Market's Course Obscured by Worldly Affairs

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Any other year, it would be easy to get a read on the coming week's theme. Mid-July? Must be time to obsess about second-quarter earnings.

It's just another example of how things have changed in the post-Asian meltdown world. In years past, the notion that elections for Japan's upper house -- a somewhat superfluous institution akin to Britain's

House of Lords

-- could steal the thunder of earnings reports from companies like

Intel

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,

Microsoft

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and

Gillette

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would draw laughter from many, polite silence from the more charitable. Yet there it is: a Japanese election that is being more closely followed on Wall Street than it is by many an average Jotaro walking Tokyo's streets.

This is not to say earnings have become unimportant -- in the end they are the

only

thing that's important. It is just that the market has come to the conclusion that for Asia's economy to turn around, Japan must turn first, and for Japan to do that it must reform, flushing out bad debt and cutting its too-high taxes. If Japan's ruling

Liberal Democratic Party

does not do well in the elections, such reforms become less likely. Riding the chain of causation, we come to an Asia that not only fails to turn around, but falls further on the back of a Chinese devaluation, threatening U.S. corporate earnings. Which, after all, are the

only

thing that's important.

So the results of Sunday's elections will set the tone for the market on Monday morning. A poor showing by the LDP will make Prime Minister

Ryutaro Hashimoto's

position precarious, and the market will worry about the ensuing political instability. Conversely, the market will be cheered if the LDP does well. The market will also pay a certain amount of attention to the noises that the prime minister and other LDP leaders make in the election's wake. Hashimoto comes to Washington the following week, on July 22, and investors will wonder what gifts he will bear. And they will buckle down and start concentrating on earnings reports.

"Remember, this is an emotional market we're dealing with here," said Brian Belski, market strategist at

Dougherty Summit Securities

. "If you have good news from Japan, and good news on earnings, we could be off to the races again. We could be a few hundred points higher on the

Dow

in just a couple of weeks."

If the Japanese news isn't good, and if there are some earnings disappointments, Belski thinks that the initial downdraft will make day-traders blanch -- but that things look good in the long run. "There is a bullish trend in stock prices that isn't near being done," he said. "It's hard to buck the trend of a declining interest rate environment."

It seems unlikely that there will be many negative earnings surprises -- preannouncement season is pretty much out of the way (and God help any company that warns this late in the game), and companies should, as usual, beat estimates. It's not a hard bar to clear -- analysts' estimates steadily fell through the quarter.

First Call

consensus estimates are for

S&P 500

companies' earnings to grow by just 1.5% from the year-ago period. A fair piece of that results from the

General Motors

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strike.

Any other year, it would be easy to get a read on the Treasury market's themes in the coming week. Mid-July? Time to watch for June

retail sales

and the

consumer price index

. Time to start worrying about Fed Chairman

Alan Greenspan's

Humphrey Hawkins testimony the following week. Inflation lurks.

"The events that have the biggest market potential are the Japanese elections this weekend and Russia," said Mike Cloherty, senior market economist at

Credit Suisse First Boston

.

The bond market, of course, is taking the opposite tack of the stock market when it comes to the Japanese elections -- it would love to see the LDP do poorly, which would spark global jitters and again send money pouring into Treasuries.

So, too, with Russia. Unless the country receives aid from the

International Monetary Fund

, a ruble devaluation looms. But with an IMF bailout will come a bitter pill -- and Russia's politicians are not terribly interested in taking the heat from their constituents for an IMF-induced austerity plan. The

Duma

returns to Moscow on Wednesday. If it does not vote for the measures the IMF wants, President

Boris Yeltsin

may impose them anyway, not bothering to split hairs over the legality of such a measure.