Update #1/ ARA MELKONIANS/ week of August 2, 2010

Good Morning Everyone and Happy Monday! Today starts a new week and a new month . . . and stock markets are off to the races to get August off to a great start. July ended up being quite a good month for the Dow and the S&P. The Dow's rally of 7.1% last month was the best month it has had since last July. The S&P jumped 6.9% last month to post its best month in a year also. Much of the gains were due to global stabilization of credit markets as Europe conducted its stress test on banks and many passed with flying colors.
On that same subject, HSBC, Europe's biggest bank, reported this morning that their first half of the year's before-tax profit topped $11 Billion, much better than the $8.8B anticipated by the analysts. Much of this profit is due to the North American unit posting a profit for the first time in 3 years. Hence, with the Euro rising, our US dollar is weak today which usually helps the stock markets rally.

The biggest story that affects us in the mortgage industry today is the comments from Bill Gross on deflation. Bill Gross, of PIMCO -- the world's largest manager of bond funds, is probably the most respected fund manager in the country. His fear of deflation going forward is based on falling home prices, flattening labor income and the possibility of a slowing economy going forward. This will keep investors focused on the long bond (which he manages) and will keep mortgage interest rates low for the foreseeable future.
Ben Bernanke, speaking this morning in South Carolina, continued his mantra that the economy is in a slow recovery. This campaign comes on the back of the GDP results last week showing a 2.4% growth for Q2. Although, he went on to say, the growth is not enough to address the continuing unemployment problem that plagues our country.

The Institute for Supply Management's manufacturing gauge fell to 55.5 in July from 56.2 the month previous, but any reading over 50 points represents expansion. July's number topped expectations of 54.5 from the experts. Construction spending surprisingly grew 0.1% in June according to the Commerce Dept. Experts were looking for a drop of .5% -- so as you can imagine, these two reports have helped fuel the big rally on Wall Street this morning.

Fortunately, credit markets aren't getting hammered too badly, possibly buffered by the outlook from Bill Gross. August is starting off with a big rally, we'll see if the bulls can hold their gains. I hope you all have a terrific Monday and a very prosperous and productive week!