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D Fry Market Outlook 06 03 2007
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"And I'm pleased that we have a strong team. And the president's working group, Ben Bernanke, Chris Cox, Reuben Jeffrey and I, have spent a lot of time just thinking through [potential financial crisis']... We spend a lot of time getting prepared. ...what we try to do is just make sure we're ready if one [financial crisis] does happen to come."

Henry Paulson
Treasury Secretary
March 4, 2007
"ABC This Week"

I would interpret the above comments as perhaps a sign that there's a willingness to be more aggressive with markets. So without going into any conspiracy theories, let's just leave it at that.

A gap open lower in U.S. equity markets followed another rout in overseas markets. A rally quickly followed since markets were at least short-term oversold. Even at its height however, the advance/decline relationship was still decidedly bearish--700 up and 2000 down. By the end of trading, mid-day gains couldn't hold. In the last few minutes of trading markets were hit hard by heavy selling. The 5 minute chart of SPY tells the tale.

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And what of breadth by the close?

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Safe havens have included bonds and cash -- nothing else really.

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Gold is now perceived as just another risky asset versus assuming the opposite historical role.

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Overseas is where all the problems began, but the contagion is profound.

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There are many ugly charts to post. Any positive looking charts are few and far between and mostly confined to bonds. All anyone can conclude now "technically" is that markets are correcting ["and how!!!"]. Some may just repeat 30% corrections like last summer. For some emerging markets, that kind of action goes with the territory. You either accept that going in, or trade it as best you can.

The primary fundamental concern is for American consumers. If credit standards tighten dramatically, Chucky will stop spending. China and their suppliers will feel the pinch. Combined that could lead to a global economic contraction of some degree.

We won't engage in conspiracy theories. We're aware of several things however.

Paulson's a Goldman Sachs guy -- maybe I could stop there.

He's re-energized the president's Working Group on Financial Markets [aka, the PPT]. Bernanke has often stated his willingness to print money to stem any severe financial market declines ["helicopter Ben"]. There's a powerful array of fee-dependent financial institutions counting on bullish versus bearish conditions. You see, hear and read their bullish bias in the financial media everyday [after all we know who pays the bills, right?]. Taken together this makes any shorting attempts difficult to sustain as you're betting against the house.

Have a pleasant evening.

Disclaimer: Among other issues, the ETF Digest maintains positions in: iShares Lehman 1-3 Year Treasury Bond ETF (NYSEARCA:SHY), iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF), iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT), streetTRACKS Gold Trust ETF (NYSEARCA:GLD), PowerShares DB Precious Metals Fund (NYSEARCA:DBP), CurrencyShares Japanese Yen Trust (NYSEARCA:FXY), iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), iShares MSCI Japan Index ETF (NYSEARCA:EWJ) and iShares MSCI Australia Index Fund (NYSEARCA:EWA).

Source: David Fry's Daily Market Outlook