the looming “fiscal cliff” cross investors’ paths, we are liable to see some serious selling — selling you don’t want to get caught in.

Finally, last week I spent some quality time at the San Francisco Money Show. This year’s attendance was down somewhat from past years, but I was fortunate to have a full house from my workshops and presentations. During the presentations, I asked the crowds how they felt about the markets. I must say there was a lot of fear in the room, and rightly so. Europe’s woes, Washington’s dysfunction and our nation’s economic predicament are reasons to be both afraid and cautious with your money.

The best thing you can do right now is to make sure your fiscal house is in order, and make sure it can withstand any damage from a financial earthquake. Getting prepared now, while the markets are relatively calm, just might end up being the best move you make this year.

Don’t Lack Will

“The difference between a successful person and others is not a lack of strength, not a lack of knowledge, but rather in a lack of will.”

–Vince Lombardi

Perhaps the greatest of all football coaches, Vince Lombardi knew that what separates the truly successful from everyone else is the will to win. This is true when it comes to sports, investing, and just about every other human endeavor. You see, it’s those with the will to win that have the best chance of winning. So, cultivate your will, nurture it, and let it grow within you. Doing so won’t guarantee success, but it will guarantee you’ve done what’s in your power to control the outcome.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

To the best within us,

Doug Fabian