Deflation, Is the Fed our friend? Should we listen?

Greg Afarian’s Market Report Week of July 26th to the 30th. The Fed and comments from the St. Louis Fed President James Bullard seemed to overshadow the market this week. His statement that chances of deflation is a risk spooked the markets on Thursday which saw the Dow drop 200 points. He went on to compare the U.S. Economy to Japan which I feel may of been uncalled for. Japan has had negative grow for a decade and the Nikkei has been down 68% over that time period. I would hate to see that happen in the U.S. These comments from Bullard may be more of a concern / warning than anything. He is still looking for moderate growth. But, todays anemic GDP numbers seem to play right into the thoughts of a double dip. Even though growth was moderate 2nd quarter GDP at 2.4% real GDP for the past 4 quarters grew at 3.2%. I feel even though these numbers are positive figures the $64,000 question is with all that stimulus and we grew at only 3%, where do we go from here?

Weekly jobless claims were down 11,000 to 457,000 week ending 7/24 and continuing claims week ending 7/17 was 4.565 Million vs. 4.484 Million the prior week. Consumer confidence for July dipped to 50.4 vs. June’s 54.3.

June new home sales (new construction) surged up 23.6% vs. May’s horrendous down figure of 36.7% which was sort of puzzling. These numbers came as a surprise as most Realtors say that buyer traffic is down since the ending of the home buyer tax credit program. My only thought is that this number represents new construction sales that went under contract prior to April 30th and continue to close due to the extension till September 30, 2010.

Fannie Mae and Freddie Mac say that prime loans are accelerating into foreclosure and a noticeable decline in home prices has occurred from May to June which breaks down as the following

Foreclosures prices down 6.8%
Short Sale prices down 6.3%
Non-Distressed prices down 4.6%

So key questions for the housing market going forward is what happens if rates go up and will that spark buyers to move? 30 year fixed rates are at 4.64% and 15 year fixed rates are at 4.12% Mortgage apps fell 4.4% last week as refi’s fell 5.9% as purchase apps rose 2%.

The market did okay this week, the DOW was up 144 points as Oil reached $78.96 and Gold is at $1,184 an ounce.

I think the questions going forward is not if the 800 Billion Dollar Stimulus Plan worked or as to how well did it work? I feel that one thing that needs to be done is extending the Bush Tax Cuts! I defiantly don’t see the U.S. Taxing our way out of this situation. I think that the private sector needs any incentives to expend growth which will lead to job creation! The facts are that 14.5 Million people are out of work in the U.S. and 7.5 Million of them have been out of work for more than 24 months. That is not good! We need to provide benefits and tax cuts to small business / employers to create these jobs. I think that there is a silver lining here. Even though this negative environment companies continue to have good earnings. There still hasn’t been a better time in the past 20 years to be a home buyer and with historic low interest rates this could be the opportunity people are looking for.