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D Fry Market Outlook 24 08 2007

The Fed pushed another $17.25 billion into markets, bringing the total in the past two weeks to $120 billion. How much of these repo actions have been repaid is impossible to know. It's said that if repos don't get repaid, money is created out of thin air. How much of today's injections are rollovers of previous activity? It's not known by pedestrians like us.

BAC tossed-in $2 billion to Countrywide after the latter received $11 billion the previous week from 40 different banks. Is the Fed putting an "arm-bar" on some banks to play ball? As noted amusingly but perhaps on the mark, Greg Newton nails what may be the story.

Most bulls on Wall Street believe [really they do] an actively involved Fed has this so-called "credit crunch" under control. Further they believe the Fed will cut interest rates and markets will be off to the races once again. After all, Goldman Sachs predicted [I wonder how they might know?], the Fed will cut two more times before the year is out.

According to an article in the WSJ, the Fed is watching market conditions including "stock prices". Noting stock prices in the statement provides even further encouragement to bulls implying a downturn in stocks would trigger further intervention -- the Bernanke Put.

Taken together, the markets rallied yesterday on light volume and gapped higher at the opening today. However, that gap was met with selling until shortly after lunch when the markets were pushed higher to close basically unchanged.

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The advance/decline or breadth data reflects accurately the type of day we had -- relatively light volume and markets going nowhere. [By the way, if market volume becomes very heavy, volume data from Yahoo/Finance becomes unreliable.]

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The following are Fed repo [repurchase agreements] made Thursday -- with a heavy balance toward mortgage-backed demand:

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Bulls argued Wednesday that markets were becoming stable, with investors willing to step back into risk-taking. But the data on commercial paper showed short-term debt maturing in 270 days or less shrunk by $90.2 billion, still a small percentage of the $2.04 trillion outstanding. Nevertheless the trend is disturbing.

This goes to feedback received by us and read about elsewhere that investors in money market accounts are examining just what constituents are in their supposedly safe fund. Many are switching to a U.S. Treasury fund, which is causing the decline in commercial paper demand -- hardly a sign that stability has returned.

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Overseas things seem better, with investors willing to step back into the markets in a big way especially in the BRICs.

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That should wrap things up. Since we cover nearly 100 of the soon to be thousands of ETFs, we can't put them all up for analysis -- just the usual suspects or noteworthy sectors.

The ongoing credit crunch doesn't seem to be over yet, although hopeful bulls see it as isolated and being well-managed by the Fed. Most bulls want/demand/expect a Fed interest rate cut. If they don't get it, they'll have a Cramer fit. What the Fed is doing now may be necessary, but it's also technically inflationary. After all, inflation is a monetary phenomenon, and printing gobs of money may trade one problem for another. So they talk a good game to reassure those fearful of the inflationary aspects of their activities. Time will tell how it works out.

Have a pleasant weekend.

Disclaimer: Among other issues the ETF Digest maintains long or short positions in: iShares Lehman 1-3 Year Treasury Bond ETF (NYSEARCA:SHY), iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT), RWN, ProShares Short MidCap400 (NYSEARCA:MYY) Rydex S&P Equal Weight Consumer Discretionary ETF (NYSEARCA:RCD).

Source: David Fry's Market Outlook for Thursday