David Fry's Market Outlook for Friday

by: David Fry

D Fry Market Outlook 23 03 2007

We've been dancing around the issue of market manipulation, and we still don't have any evidence of any direct current or past market intervention by the Treasury or the Fed. We've just been observing their policies combined with open market operations they conduct in the context of modern primary dealer structures. With that circumstantial evidence you may be able to connect the dots. However, an interesting story released Wednesday via an interview in the Belfast Telegraph of Bank of England's ex-Governor Lord Eddie George was revealing.

"The Bank of England deliberately stoked the consumer boom that has led to record house prices and personal debt in order to avert a recession. Lord George said he and his colleagues on the Monetary Policy Committee 'did not have much of a choice' as they battled to prevent the UK being dragged into a worldwide economic slump by slashing interest rates. And he said his legacy to the current MPC was to 'sort out' the problems he had caused."

I wonder if Greenspan or Bernanke would be so forthcoming?

Now posting all this is getting pretty monotonous isn't it? I may back off from this for awhile [the math is giving me a headache]. But in the meantime $15 billion expired while $17 billion was added for Fed temporary loans [repos] of $31 billion. Treasury activity Thursday amounted to a paltry $2 billion. That, combined with $17 billion expiring, brought the total from the Treasury to $18 billion still outstanding. Added to the Fed's, it equals $49 billion total. Like I've always said, it's good to be a primary dealer.

Fry 23 03 2007

D Fry Market Outlook 23 03 2007_001

Fry1 23 03 2007

Okay, now to the markets. The well-trained bullish headline writers tell us the markets "consolidated gains" Thursday. That's a fair description and I'll go with it.

D Fry Market Outlook 23 03 2007_002

D Fry Market Outlook 23 03 2007_003

D Fry Market Outlook 23 03 2007_004

D Fry Market Outlook 23 03 2007_005

D Fry Market Outlook 23 03 2007_006

D Fry Market Outlook 23 03 2007_007

D Fry Market Outlook 23 03 2007_008

D Fry Market Outlook 23 03 2007_009

D Fry Market Outlook 23 03 2007_010

So overall the tech sector looks pretty uneven, and finding the true strength or leadership isn't that easy to spot.

Just as investors were jubilant over the prospects for interest rate cuts, bonds got hit Thursday and most dismissed the possibility of any interest rate cuts any time soon.

D Fry Market Outlook 23 03 2007_011

D Fry Market Outlook 23 03 2007_012

D Fry Market Outlook 23 03 2007_013

D Fry Market Outlook 23 03 2007_014

D Fry Market Outlook 23 03 2007_015

D Fry Market Outlook 23 03 2007_016

D Fry Market Outlook 23 03 2007_017

D Fry Market Outlook 23 03 2007_018

D Fry Market Outlook 23 03 2007_019

D Fry Market Outlook 23 03 2007_020

D Fry Market Outlook 23 03 2007_021

D Fry Market Outlook 23 03 2007_022

Overseas markets are still outperforming U.S. markets at least on the upside.

D Fry Market Outlook 23 03 2007_023

D Fry Market Outlook 23 03 2007_024

D Fry Market Outlook 23 03 2007_025

D Fry Market Outlook 23 03 2007_026

I could go on, but that’s enough to give you the overall picture of things. It was interesting to note that sentiment of bond traders for a rate cut over the next few months dissipated in just one day. At the same time most equity sectors didn’t budge.

The story of note given the Fed’s actions Wednesday is to remember there’s a trade-off given there actions or nonactions. Whenever a central bank is perceived as about to weaken their interest rate policy, and other countries aren’t, the currency will suffer and gold prices will rise. That’s natural.

D Fry Market Outlook 23 03 2007_027

Are there attempts at market manipulations occurring from central bank activity? With policy and interest rate actions, yes. And usually one could or should argue that is their job -- to keep the economy growing and healthy. What bothers most people is either policy mismanagement, which is printing too much money, or allowing asset bubbles to grow unchecked. We can see from Lord George’s confession that there they let things get out of hand. Here too unfortunately, as we’ve gone from one asset bubble to another. I guess its something we knew already even without Lord George’s confession.

Other folks see conspiracies of direct intervention in the markets. We have no evidence of that, and no one else has produced any. One could look at the contemporary structure of primary dealers [now owning brokerage firms] and look at Treasury and Fed activity, connect the dots and reach manipulative conclusions. That’s fair in my opinion.

Have a great weekend!

Disclaimer: Among other issues, the ETF Digest maintains positions in: iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF), streetTRACKS Gold Trust ETF (NYSEARCA:GLD), PowerShares DB Precious Metals Fund (NYSEARCA:DBP), PowerShares DB Energy Fund (NYSEARCA:DBE), PowerShares DB Agriculture Fund (NYSEARCA:DBA), PowerShares DB US Dollar Index Bearish (NYSEARCA:UDN), CurrencyShares Australian Dollar ETF (NYSEARCA:FXA), iShares MSCI Japan Index ETF (NYSEARCA:EWJ) and iShares MSCI Australia Index Fund (NYSEARCA:EWA).