Steps to reproduce:
1) sudo /etc/init.d/xdm stop
2) rm $HOME/.Xauthority
3) sudo /etc/init.d/xdm start
4) login with xdm
5) login with ssh from another machine and try "DISPLAY=:0 xclock"

Expected results:
5) xclock can connect to the X server since it can use ~/.Xauthority

Actual results:
5) xclock fails since ~/.Xauthority does not exist.

More info:
1) strace of xdm filtered with "| grep /.Xauthority | cut --bytes=1-100" shows

2897  stat64("/home/lindi/.Xauthority-c", 0xbeb5eab8) = -1 ENOENT (No such file or directory)
2897  open("/home/lindi/.Xauthority-c", O_WRONLY|O_CREAT|O_EXCL, 0600) = 3
2897  statfs("/home/lindi/.Xauthority-c", {f_type="EXT2_SUPER_MAGIC", f_bsize=4096, f_blocks=974515,
2897  link("/home/lindi/.Xauthority-c", "/home/lindi/.Xauthority-l") = 0
2897  unlink("/home/lindi/.Xauthority-n") = -1 ENOENT (No such file or directory)
2897  open("/home/lindi/.Xauthority-n", O_WRONLY|O_CREAT|O_EXCL, 0600) = 3
2897  open("/home/lindi/.Xauthority", O_RDONLY) = -1 ENOENT (No such file or directory)
2897  unlink("/home/lindi/.Xauthority-c") = 0
2897  unlink("/home/lindi/.Xauthority-l") = 0
2897  recvmsg(7, {msg_name(12)={sa_family=AF_NETLINK, pid=0, groups=00000000}, msg_iov(1)=[{"\360\0\
2897  recvmsg(7, {msg_name(12)={sa_family=AF_NETLINK, pid=0, groups=00000000}, msg_iov(1)=[{"\24\0\0
2897  recvmsg(7, {msg_name(12)={sa_family=AF_NETLINK, pid=0, groups=00000000}, msg_iov(1)=[{"0\0\0\0
2897  recvmsg(7, {msg_name(12)={sa_family=AF_NETLINK, pid=0, groups=00000000}, msg_iov(1)=[{"@\0\0\0
2897  recvmsg(7, {msg_name(12)={sa_family=AF_NETLINK, pid=0, groups=00000000}, msg_iov(1)=[{"\24\0\0

so clearly xdm could created ~/.Xauthority if it wanted.

2) XAUTHORITY=/tmp/.XauthcJv6YX is set for children of xdm. This
however does not help with clients that are started from an ssh session.

3) If I login again then ~/.Xauthority is properly created and
XAUTHORITY is no longer set.