Stocks face a test after JPMorgan's big trading loss

Updated: 3:00 a. m. Monday

There were two big risks for stocks in the past week: Walt Disney's (DIS) performance and whether Europe would drive investors crazy.

Disney came through for investors and ended the week up 5.7%, tops among the 30 Dow stocks. Europe did drive people pretty crazy, as no one was sure if Greece could form a government and whether Spain would be able to save its banks.

And then JPMorgan Chase (JPM) shocked investors worldwide with the disclosure that a hedging plan to protect the bank from problems in credit markets ended up being the problem itself. It may generate a $2 billion loss. JPMorgan shares fell $3.78 to $36.96 on Friday, its biggest one-day percentage loss since August. The loss is expected to start house-cleaning, starting Monday.

The week ahead, meanwhile, offers a host of earnings, including Wal-Mart Stores (WMT), Home Depot (HD) and Target (TGT). There are big economic reports such as retail sales and housing starts plus release of minutes from the Federal Reserve's April 24-25 meeting. But the market will be watching Europe and JPMorgan most closely.  Futures trading Sunday suggests stocks will open modestly lower on Monday,

JPMorgan CEO Jamie Dimon is expected to accept the resignation of Ina Drew, the company's chief investment officer, as a result of the huge trading loss. Drew, 55, had been one of the most powerful women on Wall Street. Other departures are expected, Reuters said Sunday.

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Last year, Drew earned roughly $14 million, making her JPMorgan's fourth-highest-paid officer.

Two of Drew's subordinates who were involved with the trades, Achilles Macris and Javier Martin-Artajo, are expected to be asked to leave, Reuters said. In addition, trader Bruno Michel Iksil, known as the "London Whale" for big positions he took in credit markets, is expected to be ousted, The Wall Street Journal said Sunday.

Drew had reportedly offered to resign after the bank discovered that its portfolio of derivatives tied to bonds was rapidly losing money and had grown too big to be quickly unwind, according to one of the sources. But the resignation was not immediately accepted because of her past performance at the bank.

The problem with JPMorgan Chase is that it was widely believed to be a fortress bank, able to make lots of money and manage through the tough times. The trading loss has shattered that perception, and Steven Gandel of Fortune says a closer look at its financial position reveals a lot more risk that has been believed.

At the same time, Yahoo (YHOO) shares will see more volatility. The company accepted the resignation of CEO Scott Thompson on Sunday after dissident shareholder Dan Loeb found that Thompson's résumé was inaccurate. Four members of Yahoo's board also left. Thompson resigned in part because he was recently diagnosed with thyroid cancer, The Wall Street Journal reported.

Market falls for a 2nd week in a row and is struggling in May
The JPMorgan loss was a big reason that stocks ended down for a second week in a row. The Dow Jones industrials ($INDU) fell  1.7%. The Standard & Poor's 500 Index ($INX)  dropped 1.2%, with the Nasdaq Composite Index ($COMPX) down 0.8%.

May is shaping up as the worst month for stocks since September. The Dow is off 3.1%, with the S&P 500 down 3.6% and the Nasdaq off 4.4%. The market also fell in May 2011 and May 2010.

For the year, the Dow is up 4.9%, with the S&P 500 up 7.6% and the Nasdaq up 12.6%.

Get ready: All Facebook, all the time
Facebook will get lots of television coverage because of the likelihood it will be the largest Internet IPO. The offering, designed to raise $10.6 billion for Facebook and selling shareholders, is supposed to price after Thursday's close in a range of $28 to $35 a share. That would imply a market value of as much as $96 billion for the stock. Shares would start trading on Friday under the ticker FB.

It's not quite clear how the offering is doing. For one thing, the company's S-1 prospectus has not been declared effective -- the Securities and Exchange Commission's jargon for legally OK. If it isn't declared effective, you can't sell the stock.

Reuters has reported the offering is oversubscribed. Bloomberg has said institutional investors are worried about the possibility Facebook's growth is slowing. Plus, traffic from its mobile site is growing much faster than the traditional computer site. But there's little ad revenue coming in from mobile.

More questions ahead for JPMorgan Chase
Meanwhile, the questions will grow around JPMorgan Chase.

What many people don't know is if what CEO Jamie Dimon described on Thursday really is all there is to the problem. And it revives the great worry that pervaded the worst of the financial crisis: Does the big boss really know all there is to know? Does anybody?

Banks are supposed to take risks. That is the point of business from a shareholder's perspective.  With prudent risk comes profit. But big global banks are so complex that things can easily go wrong. Even Dimon conceded that point on Thursday.

Europe's problems are still with us
Europe is a different problem. Greece is admittedly a dodgy country to have in the European Union. Data Greece used to qualify for membership turned out to have been shaky at best. So, by all rights, Greece should get kicked out of the eurozone. Its economy is disintegrating, with calls for more austerity likely to make things worse.

The problem in forming a government after the May 6 elections is that no one wants the austerity -- except the European Union.

Spain has a different problem. Its public finances are falling apart because the country went on a real-estate binge. (Sound familiar?) The government had to take control of its fourth-largest bank in the past week, and there are worries about the rest of the banks.

So, there will be the usual back-and-forth. One day, investors feel great about Europe. The next day, they don't.

The earnings reports: Groupon, Home Depot, Wal-Mart, Target
Every quarter's earnings season finishes basically with Wal-Mart, which reports before Thursday's open.

It's been a decent string of earnings but not spectacular. Some 66% of S&P 500 companies that have reported results so far have beaten Wall Street estimates. That's better than the long-term average of 62% but lower than the average of the past four quarters of 68%.

The best quarter was the third quarter of 2009 when 79% of companies beat estimates, according to Thomson Reuters.

Here are the week's key reports.

Monday: Deal site Groupon (GRPN), whose IPO has been problematic. There have been management and accounting problems. The shares closed at $26 on their first day of trading. They're now at $9.90.

Tuesday: Dick's Sporting Goods (DKS), Home Depot, Saks (SKS) and J.C. Penney (JCP).  Home Depot will help flesh out the picture of the housing market. J.C. Penney has to prove its turnaround plan is working.

Wednesday: Abercrombie & Fitch (ANF), Deere (DE), Staples (SPLS) and Target. Deere's results in the last year or so have disappointed. The stock has struggled. Target has lately won Wall Street fans. Shares are up 9.4%.

Thursday: Wal-Mart, Ross Stores (ROST), Dollar Tree (DLTR) and Safesforce.com (CRM).  Wal-Mart's image has been tarnished since The New York Times alleged bribery was a big factor in its rapid growth in Mexico. Salesforce.com shares have come off their highs in April, suggesting its rapid growth may be at risk.

Friday: Ann (ANN), the former Ann Taylor, and Foot Locker (FL).

Markets for the week
			5/11/2012			5/4/2012			% chg.			YTD chg.
Dow Industrials			12,820.60			13,038.27			-1.67%			4.94%
S&P 500			1,353.39			1,369.10			-1.15%			7.62%
Nasdaq			2,933.82			2,956.34			-0.76%			12.62%
Russell 2000			790.06			791.84			-0.22%			6.63%
Crude oil			$96.13			$98.49			-2.40%			-2.73%
(per barrel)
U.S. Dollar Index			80.40			79.59			1.03%			-0.15%
10-yr. Treasury			1.84%			1.88%			-2.07%			-1.60%
Gold			$1,584.00			1,645.20			-3.72%			1.10%

The economy: The Fed minutes, CPI, housing starts, retail sales
The Fed minutes may get the most scrutiny to gauge the intensity of the Fed's willingness to pump more money into the banking system to give some juice to the economy.

Investors believe the Fed will pump money in before thinking. That's not a given.

Half the members of the central bank's Federal Open Market Committee are more worried about inflation. Chairman Ben Bernanke had conceded there must be a real crisis for the central bank to act.

This week did not come remotely close to qualifying.

Here's the rest of the week:

Consumer Price Index for April, due Tuesday. Look for a small decline because of falling gasoline prices.

Retail sales for April, due Tuesday. Wall Street pays a lot of attention to this report. Watch the sales growth excluding autos. It's likely to show some shrinkage after the warm winter weather helped business.

Housing starts and building permits, due Wednesday. Starts should grow because of strong permit growth in March. Permits may decline.

Industrial production and capacity utilization, due Wednesday. Both should rise modestly.

Empire State manufacturing survey for May and Philadelphia Federal Reserve Bank manufacturing surveyfor May, due Tuesday and Thursday, respectively. These may frustrate by declining as rapid growth early in the year tails off.

Initial jobless claims, due Thursday. Look for claims of between 370,000 and 380,000 in the latest weekly report. That's a sign of modest but steady job growth.

Index of leading economic indicators for April, due Thursday. Nomura Securities sees the index increasing by 0.1% in April following a rise of 0.3% in March. A contributing factor: expansion of the manufacturing workweek.