Highlighted stocks include Red Hat (...

The NYSE and the Nasdaq will close at 4 p.m. on both Dec 31 and Jan 2. < ?DART(15);?>

Only 3 companies are scheduled to report earnings: Cal-Maine Foods, Inc. (

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As I write this Friday morning, it is a quiet day on the markets. Stocks are mostly unchanged, largely due to a lack of news and a lack of volume.

I expect volume to remain below average until Jan 5. Many portfolio managers have closed the books and there is very little news scheduled for the next 7 days.

January should be interesting. There may be excitement heading into the inauguration. It would not surprise me to see some type of Obama rally.

On the other hand, fourth-quarter earnings are going to be lousy. Current forecasts show 276 S&P 500 companies reporting a year-over-year decline in profits. Earnings for the S&P 500 will still be positive, however, with modest growth of 3.3%. Coal, drug, medical products and refining companies should report the strongest growth. Avoid steel and semiconductor companies.

The economic data won't be positive either. December was another month

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Highlighted stocks include: Alcoa Inc. (...

No companies are expected to top expectations. Micron Technology, Inc. (

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The Fed has chosen to use all of its might to fight deflation now. Of course, the side effect will be battling against high inflation in the future. However, this is the right thing to do.

Inflation can be controlled by making it harder to spend money. Interest rates can be raised and the supply of money can be cut off. The measures are painful, but the battle can be won.

Deflation is far nastier. Consumers who think a product will be cheaper tomorrow will hold off buying it today. Once people get in the habit of not spending, it is hard to get them to start again. Furthermore, the inability to raise prices hurts corporate earnings and limits wage increases. Deflation then becomes a self-fulfilling prophecy that lingers for an extended period of time.

We are seeing the effects of deflation in holiday shopping patterns. Consumers waited through all

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Highlighted stocks include: Anadarko Petroleum Corporation (...

No companies are expected to top expectations. Best Buy Co., Inc. (

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December has brought both a stock market rally and a treasury market bubble.

Since setting an intraday low on Nov 21, the S&P 500 (SPX) has risen 21% and the Nasdaq (COMP) has rebounded by 20%. Some of the riskier industry groups have made big upward moves, including homebuilders, financials and, most recently, shipping.

Yesterday, Dec 10, 3-month treasury bills sold with negative yields. According to Bloomberg News, this has never happened in the debt security's 79-year history - which includes the Great Depression. (Negative yields imply that investors are so concerned about capital preservation that they are willing to pay for the right to loan money to the government.)

The negative yields followed an auction of 4-week treasury bills at 0% interest. Yields of long-term bonds are at record lows as well.

Combined, this data tells us that equity investors are seeking more risk, while at the

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There is a lot of hope being priced into the markets.

I don't know of any of other reason to explain why the stock markets rallied during Thanksgiving week and held onto much of their gains this week.

Let's look at the facts.

The recession is getting worse. The ISM manufacturing index set a new 26-year low. Black Friday sales were not enough to prevent November retail sales from being horribly down. 553,000 jobs were lost last month - the biggest drop since December 1974.

Valuations are not as cheap as they could be. The Dow Jones Industrial Average ($DJI) still trades a double-digit P/E. There have previous periods where the average has traded at single-digit P/Es.

On a technical basis, the Dow has been setting lower highs and lower lows - a bearish trend. My colleague, Kevin Matras, described the chart pattern as a "sloppy descending triangle"; in

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