It should be obvious to most investors that until the financial sector stabilizes and starts to post a meaningful rally, stocks will not bottom and remain hostage to an ongoing bear market.

Already this month the banking sector has tanked more than 15% weighed down by another wave of losses in Q4 and yet fresh announcements of government bailouts, including a whopping $138 billion dollars for Bank of America.

As I stated a few days ago, the market will probably not bottom until we see a combination of bad assets removed from bank balance-sheets and a bottom in U.S. residential housing. These two important conditions are desperately required to finally end this crisis; other issues, including illiquid assets in other segments of credit, including revolving credit card and auto loans and now deteriorating commercial real estate loans will eventually be absorbed through additional write-downs or government handouts.

But establishing a separate entity to bundle toxic mortgage-backed securities and other illiquid credits must be done immediately.

Fed Chairman Bernanke proposed this solution a few days ago in a speech at the London School of Economics and even posited having the government buy bad assets directly from the banks. Either way, something has to be done to unclog bank lending and this solution is a step in the right direction.

Thus far, TARP or the Troubled Assets Relief Program ($350 billion already dispersed) has channeled funds directly to banks -- many of which don't even need the additional capital. Some banks regard TARP as a government "giveaway" that simply bolsters their capital ratios while doing nothing to unclog bank lending.

TARP cannot force banks to lend if they are reluctant to commit precious capital to risky borrowers in a deteriorating economy.

President-elect Obama, who takes control of the White House next week has secured the remaining $350 billion of TARP funds from Congress. Just exactly what he plans to do with this money is uncertain at this stage. Yet you've got to believe that government spending alone will not force banks to lend or consumers to borrow, especially amid an accelerated environment of falling asset prices and surging unemployment.

Deflation is now the buzzword. December CPI fell for the third straight month and was up just 0.10% over the last 12 months -- the lowest rate in more than 50 years. Deflation is a drag on the market, especially common stocks.

Buying equities remains largely too risky. My strategy is to focus on high-quality investment-grade bonds and some convertibles instead where income flows into your brokerage account. Income makes all the difference in a bear market. Many company dividends will be cut again in 2009 as profits crumble and CEOs opt to hoard cash and cut capital spending.

I doubt November 20 marked the low in this bear market. It's hard to believe that stocks have already discounted the worst in the earnings cycle with most consensus estimates pointing to a recovery the second half of this year. I think that's wishful thinking. If that's true then stocks have not seen their lows and should largely be avoided.

Have a good weekend. See you on Monday.