Kevin Spires, CFA, FRM

State & Local Governments have been shedding jobs over the past 36 months while the Private Sector has been adding jobs.  Some months, State & Local Governments would shed 30-40k jobs while the private sector was adding 200k jobs.  The average addition to payrolls by State & Local Governments over the past 20 years has been about 15k jobs/month so a return to normal growth would be a big boost to the employment situation.

Inflection Point in the rearview mirror...

State & Local Employment growth accelerated through the third quarter of 2008 and then collapsed for the next 3 years.   An inflection point in total employment was reached in the third quarter of 2011 and a stabilization in the State & Local Government Sector appears imminent.

Stabilization in the books - Growth Ahead?

My optimism that stabilization is right around the quarter is driven by the return to growth of State & Local Government tax receipts.  These receipts turned positive back in the summer of 2010 and have grown at modest rates of 3-4% for the past year.  Tax receipts tend to lead employment growth by 4-5 quarters, so expect continued improvement in the State & Local Government Employment over the rest of 2012.

Kevin Spires, CFA, FRM

With the update to first quarter GDP, the BEA released their first picture of Corporate Profits for the first quarter.  I like to look at after tax corporate profits as a percentage of Nominal GDP.  On this basis, Corporate Profits dropped to 7.2% from 7.6% in the 1st quarter of 2012 from the 4th quarter of 2011.

As Larry Kudlow likes to say Corporate Profits are "the Mother's Milk of stocks, business success and job creation."  Corporate Profits reported in the GDP Report tend to lead reported corporate profits of companies in the S&P 500 by 2 quarters.  With the potential peak in Corporate Profits for the GDP report, S&P 500 earnings may be about to peak as well. 

Trouble could be brewing.  The stock market tends to peak after the peak in corporate profits.  The timing is uncertain as the stock market peak follows with an uncertain lag.  It took three years from the 1997 peak in profits to the 2000 peak in stocks while it only took one year from the 2006 peak in profits to the 2007 peak in the stock market. 

Once Stocks peak, given a peak in corporate profits, then a recession is usually just around the corner.  If the peak in Corporate Profits is confirmed over the next two quarters, the Stock Market - and the whole economy - will enter a much more fragile stage of the economic cycle.

I am skeptical that the current expansion is about to fall apart of its own accord, but the dual uncertainty of tax increases on the table for the end of 2012 and the pending implemenation of Obamacare have caused a certain amount of investment and hiring to be pushed back by Corporate America.  A potentially strong expansion based on Corporate Profitability has been turned into the weakest recovery outside of the Great Depression. The upcoming U.S. Elections will be crucial for relieving economic uncertainty and I expect many months of choppy performance in the markets as uncertainty reigns. 

Click here for our Corporate Profits Chart Package.

Kevin Spires, CFA, FRM

The last report this month that I can use to estimate payroll growth is the Weekly Initial Jobless Claims report.  Weekly Claims are not very useful in predicting the monthly number of new Jobs created in the economy - at least not as useful as other indicators - but, initial claims are better are predicting turning points.  For now, Claims are not predicting an imminent turn in the economy.

 Initial Claims were 383k last week, with a four week moving average of 374.5k.  Based on this data, I would expect the monthly jobs report to show a gain of 100-150k total jobs.

Given an ADP report showing 133k private sector jobs added in May, I am adjusting my expectations for the Jobs Report.  I am now expecting 150k new jobs to be reported for May - with a fairly high level of uncertainty.

Kevin Spires, CFA, FRM

The ADP Employment Report was released at 8:15 am EST today.  According to ADP, 133k new private sector jobs were created in May vs. a consensus of 154k jobs.

The ADP report is the single best employment indicator for understanding how many jobs were added in the past month - even better than the governments own release set for this Friday.  The ADP report is built from ADP's count of actual payroll checks to employees in the ADP system.  The government's report is based off of a survey of employers - a survey that relies on thousands of individuals to manually enter data into a governement online form. (For full disclosure, my wife's small business is a payroll survey respondent). 

When the monthly payroll report is released, I view the ADP report as the true count and the government's report as an estimate.  Later, as employers file actual payroll tax data on a quarterly basis, the government's count then becomes a better, more complete count as the government slowly replaces the survey results with actual payroll counts based on tax data - mainly with the annual benchmark revisions.

Kevin Spires, CFA, FRM
Disclosure:  As of 5/30/2012, Bellaire Capital Management did not hold any position in SJT.

The San Juan Basin Royalty Trust (SJT) is a Royalty Trust that has a 75% net interest in Natural Gas and Oil Producing Properties in the San Juan Basin of NW New Mexico.  Almost all of the revenues of the trust are from 1,000+ producing Natural Gas wells.  Unfortunately, once you subtract operating expenses, the Trust has trouble producing Net Cash flow with Natural Gas prices below $3.50 MCF. 

Back in 2009 when the Average annual price for Natural Gas was $3.48/MCF the Trust was able to distribute less than $.65 for the year - and the Trust traded at a low price of barely $12.50/share.  Down over 10% at times today to trade below $15 for the first time since 2009, SJT looks likely to attack the $12.50/share price at some point this year.  Natural Gas prices are barely at $2.40 for the nearby months and have traded below $2.00 in March/April - prices that will determine distributions for June/July.  Expect monthly distributions to average < .$.05 for the next few months under current prices.  Even though SJT is deeply oversold based on a 20 day Stochastic Oscillator, the $12.50/share is beckoning.

Disclaimer:
This information is neither an offer to sell nor a solicitation to buy securities. Forecasts, estimates and opinions stated are my own and the data presented is for educational purposes only.  Investments involve risk unless otherwise stated. Past performance is not a guarantee of future results. Be sure to first consult with a qualified tax and/or financial adviser before implementing any strategy discussed.

Kevin Spires, CFA, FRM

At 8:30 am EST Friday morning, the monthly Jobs Report will be released.  Currently, The Bloomberg Consensus is for an increase of 150k Jobs in May.  Leading up to the Jobs Report, I will review my favorite employment indicators and see what estimates drawn from these indicators would predict.  Today, I will review the Senior Loan Officer's Survey and the Temp Employment indicators.

The first of the employment indicators I review to assess the underlying trend in employment growth is the Fed's Senior Loan Officer Survey.  Specifically, I look to see if C&I loan terms to Small Business are becoming tighter or easier.  Easier terms lead to faster employment growth with a 0-2 quarter lead.  The current easing in terms by Senior Loan Officers implies employment growth of 250k/month.  This factor has not changed from the past month and won't change until the next quarterly SLOS report due in late July/Early August.

The second indicator I will review this week is the growth rate in Temp Employment.  Released in the Jobs Report, total Temporary Worker employment leads overall employment by 2-4 months.  Average job growth predicted by this indicator is 150k-200k.

At first glance, the May Jobs Report could come in much higher than consensus and I will update my thoughts as the week progresses and the ADP Employment Report and other reports are released.  But base on these two indicators, underlying Employment fundamentals are strong enough to expect an increase of 200k jobs this past month.

Kevin Spires, CFA, FRM

Yesterday, the Federal Reserve released its weekly Money Supply (H6) Report.  The QE2 Money Printing is now fully distributed into the Money Supply.  M1 growth rates peaked on a quarterly basis last October and are now taking another dive down after stabilizing during the first quarter of this year.  Year over year growth rates are still solidly above 15%, so the economy won't be starved for liquidity, but the QE2 effect is finally starting to fade.  For anyone who is wondering why I am refering to the QE2 effect, remember that Monetary Policy acts with a long and variable lag.  QE2 is just now hitting the real economy with a 6-8 quarter lag - as expected.

The Growth in the broader M2 measure of Money Supply has also peaked - although at rates above nominal GDP -especially on a year over year basis, where the M2 growth rate is still 9.77% for the past 13 weeks over the same 13 weeks one year ago. 

The trend in Money Supply growth bears watching as extremely low Money Supply growth can be a harbinger of an economic slowdown.

Kevin Spires, CFA, FRM

In yesterday's Wall Street Journal, Tim Know and Ryan Bourne presented the results of research showing that the smaller the size of government, all else equal, the faster the growth rate of an economy.  In their own words  "our results suggest that reducing the ratio of taxes or spending to GDP by five percentage points increases the growth rate of GDP per capita by 0.5 to 0.6  percentage points per year. "  Over 25 years those .5% to .6% a year matter, leading to a smaller government economy outgrowing a larger government economy by "115% to 64%."  

Their suggestion for resolving the European Economic Crisis is to put government on a diet.  They correctly point out that "Austerity" as the Europeans understands the word is higher taxes on the private sector and no cut backs in the bloated state sector (some editorializing on my part-ks).  To create sustainable, higher growth rates, a small state sector and smaller taxes are warrented.  Seems pretty straightforward to me.

The combination of smaller government and smaller taxes can also be a winner politically as well.  Scott Walker, the Governor of Wisconsin, who pushed through "Austerity" by cutting into the inefficiencies of the Government Union Bureaucracy and did not raise taxes to close a big budget hole.  The European political parties should take note - as whomever is in power has been getting bounced from power at the next election due to their failed policies.

Kevin Spires, CFA, FRM

The Federal Reserve releases a break down of its Balance Sheet every Thursday afternoon.  The Fed has been holding its balance sheet fairly steady this year.  Changes in the Fed's Balance Sheet tend to hit the economy with a 12-18 month lag, so we are just now feeling the full effects of QE2 and Operation Twist won't be fully into the economy for another 6-12 months.

Monetary Base Growth Rolling Over?
The Monetary Base has been flat for the past couple of quarters - causing the year over year change to drop to 2%.  Does the Fed need to print more money?

Not really - over 50% of the Monetary Base is Excess Reserves held by banks at the Fed.  During QE1, there was only a 1% increase in the Monetary Base without Excess Reserves for every 10% increase in the Total Monetary Base.  After QE2 and Operation Twist, the relationship has been a 1% increase in the Monetary Base without excess reserves for every 2-2.5% increase in the overall Monetary Base.  In other words, Banks have been passing through a higher percentage of the Fed Money Printing as loans to Corporations and Consumers and the growth in the Monetary Base less Excess Reserves is still a healthy 10% year over year.  There are plenty of Excess Reserves for Banks to increase lending without any more increases in the Federal Reserves Balance Sheet.

Kevin Spires, CFA, FRM
Disclosure:  Bellaire Capital Management is long SPY on behalf of its clients

The SPY (S&P 500 Index SPDR ETF) has bounced a bit from very oversold levels and is now a bit above its 200 day moving average.

A Stochastic Oscillator suggests the bounce has a bit to run, with the 20 day EMA barely off the bottom.

Going forward, it appears the market could run back up to the broken trend line in the 1350 range.  From there, I expect to see failure to break back into the old uptrend and a retest of lower levels with a more serious attempt to break the 200 day moving average on the table.

Disclaimer:
This information is neither an offer to sell nor a solicitation to buy securities. Forecasts, estimates and opinions stated are my own and the data presented is for educational purposes only.  Investments involve risk unless otherwise stated. Past performance is not a guarantee of future results. Be sure to first consult with a qualified tax and/or financial adviser before implementing any strategy discussed.