David Fry's Daily Market Outlook

That I hate January markets especially, when in December markets are extended!? And, that I wanted to take the month off and go tramping in Patagonia?? Would I have lost my place in line? We have soldiered on trying to deal with January's day-to-day investor schizophrenia. Maybe next year our subscribers will pay me to go!

Ok, I've got that off my chest and should note there's just a few more trading days left in the month.

Suddenly, the Street is abuzz with news of a housing downturn. I've been posting the chart for streetTRACKS SPDR Homebuilders ETF (XHB) since late spring. Its collapse didn't surprise, and the initial rebound didn't either since it was much oversold. But the "value buyers" [Buyers? Better, think of a word that rhymes with "wimps"] have been pushing the sector higher seizing any morsel of possible good news. Today reality bites.

It's tough being a realtor in this environment, let alone being David Lereah whose job is "happy talk" convincing potential buyers now's the time to buy and for seller's to keep their chin's up [and um, cut prices!]. He wasn't able to convince Beazer's CEO today given their simultaneous comments.

"It appears we have established a bottom," said David Lereah, chief economist for the NAR.

"At this point, we have yet to see any meaningful evidence of a sustainable recovery in the housing market," said Ian McCarthy, Beazer's president and chief executive.

Treasury bond prices backed-off to the level we suggested they would for the past two weeks. For now I suspect we'll be in the trading range we outlined previously.

Some kind readers found the article I couldn't locate yesterday which discusses Middle East bond sales as oil prices declined. This could be another reason why bonds are dropping in price now, since crummy home sales should mean higher bond prices.

Energy prices dropping today was another oddity, but will probably be explained away by [fill in the blank]. Maybe it's just because the Bush administration said they were going to start buying in the spring and not now. [Sounds silly doesn't it?]

The great monetary reflation continues apace. It's not something you're going to hear about on CNBC or read about in the mainstream financial press. Nevertheless, the Fed started pushing the money supply higher shortly after 9/11 creating the housing bubble, and when that burst, it started reflating to primary dealers to get stocks higher again. The activity has given new meaning to the maxim "don't fight the Fed." Some think to hide the money supply expansion officials decided to discontinue viewing M-3 data. It really doesn't matter that much, since others such as Shadow Government Statistics have been able to reconstruct it fairly easily.

The Fed and other central banks are keeping the printing presses running. It's almost as if there's a financial accident or some other negative event that they see in the near future. The following is today's activities, which, when added to the past ten days total nearly $60 billion when you include nearly $25 billion in Treasury auction activity. Finally, most of these funds are being injected at costs beneath the 5.25% Fed Funds rate. So, who wouldn't want to be a Primary Dealer? All this new money is being placed in private equity deals, REITs, junk bonds, routed to trading desks and so forth.

Gold is the primary disciplining force to thwart rapid monetary expansion. Central banks don't like rising gold prices and may [and some cynics believe they have already] intervene in markets to keep prices down. But, if gold prices breakout from these levels, as they were close to doing today, there's a message contained that's not good.

Meanwhile, back in equity land, the January roller coaster ride continues. It's been "sell energy, buy tech", then "buy energy, sell tech" and now "sell energy, sell tech". Tomorrow? Most investors are watching Microsoft Corp. (MSFT) and eagerly awaiting their earnings report believing that it alone will save and even stimulate tech.

Most mainstream markets took it on the chin today as well. Remember, we post mostly weekly charts believing that they are, with some exceptions, more telling than daily charts. So patience throughout even the most volatile weeks generally proves valuable, even though it requires more patience.

Were there any winners today? Not really since there were some real stinkers today. Remember, only yesterday we posted an article from the Davos Forum suggesting that overseas markets could "decouple" from U.S. markets in terms of performance. That suggestion was followed by investors making mincemeat out of most overseas indexes today. So let's examine the usual suspects.

Despite economic growth at 10.7% stocks sell off in China. Growth may be too good and will force authorities to reign in some credit.

There are many charts that could be posted, but you get the idea -- it was a crummy day all around the world. We're still in earnings season, and no doubt MSFT's earnings which are now not that much higher in after hours trading may help tech, but EBAY's excellent report didn't hold back the dam today either.

There's an extra $60 billion sloshing around with Primary Dealers, and when the Fed and/or Treasury have been this active usually it meant stocks would respond to the upside. That will work until it doesn't any longer. Now the VIX action should be watched carefully, as well as continuing earnings reports.

I shouldn't be complaining so much about sticking around in January. But, I did fall down the stairs here and still am pretty sore. I'd rather have gotten hurt in Patagonia, been in cash, and avoided all this volatility. But that's the way it goes.

Given today's action "try" to have a pleasant evening.

Disclaimer: Among other positions, the ETF Digest maintains positions in: streetTRACKS Gold Trust ETF (GLD), First Trust DJ Internet Index ETF (FDN), iShares Goldman Sachs Network Index Fund (IGN), iShares Goldman Sachs Software Index Fund (IGV), S&P 500 Index (SPY), MidCap SPDRs ETF (MDY), iShares Russell 2000 Index ETF (IWM), streetTRACKS KBW Capital markets (KCE), iShares MSCI EAFE Index Fund ETF (EFA), iShares MSCI Emerging Markets ETF (EEM), iShares S&P Latin America 40 Index Fund (ILF), iShares S&P Europe 350 (IEV), iShares MSCI Pacific Ex-Japan Index Fund (EPP), iShares MSCI Japan Index ETF (EWJ), iPath MSCI India ETN (INP), iShares Trust FTSE-Xinhua China 25 Index Fund (FXI) and iShares MSCI Malaysia (EWM).