Deflation Part One

Market Action:
The market unceremoniously traded higher on this Monday morning charging to new relative highs in all the major indexes we follow. With about an hour to go, someone pushed a sell button somewhere and brought the averages down off the mountain top.

Opinion/Analysis:
We have nothing to say about the market this evening so we have decided to give you the day off. This is a holiday week and volume will probably be light again unless for some reason we find some sellers out there.

Deflation Part One:
As the stock market continues its heavenly journey, we must find something else to pass the time so the topic of the week will be Deflation. Looking back over the past few years, as the residential housing market has faded, we have seen very little in terms of headline inflation. As the media focuses on “core” inflation and the market waits for “good” news on the “core” inflation, there are real inflation forces at work that can not be denied even with the modest “core” inflation figures.

Our premise rests in the residential real estate market being the key to the economy and ultimately the stock market. The reason the consumer hasn’t been “tired” in the last five years is their ability to extract cash from their houses that have “appreciated”. The economists are at least recognizing that the consumer might be having some trouble but it’s because of the higher gas prices, not home price depreciation. The economists say that the economy won’t be affected by the consumers’ lack of funds.

Plus, the real estate market seems to be doing ok in the media but for some reason home builders and the home improvement stores are having difficulty. We even see ads for low teaser interest rates on homes, like get $500,000 for your mortgage and pay under $1500 a month. So, even though subprime mortgage companies are having trouble, there doesn’t seem to be any shortage of funds for mortgages in general.

We’ll be discussing deflation this week, unless something better comes along.

Dow Industrials: 13,542.88 -13.65
VIX: 13.30
HUI: 330.77
QQQQ: 47.01
QQQRS: 0.18 bid
QQQRT: 0.35 bid
RYVNX: 14.95
RYAIX: 20.30
RYCWX: 30.66
TLT: 8719
BEGBX: 13.81