Stocks Stay on Storm Watch

The last few weeks of the year are often about mopping up and moving on. But this December seems to be more about mopping, because moving beyond the market's turmoil likely won't be in the cards anytime soon.

Traders should see continued volatility in the coming week as big brokers report fourth-quarter earnings and economic data shed light on two key concerns: consumer spending and inflation. Moreover, those reports will converge with a trial run for the Fed's new liquidity-boosting plan.

"It's going to take time flesh out these problems," says Randy Diamond, a trader at Miller Tabak. "The end of this year is really about preventing the dam from overflowing with bad news."

The brokers reporting earnings this week will likely show stark contrasts. Goldman Sachs(GS Quote), Morgan Stanley (MS Quote) and Bear Stearns'(BSC Quote) report on Tuesday, Wednesday and Thursday, respectively.

Goldman, lauded for its strong third quarter on the back of a decision by its proprietary trading desk to take a short position in mortgage-backed securities and related derivatives, is expected to report fiscal-year income of more than $11 billion, according to a report in The Wall Street Journal. The firm was able to offset the fixed-income-related losses in other parts of its business with its savvy bet.

But things might not look as good for Bear Stearns (BSC Quote) and Morgan Stanley (MS Quote), which both have warned of writedowns. Some of the same issues that plagued most brokers' earnings in the third quarter will still likely hang over them this time around. The markets for illiquid securities tied to mortgages have remained stuck, and firms have continued to overvalue their most unsavory balance sheet assets.

"The writedowns at Citigroup, UBS (UBS Quote) and others indicate that bankers have been overvaluing mortgage-backed securities," recently wrote Peter Morici, professor at the University of Maryland School of Business.

Other credit markets are likewise stuck -- something the Federal Reserve is attempting to resolve with four other central banks. The Fed's plan to inject its first $20 billion of liquidity through a newly formed Term Auction Facility is scheduled to take place Monday morning.

After the central bank's 25-basis-point rate cut last Tuesday, and the TAF's announcement Wednesday, traders hoped that key interest rates tied to mortgage rate resets, like Libor, would come down.

Instead, Libor rates have remained elevated, as was revealed by the Treasury Department's net reduction in liquidity via open market operations this past week. Credit markets are still stuck and banks are hesitant to lend to each other.

To boot, Treasury bond rates have inched higher amid a rising tide of ugly inflation data in the past week, which roiled the markets.

The Labor Department reported Friday that the consumer price index rose a bigger-than-expected 0.8% in November, pushed higher by rising energy prices. The core CPI climbed 0.3% in the month, slightly more than expectations. A separate report showed that import prices and producer prices rose to their highest levels in 17 years.

The inflation figures call into question the Fed's path of monetary easing, and they make some traders worry that their hopes for more rate cuts may be dashed. As the market fell Friday on the CPI data, the fed funds futures market's odds for a rate cut at the January meeting slid to 84% from 100% on Thursday, according to Miller Tabak.

The market's next read on inflation comes Friday with the Fed's preferred measure, the core personal consumption expenditures report. Analysts expect core prices by that gauge will have risen 0.2% in the month. The same day brings reports on personal income and personal consumption gains, which will also be closely watched for clues on the consumer's health.

The all-important consumer will also be in focus with several big-name earnings reports, including Best Buy(BBY Quote), Research in Motion (RIMM Quote) and Nike (NKE Quote). Besides the brokers, other names on tap for quarterly reports include Oracle (ORCL Quote) and FedEx(FDX Quote).

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting