Coming Week: Job Jitters

While the employment report promises to be a spectacle, next week will begin slowly with a full trading session on Monday -- New Year's Eve -- that's likely to be quiet as traders plan to party that night and enjoy the day off in the markets on Tuesday.

Once trading resumes Wednesday, economic news will be light, with December's Institute for Supply Management manufacturing index reading due before the opening bell. Thursday will see December sales reports from the auto industry, and the government is expected to report that factory orders rose 1% in November.

Throughout, Wall Street will be bracing for U.S. financial giants to bring out more dirty laundry as a result of the mortgage mess. Investors have already digested multibillion-dollar writedowns from the likes of Citigroup (C Quote), Merrill Lynch (MER Quote), Bear Stearns (BSC Quote) and Morgan Stanley (MS Quote). Now, they're expecting more.

Last week, Goldman Sachs (GS Quote) analyst William Tanona predicted Citi will be forced to write off $18.7 billion in collateralized debt obligations and cut its dividend by 40% to preserve capital. He also said JPMorgan Chase (JPM Quote), the third-largest U.S. bank, will write down $3.4 billion in fixed-income securities.

Mendelsohn says next week may be a good time for such announcements as corporate America's confessional period kicks into high gear as fourth-quarter earnings season begins the following week. Thomson First Call reports that expectations are being lowered, and the main drag is the financials, where analysts now foresee a 67% drop in fourth-quarter earnings. In October, they were expecting 7% growth from the financials.

Elsewhere, investors will be on guard for potentially debilitating credit downgrades for bond insurers such as MBIA (MBI Quote) and Ambac (ABK Quote), which if they occur would strike at the heart of the U.S. financial system.

Berkshire Hathaway's (BRK.A Quote) Warren Buffett announced Friday that he's starting up a new bond insurance firm to guarantee municipal bonds. His venture will enjoy a stellar credit rating and pose a huge competitive problem for existing bond insurers, possibly further endangering their current ratings.

On top of all that, crude oil prices are approaching $100 a barrel on the New York Mercantile Exchange, the housing market's decline appears to be steepening and the assassination of the former prime minister of Pakistan, Benazir Bhutto, could aggravate geopolitical turmoil in the Mideast.

"My advice to investors is to stick with what has been working," says Mendelsohn. "I'm going into 2008 the same way I came out of 2007, with my portfolio in technology, energy and materials."

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