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European Threats Linger in the Coming Week

Updated from 11/05/11 with news that Greek leaders had reached a deal on an interim government.

NEW YORK (TheStreet) -- After lots of huffing and puffing, equities finished this past week worse than where they started it. The S&P 500 lost about 3%, and the Dow and Nasdaq each shaved off 2%.

The net loss in stocks for the week echoed some of the nervousness in the European debt market: Italian bond yields drifted to a record high since the country joined the euro currency. The 10-year yield jumped to 6.35% on Friday.

The week's action was driven by speculation about the future of Greece's government and what that means for Europe's bailout plan. It was far from over by Friday's closing bell.

Late Friday evening, the Greek government barely survived a vote of confidence.

Nevertheless, the country had remained in a political deadlock with Prime Minister George Papandreou appealing to the opposition to participate in an interim government that would work on accepting austerity measures laid out by its eurozone creditors in order to get much-needed aid.

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But Antonis Samaras, who leads the main opposition New Democracy party, had rejected Papandreou's appeals earlier in the weekend, saying he would not discuss forming a government unless Papandreou resigned.

On Sunday, however, President Karolos Papoulias hosted a meeting of the two rivals, and Papandreou agreed that he would not be prime minister of the new government. Politicians are expected to meet Monday to decide on the government's makeup.

Papandreou or no, all the market wants is a stable enough government to lead Greece away from the risk of a disorderly default. Greece needs to accept the bailout plan from its euro neighbors ahead of mid-December, when it runs out of money to pay its bills.

For anyone wondering why Greece raised the huge fuss over the bailout plan that led to the political turmoil seen this past week, the short explanation is that Greeks felt they got severely shortchanged.

For example, as Ed Yardeni from consulting firm Yardeni Research notes, the 50% haircuts worked out by eurozone leaders only apply to two-thirds of the country's debt, half of which is held by Greeks. In other words, Greek pension funds will take big hits.

"The latest rescue plan was actually a sneaky way of taking back some of the generous benefits that all those undeserving Greek pensioners got the government to give them," explains Yardeni.

"They don't want to accept the Trojan horse they've been offered by Merkozy," he adds, using a mash-up of the names of the German and French leaders.

However, whether Greece likes the bailout plan or not, global markets have sent a clear signal that it doesn't have much of a choice. After a week of going back and forth on the bailout plan, it looks like the country may be getting back on board with what eurozone leaders originally had planned for the nation.

Stocks could rebound in the coming week following this past week's losses, but they won't be able to sustain any substantial rally if European leaders don't make headway on their debt problems. Given the political gamesmanship in Greece, the possibility that the country may abandon the euro could be put back on the table for discussion.

Furthermore, next week's economic calendar is pretty light in the U.S., so there's plenty of opportunity for European headlines to catch fire. And, as more chapters of the debt debacle unfold, investors may find themselves turning into experts on European history and politics.

Slight Improvements in the U.S.

It would be a dream for investors if Europe could release its shackles to let the market focus on the U.S. After all, economic data out of the U.S. has held up. The week culminated in the government's monthly jobless report, which showed upward revisions to payroll gains in the previous month and a slight slip in the unemployment rate to 9%, even as October's payroll additions were a touch short of expectations.

Economists aren't worrying about a double dip in the U.S., at least not for this year as we head into holiday season. The Federal Reserve this past week held back on further monetary easing, saying that third-quarter economic growth had improved.

The historical average return for equities in November and December is 3.27%, according to Schaeffer's Investment Research. For the same two months, Schaeffer's estimates that the market shows a positive return about 70% of the time.

"Stocks often see a year-end rally because investors start pricing off of next year's earnings," says Larry Adam, chief investment strategist with Deutsche Bank Private Wealth Management.

About one-fifth of S&P 500 companies have yet to report. Key ones scheduled to report in the coming week include: Priceline (PCLN), Rackspace Hosting (RAX) and Momenta Pharma (MNTA) on Monday; Fossil (FOSL), Activision Blizzard (symbol) and Weight Watchers (WTW) on Tuesday; Iamgold Corp (IAG), Macy's (M), Polo Ralph Lauren (RL), Cisco Systems (CSCO), Green Mountain Coffee Roasters (GMCR)and Mako Surgical (MAKO) on Wednesday; Kohl's (KSS), Nordstrom (JWN) and Walt Disney (DIS) on Thursday; and D.R. Horton (DHI) on Friday.

Adam from Deutsche notes that two stocks worth watching are Cisco, which can move the broader market, and Walt Disney, which signals what consumers are doing on the spending side. For Cisco, analysts expect EPS of 34 cents, vs. 37 cents a year earlier.

On the U.S. economic docket, investors will get reads on consumer credit for September on Monday; the small business optimism index from NFIB Research on Tuesday; wholesale trade data for September on Wednesday; weekly initial jobless claims and import and export prices for October on Thursday; and consumer sentiment from the University of Michigan on Friday.

All in all, investors are keeping a skeptical eye on any market rallies. "Clearly the existential nature of the euro/European crisis dominates thinking because no matter what U.S. growth may look like now, a panic over there will rapidly notch down our prospects," writes David Ader, strategist with CRT Capital Group.

According to a survey by CRT, the market may go sideways into year-end. "[That]" means basically you're supposed to buy dips, sell strength, play the range and not get overly engaged with the political headlines coming out of Europe unless you have two or three days where they don't contradict one another," explains CRT.

-- Written by Chao Deng in New York.

>To contact the writer of this article, click here: Chao Deng.

>To follow the writer on Twitter, go to: @chao_deng

>To submit a news tip, send an email to: tips@thestreet.com.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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