The week ahead: The wild ride isn't over

Europe's problems could get worse unless leaders start to focus. Watch the Fed's Beige Book report for the economy's vulnerabilities. Dollar General and Lululemon are the week's big earnings reports. Futures trading suggests a weak Monday open.

By Charley Blaine Jun 1, 2012 9:55PM
Charley BlaineUpdated: 8:50 p.m. ET, Sunday

You can bet that government and financial leaders around the world have spent the weekend trying to find a way to give markets confidence that a solution to Europe's debt-and-deficit crisis can at least be outlined.

If they can't, the week ahead could be very rocky. It was rocky enough this past week, where the market had one really nice rally and three down days you'd rather forget, especially Friday's mauling that saw the Dow Jones Industrials ($INDU) give up all of their gains for the year.

The surface reason for the sell-off was the payroll report that said the economy created only half the jobs that Wall Street was expecting. The report wasn't truly awful, but it gave investors a great excuse to get out of the market -- and Republicans to declare the Obama administration incompetent or worse.

The larger problem was -- and will be -- Europe, where things are getting dicier. It's not clear if Greece will vote to stay in the eurozone. Spain's banks are being pressured by short-sellers and others, much like Bear Stearns Companies and Lehman Bros. were pressured in 2008. Manufacturing in Europe and Britain is weakening. Unemployment is rising. And U.S. companies trying to decide whether to expand anywhere are suddenly being cautious.

The week ended with the market down for the fourth time in the last five weeks. The Dow was off 2.7%, with the Standard & Poor's 500 Index ($INX) down 3% and the Nasdaq Composite Index ($COMPX) down 3.2%. Futures trading Sunday evening suggested the Dow might open down 90 points or more. The S&P 500 may open off 9 points, and the Nasdaq-100 Index ($NDX), which tracks the largest Nasdaq stocks, could see a drop of 18 points at the open.  Crude oil (-CL) and gold (-GC) were also slightly lower.

Article continues below.
That's only part of the story. The Dow has fallen 8.7% since peaking on May 1. The S&P 500 is down 9.9% since its peak on April 2, and the Nasdaq is off 12% since peaking on March 26.

If it seems like last year, when the major averages peaked at the end of April and didn't get back to those levels until early this year, you're right. It's even more like 2010 when the indexes fell nearly 8% in May and didn't come back until the fall.

What makes the market more vulnerable now is that flaws in Europe's banking system have been exposed. Money can flee and is fleeing Spain because of worries its banks may fail, and there are fears the Spanish government may not have the cash to make good their deposit guarantees. (The government says it can make good on its obligations.)

In Greece, the worry is that the country might go back to using the drachma as its currency, and purchasing power will be cut by roughly half.

There were calls for a eurozone-wide fund that can guarantee deposits. Germany is resisting because it fears being forced to bail out everyone else. But if Germany doesn't help, the banks will fail, recession will sweep across Europe, and Germany's export-oriented economy will suffer.

A third of Germany's gross domestic product is generated by exports. Only 11% of the U.S. economy is export-driven.

And that could have worldwide ramifications.

That's why there will be a lot of phone calls over the weekend -- across Europe, to New York and Washington, D.C., to China and Japan. That's why the volatility you saw this week is likely to continue.

In the meantime, what was so terrible about the jobs report? The headline job-creation number was crummy at 69,000 when the market was looking for 150,000. There were some 82,000 private-sector jobs added, down 5,000 from a month earlier. The unemployment rate ticked up to 8.2% from 8.1% in April.

Wage growth was nonexistent. Hours-worked growth was nonexistent. There were gains in temporary employment. None of these factors give you confidence of a robust economy.

The economy gave up 28,000 construction jobs, but these were in specialty trades -- plumbing, electrical, concrete and the like -- and in heavy construction. Revisions next month may clarify what those declines mean.

Markets for the week



6/1/2012

5/25/2012

% chg.

YTD chg.
Dow Industrials

12,118.57

12,369.38

-2.03%

-0.81%
S&P 500

1,278.04

1,295.22

-1.33%

1.63%
Nasdaq 

2,747.48

2,778.79

-1.13%

5.46%
Russell 2000

737.42

747.21

-1.31%

-0.47%
Crude oil 

$83.23

$90.86

-8.40%

-15.78%
(per barrel)











U.S. Dollar Index 

82.97

82.52

0.55%

3.04%
10-yr. Treasury

1/0/1900

1/0/1900

-15.93%

-21.59%
Gold

$1,622.10

1,568.90

3.39%

3.53%

Bernanke and the Beige Book are the key events for the week
There are domestic reports that could affect markets. Here's a quick look.

Factory orders, due Monday from the Commerce Department. Look for a small gain of perhaps 0.4%.

Institute for Supply Management Non-Manufacturing Index for May, due Tuesday. Look for a small decline. Services account for the bulk of economy activity, and employment in this area has been slowing. So has consumer confidence.

Federal Reserve Beige Book, due Wednesday. Nomura Securities expects a more cautious view of the economy from economists at the 12 Federal Reserve banks who prepare the report. Comments on Europe and China will get close scrutiny.

Crude oil inventories, due Wednesday from the Energy Department. CNBC's Jim Cramer raises this as something to watch. Rising inventories mean there's less demand and a softening economy. If inventories tighten, with crude oil (-CL) rising, that's a signal of an economy that's not that weak.

Initial jobless claims, due Thursday from the Labor Department. Claims have been rising for four weeks, but they've been hovering basically around 380,000.

Consumer credit, due Thursday from the Federal Reserve. Look for a small gain, powered by student debt and auto loans.

U.S. trade balance, due Friday from the Commerce Department. This should shrink because exports are falling. And so are imports. The latter should reflect lower oil prices.

Lastly, Fed Chairman Ben Bernanke is to testify before Congress on Thursday. You can bet there will be a boatload of questions on whether the Fed will start a third program of quantitative easing to stimulate the economy.

The weaker-than-expected jobs report boosted Wall Street's excitement about the prospect of a new round of securities buying. But the better bet is that Bernanke will say something like, "Things have to get much worse than Friday's jobs report before the Fed will act."

Earnings: Dollar General, Lululemon are the key reports
It's a very light week for earnings reports. And worry is starting to build over what the second-quarter reports will show. These start July 9 when Alcoa (AA) reports how its second quarter went.

The first quarter showed profit growth of 8%. Take out Apple, and the growth rate drops to 5.8%. The second quarter is shaping up as a quarter of little profit growth.

Here's what to look for:

Monday: Dollar General (DG), which sells low-priced goods to consumers. The stock is up 50% over the last year as profits have been climbing nicely. The company boosted its guidance in March.

Tuesday: Ulta Salon, Cosmetics & Fragrance (ULTA). The fast-growing beauty salon operator has seen its stock jump 80% in the last year. Analysts are expecting strong results.

Wednesday: Hovnanian Enterprises (HOV). This luxury homebuilder may shed light on what the housing recovery looks like, assuming it's happening.

Thursday: Chipmaker Altera (ALTR) and Lululemon Athletica (LULU),  The latter has been a hot retailer of athletic apparel. The stock has come off its highs, but analysts are bullish.
145Comments
Jun 1, 2012 11:04PM
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During the great depression we had 20% un-employment for ten years because the working classes didn't make enough to sustain a strong demand for goods and services. 45 to 50% of all income was going to the top 10% stagnating the markets. WW2 put every able body citizen back to work for 5 years and the wealth disparity shifted, where the top 10% in 1947 now earned less than 35% of all earned income, giving rise to the great American middle class. This was consistent till 1981 when the tax burden was shifted from the super wealthy back to the middle class, today the top 10% earn almost 50% of the wealth and we have returned to the depression era economic structure, where the middle class is shrinking and is un-able to sustain a strong demand for goods and services, unless the trend is reversed we can only expect more and more weakness in the future.
Jun 1, 2012 11:15PM
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I personally feel that the confidence in consumer spending is due to just that: injured confidence. Most of those who are wealthy are not hurt by this economic downturn. They dont lose a job, they dont lose money or have to worry about where the next meal is coming from. They do not worry about how to help a loved one get to the hospital then worry about how to pay for it. Our politicians continue to fail us over and over again. I am tired of worrying about war in other countries but that also means i am tired of helping out other countries with foreign aid. Send that money back to the U.S. where it can be better used. I say why wait 4 years to see if a President elect can produce effects? If they cant make changes when they say then they get 1 term AT BEST. caught making a promise you know you cant keep or dont end up keeping? Impeached.

Jun 4, 2012 4:54AM
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Volatility will continue, kicking the can is becoming more difficult, finding funny money to cover is getting harder to find.  Germany as a savers haven will be forced  to fund the dead beat economies or will be left holding the bag.  Eventually, after all the savers have been wiped out things will collapse, this will be and must happen.  I've stated this before, ALL debts must be repaid, either by default (not paying and forgiving debt) stealing from savers through debasing currency via inflation or outright confiscation.  The nations of the world will enter a dark time as financial so called experts will run out of options.  Repeating mistakes of the past is criminal, stealing from productive citizens destroys confidence in leadership. 

Jun 3, 2012 12:44PM
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Tumbleweed....

 

Yes I concur Spain will fall along with Greece.  Their banks all hold government debt that cannot be paid.  Their private economy loan portfolios are fine, but Spain cannot pay what it owes to its own banks without a printing press...

 

France is even in worse shape.  When governments borrow excessively and cannot pay their debts, and cannot print, they collapse.  We here in the USA have a printing press.  The question remains do we have enough wheel barrels...

Jun 3, 2012 12:06PM
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Tumbleweed...

 

Better to let the Greeks default than to devalue the savings of the German Middle Class.

 

besides, once Greece leaves the EU, then they will have their own currency, they will seize and convert bank deposits in Greece to Drachma's and then print like mad.  The only people likely to be hurt in that senario are what is left of the Greek middle class.  The reality is after they default, they will have zero borrowing ability.  This will force a balanced budget immediately and end their entitlement state.  Of course those that vote for a living will get crushed. 

 

Spain, Portugal and France will follow.  Spain and Ireland might be saveable.

 

In any case the entitlement states of Europe are doomed...

Jun 3, 2012 1:10PM
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 If Europe has proven anything it is that Socialism and private banks do not mix. You simply cannot have both in the same country, each seeking opposite ends. And so it unravels
Jun 3, 2012 12:11PM
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Imagine if  China decided to dictate our budget to us in order to get more loans just as Germany is doing to Greece.  Maybe even sell our national forests to raise a little cash. We'd be saying uff da too!
This the perfect time to put an end to globalization , that the EU facilitated. Time for the end of exports and beginning of local economies where we buy and sell MOSTLY to just ourselves. If that means an end to the upper class, so be it. They were economic traitors anyway
Jun 4, 2012 6:28AM
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White collar crime and no one can stop it...
Jun 3, 2012 11:08AM
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Food stamps (SNAP) costs reached $78 billion last year. That's $223 in costs for every one of the 350 million people in the country. Or $446 for the half that pay taxes. There are 46 million on food stamps. No wonder we're sinking in debt.
Jun 3, 2012 11:46AM
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Past Spain bankruptcies --- 1557, 1575, 1596, 1607, 1627, 1647, 1809, 1820, 1831, 1834, 1851, 1867, 1872, 1882, 1936-1939

 Whats one more on the list
Jun 3, 2012 12:57PM
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MG defaults are a problem of Capitalism. Why would they make loans to Socialists, given their loathing of the system? Stupid is as stupid does?


 They made the loans because they were forced by competition to scrape the bottom of the creditworthiness barrel in order to just stay afloat-- even competing to launder Drug Lord money. Works out swell when you can ' bundle the crap" and sell it almost overnight to sucker investors on Wall Street long before the crap hits the fan, and make a clean getaway. Countrywide's Mozila just for one. Thain at  Merrill Lynch for another
Jun 3, 2012 10:10PM
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Futures trading suggests a weak Monday opening ? Go Figure ? Here comes the BLACK SWAN !!
Jun 2, 2012 12:37AM
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What's that you say?  The economy sucks?  Well Hell's bells.  And here I thought the recession ended back in 2010 as Obama would have had us believe.
Jun 2, 2012 7:52AM
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The losses so far this year have far exceeded 2008!!!
Jun 2, 2012 7:30AM
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Comrade Max Sparticas...

 

The real crushing blow to the middle class is government...  Lets simply look at the typical taxes in 1950 for the average working family...

 

State Income Tax              0%                      5.5%

Sales Tax                          3%                      9.5%

Real Estate Tax              $350                    $6500

Social Security Tax            3.5%                  7.5%

Medicare Tax                     1.2%                  1.8%

Income Tax Rate               8%                     17%

Misc taxes                          2%                       6%

 

It is the growth of the entitlement state and GOVERNMENT that has crushed the middle class.

 

Seizing the property of one class to support anothe rdoes not benefit anyone.  The Soviets tried that, Hitler and Mao also.  The 1% currently pay 40% of all taxes.  The highest percentage in history.

 

Obamanomics is a complte and utter failure.  The so called Buffet rule, according to the CBO woould generate a whopping 47 billion a year.  With Obama running a huge 1,270 deficit this year, (1,572 last year) this would make little to no difference.

 

With 48% PAYING ZERO taxes, that Sir is the problem.  So we have 48% paying 0% and 1% paying 40%....   Seems  to me the rich are paying far in excess of their fair share.   Its the 48% of the deadbeats (democrats) skating and not pulling their weight that is the problem...

Jun 2, 2012 7:35AM
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Someone, we all remember Obama's "the recession is officially over" speech, just as we remember W's "mission accomplished" banner.   In this our 4th annual "Recovery Summer" where things continue to get worse, as Obama's failed stimulus, has left us with a huge debt, sub 2% growth, 8.2% (really 11% if you left  the people in the workforce) unemployment, it is clear he has to go.

 

We need to fire another 2000+ Donkey office holders this November like the people did in 2010.  This Tuesday we will see Scott Walker easily win in Wisconsin.  We will see Obamacare struck down by  the SCOTUS this month too.  And we shall probably see much more of Obama trying to blame the rich for his failed socialist polices....

Jun 2, 2012 10:07AM
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"You can bet that government and financial leaders around the world will spend the weekend trying to find a way to give markets confidence that a solution to Europe's debt-and-deficit crisis can at least be outlined."

 

All they will do is make up more lies about how Greece is going to accept the austerity programs, Spain is looking better etc. China will lie again about infusing money into their system.  Blah, Blah, Blah.  All of which is nothing more than lies but of course our media will hype it up to give the illusion is well and there are enough stupid investors out their to believe it.

Jun 4, 2012 4:52AM
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Well the governments better do something soon. Investors are exhausted trying to stay in and according to averages, losing again. Merkel continues to rebuff calls for bonds, and if anything, they might as well toss Germany out of the Euro since obviously they want everyone else to pay the burden, but if the shoe were on the other foot, bet we'd see a different response. Democracy only works when you hold the cards apparently. As for comments about Spain and Greece going under and the proliferation to other Euro countries - only because the media hasn't tapped into other global regions, and bet they're next. Anyway the US has the largest debt, so if the doomsayers prayers are correct and Euro goes down, have fun in the US since it will get alot worse then there! As for Japan - intervention isn't helping and the market is doing their damndest to make sure the yen continues to strengthen - so yet another blow to any ability to strengthen demand and industry. Australia wants to tax the crap out of resources - coupled with perceived slow down in industrialisation and impact on resource prices, well that's buggered their investment sentiment locally. And spec stocks have been totalled across the board - all fine and dandy to tax the hell out of any gains by investors, so let's continue screwing those investors - if those investors weren't in the market, forget about future initiatives since the specs will all go under well in advance. Unemployment in the US - at 8% give or take, still too high, and as for comments whether it's 8.1 or 8.2 or 7.8%, that's pretty much splitting hairs and hardly worth commenting on as if those comments amount to a trend. And as for the Volcker rule and the ongoing pointless and costly debates and meeting - what an ineffectual lot they are. It hardly takes a brain surgeon to see the links between financial institutions, liquidity, myopic governments as far as the GFC causes and the ensuing three years of crap are concerned. And now the banks are further restricting interbank lending in Europe - sure that will help the situation. The Fed doesn't see any need for further easing or propping the market. The administration can't formulate any method to restore consumer confidence. The UK government talks, and talks and talks of further stimulus there. China has it's own internal issues especially deflating any bubble mechanics while balancing internal economic productivity, so don't expect them to save the day. Pakistan drops it's tax rates and increases public spending to appease voters. Syria continues to execute civilians while the English celebrate 60 years of Elizabeth on the thrown. Moodies and SP continue their merry dance of downgrading eveything on the planet despite the fact the damage has been done, in no small part to their over-rating of the very institutions that contributed to the collapse. But things will all be fine in the US since we have this enormous stockpile of oil (but don't expect gas prices to drop considering the high cost of refining that will continue according to the industrry) - I'm sure that stockpile will last a few decades....give it a few months should everything sort itself out, and we'll be back to 'domestic demand puts pressure on oil prices' and the pump prices will rise yet again. In fact lets wait till summer kicks in, and see how much demand stays low when all the somehow 'better off' Americans decide to vacation after two years of abstinence. Not to mention the demands Japan will add to oil given the nation's energy needs can't be met through nuclear provisions - last summer was bad, this one will be worse. Someone mentioned recently that we should have faith in the human spirit. Sure, good advice, but unfortunately most politicians and financial executives appear to fail heavily on the human spirit and decency front - they only got to those positions by treating the lower plebs as road kill, so why we put the faith in these individuals is a good question.

Jun 3, 2012 12:37PM
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 And then Uncle Ben and Little Timmy unveiled a 2 trillion dollar TARP 2 for Europe at Jackson Hole in August and warned of dire consequences if Congress did not pass its one page bill NOW! Like within 24hrs or ELSE!
Jun 2, 2012 9:09PM
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You people want a Conspiracy Theory to go with this???

  On Friday when the markets were at their lowest, and 10 yr note and 30 yr Bond prices broke into all time low yield territory, for the last two hours, they were artificially kept from retreating.  I watched as the amount of 10 year note contracts piled up over 400,000 to keep the yield from retreating up.  As a trader, the margin for 1 contract is aprox $2,500.  To throw a Billion dollars at this to prop up the contract level all time low yield, means government intervention.  Operation TWIST was thrown in for our Govt to actively do exactly this, and was an ultimate way to lower American borrowing costs, and a last ditch effort, I feel, before our own economy collapses in default from the Trillions owed.

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