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Saturday, June 11, 2011

stock market future ?

What's ahead for the stock market

Two big inflation reports and earnings from Best Buy, Kroger, Pier 1 Imports and Research In Motion will help decide if the market can stabilize after the past week's drubbing. But the market now faces some strong head winds.

21You recommend this43%You don't recommend this57%Shared 45 timesFirst the good news. The stock market isn't falling apart. It's not 2008. Not even close. The Dow Jones industrials ($INDU) are still up 3.2% for the year. By this time in 2008, the blue chips were down 8.9%.

It's not 2010 either. By June 11, 2010, the Dow and the Standard & Poor's 500 Index ($INX) were down 2.1% for the year. Admittedly, the Nasdaq Composite Index ($COMPX) was up 1.1% at the time. It's now in the red for 2011.

But the market is in a pullback. Maybe one can call it a correction. In time, the market will regain its momentum. But probably not in the coming week. The economic reports aren't likely to bring much cheer, and some of the earnings reports due next week, particularly Research In Motion (RIMM), may generate some heartache.

The market may continue to move lower, but the conditions for a rebound are forming. Consumers are going to have a bit more cash in their pockets. Here's why.

Oil prices are not headed higher. A schism is developing within the Organization of Petroleum Exporting Countries, and there may be more oil coming on to the global market than expected.

Gasoline prices are off more than 6.5% since peaking in early May. Oil and gasoline prices tend to peak in June and July and sink slowly into about January.

Many commodity prices are lower, particularly copper and cotton. Wheat prices are down 8.8% since peaking in March because of better-looking crops, particularly in Russia. Corn, used to feed livestock, is a different matter because of heavy flooding in the Midwest.

Interest rates aren't going wildly higher any time soon. The Federal Reserve doesn't want to be the cause for the next recession.

And the odds are the Japanese economy will be looking stronger late this summer. Economists and pundits alike have gotten two things wrong this year: the impact of higher fuel prices on the economy and the startlingly broad impact of the Japanese earthquake on the global economy.

The global economy needs two things, apparently, to function perfectly: a happy U.S. consumer and humming factories in Japan to spit out cars, auto and motor vehicle parts and all sorts of electronics that are used in factories around the world, including the United States.

Parts of Japan are recovering fairly quickly. Toyota expects its Japanese production to be back to normal by August.

That said, the market does face some big issues going forward. Here are five:

The market needs to locate its support. That's a level that sets off a new round of buying. The S&P 500 closed at 1,270 on Friday, down 1.4%, and broke below a very important support level. That was 1,275, the low the index reached during the Egyptian revolution in January. The next big support level is about 1,260, which the index held at the end of December.

The transports are negative. The Dow Jones Transportation Average ($DJT) went negative for the year on Wednesday and ended Friday off 0.9% for 2011. Many traders watch the index carefully because it tends to be a leading indicator. The average is being hurt most by its airline components, including JetBlue (JBLU), Delta Air Lines (DAL), American Airlines parent AMR (AMR) and Southwest Airlines (LUV). These are most vulnerable to rising fuel costs and consumers worried about jobs. If oil prices continue to move lower and consumer confidence rises, the airline stocks will move higher again.

The banks need to show some strength. That means they feel more comfortable about lending to consumers and businesses alike. The issue appears to be their horror of additional regulation. The counterargument is that regulation was significantly weakened in the first decade of the century, and the industry went crazy lending on real estate. And no one wants to go through that horror again. Only two of the 24 stocks in the Philadelphia KBW Banking Index are higher for the year: Capital One (COF) and Commerce Bankshares CBSH). Goldman Sachs (GS), Bank of America (BAC) and Citigroup (C) are each down 19% or more on the year.

You don't know how the budget battle will break. State and local governments are cutting staff swiftly; government employment is, in fact, falling while private-sector employment is still growing. What's not clear is how and if a deal will be made to raise the U.S. debt ceiling. If the government is forced to shut down, consumer spending will drop, and the economy will shrink. If government spending is cut too fast, you get the same result.

The Europeans have to find a solution to Greece. This is not an academic argument. Many of the largest banks in Europe have money tied up in Greece, and a bad solution could destabilize them. That would have global implications. Think what happened when Lehman Bros. failed in the fall of 2008.

That said, here's what the market faces in the week ahead.

Markets for the week



% chg.

YTD chg.

Dow industrials ($INDU)





S&P 500 ($INX)





Nasdaq ($COMPX)





Russell 2000 ($RUT.X)





Crude oil (-CL)





(per barrel)





U.S. Dollar Index





10-yr. Treasury





Gold (-GC)





(per troy ounce)

Earnings: Best Buy, Kroger and Research In Motion

This is the back end of the second-quarter earnings season. But the week ahead has some reports that can move markets.

Best Buy, fiscal-first-quarter results, due Tuesday before the open. Best Buy (BBY) shares fell 7.2% in the past week and are off 10.5% so far this month. There's a big crowd of short-sellers trying to drive the shares lower. Watch for the company's commentary on consumer willingness to buy appliances and other big electronics. The Street expects 33 cents a share in earnings, down from 36 cents a year ago. Revenue is estimated at $10.71 billion, down from $10.79 billion a year ago.

Sino-Forest, first-quarter results, due Tuesday before the open. To say Sino-Forest (SNOFF) is a controversial stock is an understatement. The operator of tree plantations in China has lost 82% of its value since the end of March. Most of that loss has occurred in the past week after a short-seller charged that the entire company has grossly inflated its assets. The company is disputing the charges.

Kroger, first-quarter results, due Tuesday before the open. Kroger (KR), one of the largest supermarket chains, is expected to report 64 cents a share in earnings, up from 58 cents a year ago, with revenue of 26.5 billion, up 6.8% from a year ago. Two big questions: How well is it competing against Wal-Mart Stores (WMT) and how is it coping with inflation pressures?

Research In Motion, fiscal-first-quarter earnings, due after Thursday's close. Research In Motion's lot is to have created the smartphone and then lose all the glory to Apple's (AAPL) iPhone. The shares are down 37% this year -- 14.5% in June alone. The Street sees sales rising 22% to $5.16 billion but earnings falling to $1.33 a share from $1.38 a year ago. The problem: It's having to sacrifice profit margin to get the business.

The economy: CPI, PPI, retail sales, housing starts and manufacturing

The week will tell us a lot about the economy. Here's a quick rundown.

Retail sales for May, due Tuesday from the Commerce Department. The consensus estimate is for a 0.5% decline, the first since June 10, because of falling auto and gasoline sales. This is the Japanese earthquake again, which has crimped supplies of Japanese vehicles and some U.S. models as well. Lack of payroll growth also is constraining sales, economists from IHS Global Insight say.

Producer Price Index for May, due Tuesday, and Consumer Price Index, due Wednesday, both from the Labor Department. Look for little or no change. Reason: Gasoline prices are falling.

Industrial production for May, due Wednesday from the Commerce Department. Look for a small gain. That's because automotive production has been disrupted by parts shortages from Japan.

New York Empire State Manufacturing Index and the Philadelphia Fed Manufacturing Index, due Wednesday and Thursday, respectively. The first comes from the Federal Reserve Bank of New York, the latter from the Philadelphia Federal Reserve Bank. The first is expected to show a decline. The latter may see a gain, according to Nomura Securities. Watch what both reports say about materials costs.

Housing starts and building permits, due Thursday from the Commerce Department. Look for small gains, to an annualized 540,000 units for housing starts and 570,000 units for permits. Both are near record lows and reflect huge inventories of foreclosed homes.

University of Michigan Consumer Sentiment Index. Look for a decline to around 70. The problem is disappointing job growth, falling home prices and volatile stocks. There is some good news that may appear in the index: the positive effect of lower gasoline prices on strained household budgets.
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