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D Fry Market Outlook 17 12 2006

After a few days of relative calm, stocks were driven higher today by some heavy duty liquidity injections from Uncle Sam. [And, people wonder why there’s so much cash around.] The actions below have been typical and coincided with rallies in previous months over the past few years.

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D Fry Market Outlook 17 12 2006

D Fry Market Outlook 17 12 2006

Who gets to play with all this money? The Primary Dealers listed below of course.

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You’ll note that “some” of the government’s generosity today came at rates below the posted Fed Funds rate of 5.25%.

Sometimes these funds aren’t repaid by the borrowing primary dealer. When that happens, new money is created out of thin air. But while “Da Boyz” have the dough they’ll surely route it to their trading desks.

Further when you connect this type of activity with the players and then study their earnings reports carefully you’ll note profits from trading activity is the largest single source of revenue and gains for the “gang of 22”. Should you care? Well, it is “your” money they’re playing with. And you can’t play, just follow. Speaking for myself, I’m jealous.

This is the way things work today. Fight it at your peril.

While the big boys play, retail cash-flows are strangely missing. It’s often thought that when retail commits to the market, that’s the time to exit. [As of this hour, I only have last week’s numbers, but that should give you the idea of who’s in charge of this market.]

D Fry Market Outlook 17 12 2006

While the stock market is behaving like December 1999, back then the Fed was tightening credit and trying to constrain money-supply growth. But we also had Y-2K to worry about, and equity markets were in a frenzy to go with the dot.com boom. Some may remember that in early January 2000 when world computers continued to function well, a powerful, albeit brief, sell-off occurred. This shook-up a lot of investors, but the rally quickly resumed for a few months before the bear market set-in with a vengeance.

I have no idea whether January 2007 will begin with heavy profit-taking or not. The market isn’t cheap and is by most measures overbought. But it can continue in that manner for a period beyond rational analysis. If the Fed and Treasury keep providing liquidity markets will continue to rise. The only insurance an individual investor can maintain is probably having some allocation to gold since this liquidity orgy debases all fiat currencies.

Today I also noted that the SEC is proposing that banks be allowed to receive commissions from mutual funds without having to register as brokers. They needed this kind of help? It should remind you that many of the rules implemented by the SEC after the 1929 market crash are being whittled away. The demise of Glass-Steagall was of course the major change which created today’s featured players. Last week the SEC also suggested eliminating the long standing up-tick requirement for shorting and are thinking of decreasing margin requirements from 50% to as little as 15%. Things are changing that’s for sure.

Anyway, back to the action today. Everything was up except bonds and currencies.

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D Fry Market Outlook 17 12 2006

Let’s focus on a few other sectors that usually are of importance.

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D Fry Market Outlook 17 12 2006

And, how about some odds and ends?

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And overseas markets were as or more heady.

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D Fry Market Outlook 17 12 2006

D Fry Market Outlook 17 12 2006

D Fry Market Outlook 17 12 2006

D Fry Market Outlook 17 12 2006

Friday is “quad-witching” when futures and options expire for December. Lots of goofy things can happen as volume builds as traders need to settle positions. Do you think there are any shorts left to squeeze after today? Well, maybe a few brave souls.

As for the Da Boyz, if you can’t beat ‘em, join ‘em. That’s our philosophy. They’ve been the beneficiaries of a boatload of cash from the government to keep things well oiled through the holidays. It’s scary and controversial stuff that the mainstream financial media hasn’t written a bit about. I wonder why?

Have a great weekend!

Disclaimer: Among other issues, ETF Digest maintains positions in: S&P 500 Index (SPY), NASDAQ 100 Trust Shares ETF (QQQQ), MidCap SPDRs ETF (MDY), PowerShares Zacks Small Cap (PZJ), PowerShares Zacks Micro Cap (PZI), iShares Lehman 7-10 Yr Treasury Bond ETF (IEF), streetTRACKS Gold Trust ETF (GLD), iShares Silver Trust (SLV), United States Oil Fund ETF (USO), PowerShares DB Commodity Index Tracker (DBC), PowerShares Water Resources ETF (PHO), PowerShares WilderHill Clean Energy ETF (PBW), iShares MSCI EAFE Index Fund ETF (EFA), iShares MSCI Emerging Markets ETF (EEM), iShares S&P Latin America 40 Index (ILF), iShares FTSE/Xinhua China 25 Index (FXI) and iShares MSCI Australia Index (EWA).

Source: David Fry's Daily Market Outlook