What a Week: Bear Rout

Major averages were restrained Friday by weakness in Apple Computer (AAPL Quote) and Dell (DELL Quote), each of which delayed regulatory filings due to separate accounting probes. In addition, disappointing earnings guidance and/or results came from Black & Decker (BDK Quote), trucker YRC Worldwide (YRCW Quote) and Illinois Tool Works (ITW Quote).

Next week will feature earnings reports from Oracle(ORCL Quote), FedEx(FDX Quote) and Morgan Stanley(MS Quote), among others.

Inflation: Merely a Flesh Wound?

The tame November CPI leaves stock investors believing in the so-called Santa Claus rally, but the fifth consecutive soft inflation reading doesn't mean core inflation couldn't turn up again.

Indeed, a resurgence of core inflation could be the biggest threat to the stock market in 2007.

"The data do not seem consistent with the ongoing pressure on commodity and labor costs," writes Ethan Harris, chief economist at Lehman Brothers. He adds that the Fed will be watching for its preferred inflation measure, the core personal consumption expenditures deflator to confirm the CPI's decline. Thus far the core PCE has not come down as fast or furiously as CPI on a monthly basis. Furthermore, both core PCE and core CPI are above the Fed's so-called comfort zone of 1% to 2% on a year-over-year basis.

So, while the Fed and Chairman Ben Bernanke are likely thrilled to see the trend in CPI, their hawkish talk and tightening bias probably won't go away.

The fed funds futures has finally taken the hint about no imminent rate cuts. That market didn't even budge after the low inflation print came out Friday. Bonds did rally, but came off the boil later in the day.

The fed funds futures market puts 4% odds on a cut in January; 24% in March; and 64% in May, according to Miller Tabak. As of last Friday, the market had slightly higher 8% odds on a January cut; 32% odds for March; and 84% for a May cut.

The Treasury bond market sold off sharply on the CPI report, but reversed course in the middle of the day -- possibly reflecting a hint (of all things) inflation concerns, writes Randy Diamond, trader at Miller Tabak.

Supporting Harris' concerns about commodity prices, the Journal of Commerce's index of industrial materials reached a new all-time high Friday and the Cleveland Fed put out a weighted index of core inflation that shows "true" core inflation registered a 0.2% gain, writes Diamond.

The yield on the 30-year bond added 8 basis points this week to yield 4.72%, while the 10-year added three basis points to yield 4.59%, and the two-year jumped four basis points to yield 4.72%.

For the time being, evidence of excess cash is boosting the prices of financial assets without spilling into consumer goods. It's an easy win for stocks. "We can have or excess liquidity cake and eat it, too," as Michael Darda, chief economist at MKM Partners says.

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