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tdp2664 InvestorPlace Is there another 2008 in our future? Not yet. But the slow-mo train wreck in Europe should give pause to even the sturdiest optimist. Greece still hasn’t stabilized its finances, and now the sovereign-debt “contagion” is quietly spreading to Italy. Yes, I’m aware that Italian Prime Minister Silvio Berlusconi has promised to resign. Assuming he actually follows through, and a respectable figure (like veteran EU bureaucrat Mario Monti) replaces him, we can expect another leg up for the year-end rally in global stock markets. However, the flow of events in Europe is starting to take on an eerie resemblance to what we saw in the United States as the mortgage crisis unfolded in late 2007 and early 2008. Policymakers tried to stick one patch after another on the deflating balloon. In the end, the market got its own way. Already, it’s clear that the European economy, taken as a whole, is in recession. The October Purchasing Managers Index for Europe’s manufacturing sector sank to 47.1, the lowest reading since mid-2009. Any number below 50 indicates contraction. What we don’t know yet is how much of a spillover effect the European slowdown will have on America’s economic growth. If we’re lucky, the United States will skirt the slump and plod through a year of subpar growth in 2012, much as we did in 1992 — when Europe last put a major drag on the world economy. In that case, I would envision modestly positive (single-digit) returns for domestic stocks next year. On the other hand, a messy outcome in Italy could signal deeper problems for Europe. A sharp slide in economic activity across the Atlantic might, in turn, trigger a double-dip recession (and bear market for stocks) on our own shores. The key barometer to watch now is the yield on 10-year Italian government bonds. You can track it easily here . On Tuesday, the Italian tenner spiked as high as 6.77%, a new record since the euro era began in 1999. On Wednesday, the 10-year yield jumped above 7%. Sound the plague bell: Beware the ragin’ contagion! For now, my road map suggests that the stock market ’s bounce off the October lows should continue at least into the first half of December. Probably, though, the S&P 500 already has bagged about two-thirds to three-quarters of the total point gain the index will achieve through year-end. Thus, I advise you to be very selective with any new buying at this stage, and to exit vulnerable stocks and mutual funds as the market rebounds. On the buy side, my appetite is returning for Kellogg (NYSE: K ). Last week, the cereal maker came in with a soggy Q3 earnings report and lowered its forecast for 2012, citing additional “brand building” costs (for product extensions, advertising and promotion) in the year ahead. While this clearly is a short-term setback for Tony the Tiger, profits still should touch a new all-time high (by a small margin) in both 2011 and 2012. Boasting a 3.4% yield at Tuesday's closing price, the shares offer good current income as well as potential capital gains as Kellogg’s investments to develop the business pay off over the next few years.
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