David Fry's Market Outlook for Friday

Includes: GLD, USO, XLF
by: David Fry

It’s enough to drive you nuts, as interpreting news is particularly tough for investors. Bad economic news cheers investors wanting rate cuts, while good economic news Thursday was, well, good news. And the good news from better than expected retail sales and ISM data trumped for the moment further increases in foreclosures and higher oil and gold prices.

Taken together it might mean the all-important employment data tomorrow may be better than expected. If so, those hoping for rate cuts may be very disappointed.

The bottom line is that volume is still relatively light as many investors await employment data. Then we should see whether bulls or bears can seize control of the tape.

Just a few charts that matter from today--tomorrow will be a different deal.

The Fed was active, conducting $31.25 billion in repurchase agreements. They conduct these operations when the Fed Funds rate gets out of whack from where it should be. As we noted Wednesday with the Libor rate [the short-term rate at which banks lend to each other] rising to nearly 5.70%, the credit crunch continues. It follows then that the Fed would enter the market to defend short-term interest rates.

There wasn’t any great news. The Fed is in a box with gold, oil and food prices rising. Remember it was only in June that the Fed hinted that market participants should pay attention to the “headline” inflation rate and not just the “core” rate. The news over the past few weeks means an interest rate cut would surely send the dollar sharply lower [inflationary] and gold higher.

I expect Bernanke & Co. to cut interest rates but talk a tough inflation fighting game at the same time. We’ll see.

I’ll be one of the many to pay tribute to Luciano Pavarotti this week and beyond. When they say: “He brought opera to the masses”, they weren’t kidding. Count me as one.

Bravo, Maestro! Vada con il dio, Luciano!

Disclaimer: Among other positions the ETF Digest maintains long or short positions in: iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF), PowerShares DB US Dollar Index Bearish (NYSEARCA:UDN) and streetTRACKS Gold Trust ETF (NYSEARCA:GLD).