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D Fry Market Outlook 09 03 2007

The Fed has been conducting one-day repurchase agreements ["repos" or short-term loans] for much of the past week in amounts ranging from $4-7 billion. These funds are bid for by the primary dealer network, and recently have been done beneath the Fed Funds rate.

A pretty good deal for the borrowers, right?

Sometimes repos aren't even repaid, and when that happens money is created out of thin air. [Think money supply growth.]

The primary dealers will use the money as they see fit, but may route much of it to their trading desks to play trade with.

Today's 14-day $15 billion repo gives the dealers two weeks ["your tax dollars at work"] to "use" that money. If the money should wind-up at trading desks you can rest assured program trading, "this machine starts automatically," will be the result. Or, the funds could help cover some subprime lending problems which we featured in a Bloomberg article yesterday.

When we advised earlier this week that "Big Brother is Watching," we weren't kidding.

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The equity markets bounced today on the back of strength overseas. It may seem unusual for U.S. stocks to follow overseas markets, but that's where troubles first began. Last week investors' rediscovered risk and many moved to the sidelines. So far this week the appetite for risk has quickly returned as some investors sensed buying opportunities. The behavior is schizophrenic, but that's the market we have. When markets are in rally mode and cash on the sidelines [and obviously juiced higher by the Fed] is great, bad news is pushed to the side.

Negative retail sales numbers were dismissed as cold weather related. Later rumors of a bankruptcy filing by subprime mortgage lender New Century Financial only gave markets a slight pause. Bulls chattered today that the subprime problems and fears are overblown.

Tomorrow we get the employment report, and with so much fresh cash in circulation even a bad number may get shrugged-off.

So I guess the question remains, are we back to total asset inflation again where all markets everywhere rally?

The best, or most humorous, story of the day has to be D.R. Horton CEO Donald Tomnitz who said, "I don't want to get too sophisticated here, but '07 is going to suck, all 12 months of the calendar year." Oh, and with that kind of guidance the stock went up!

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Tomorrow the employment numbers come out and they'll no doubt move markets. But with markets juiced with more Fed injections, the machines are on autopilot. Don't mess with Big Brother's machines!

Have a pleasant weekend.

Disclaimer: Among other positions, the ETF Digest maintains positions in: iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), streetTRACKS Gold Trust ETF (NYSEARCA:GLD) and iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF).