Kevin Spires, CFA, FRM

Yesterday after the market close, the Federal Reserve released its weekly Money Supply (H6) Report.  M1 Growth continues to decelerate with the Q/Q growth rate at 5.82% while the Y/Y growth rate is still quite steamy at 16.76%.  Looking at the chart to the left, the sharp deceleration in the quarterly rate is slowly flowing through to a slower yearly growth rate.

For now, there is plenty of money in the system, but if the quarterly growth rate turns negative, expect the Fed to leap into action on QE3

M2 Money Supply growth has also decelerated. with the Q/Q growth rate at 4.78% versus a quite healthy 9.58% yearly growth rate. 

Operation Twist hasn't been a boost to Money Supply (or Credit) growth.  The big boost to Money Supply has come from the Federal Reserve's outright money printing from QE1 and QE2.  As big banks continue to come under pressure to delever, expect Ben Bernanke to rev up the helicopters again this fall and print money in a QE3 operation.

Watching how Money Supply & Credit Growth behaves over the next 2-3 months is crucial to calling the exact meeting where Bernanke will be able to convince the FOMC to undertake QE3.  QE1 and QE2 were undertaken in response to money growth rates close to zero.  If quarterly money growth rates continue to drop over the next quarter, expect the FOMC to leap into action. 

This does not mean that I think QE3 is necessary or good for the economy.  In my quest to understand Ben Bernanke's outlook on the world, I have come to believe he would rather ignite an inflationary episode like the 1970's rather than repeat the mistakes of the 1930's. Unfortunately, I think the Fed's medicine is counterproductive and is allowing a massive leveraging up of the Federal Government that will ultimately have to be unwound. There is an increasing probability that the unwinding of the Federal Government's fiscal situation will be accompanied by a debt crisis that will make the current European Debt Crisis pale in comparison. 

Kevin Spires, CFA, FRM
(Disclosure:  At the time this post was written, Bellaire Capital Management was long SPY on behalf of its clients)

In the immediate aftermath of the Obamacare decision, the equity market has increased its daily loss, now down over 1%.  I expect a further test of the 200 day moving average and then another attack of the recent lows.

I would not expect the current sideways market to be resolved, up or down, until the 2012 elections are over in November.  Given the sharp divide between the two parties on how to resolve the budget deficit, I would be surprised if anything short of massive Quantitative Easing leads to a sustained market uptrend before November.

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.

With the Obamacare court decision in the books, the win for Obama on the upholding of the Affordable Care Act is resulting in a slight bump in Obama's reelection odds at www.intrade.com to 55.8%.

Kevin Spires, CFA, FRM

Initial Jobless Claims were 386k last week according to data released today.  This is down from last week's upwardly revised 392k.  There has been a clear hook up in the data over the past quarter, but it just looks like seaonal noise as jobless claims are actually down 9.18% from 52 weeks ago.

As I keep saying, the claims data should be watched to see if it follows the same statistical pattern in did the past two years and starts to dive in Q4 2012 -Q1 2013.

Kevin Spires, CFA, FRM
Disclosure:  Bellaire Capital Management, LLC was long SPY on behalf of its clients at the time this report was written

With the refusal of SPY to break above the July 2011 highs, it looks like the stock market may want to test the 200 day moving average again.

With the 200 day moving average now up to 130, that is probably a good test of support for the market at this time.  I don't think that a sustained rally is in the cards so I would not be surprised if 130 does not hold.  The 127.5/128.0 level may be a better place to enter a new long, but don't be surprised if the market tests lower levels.  Tight stops on new longs is probably a good idea at this time until the uncertainty about the U.S.'s fiscal policy is resolved.

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.

According to www.intrade.com, the odds of a Democrat winning the 2012 presidential election are currently 54.5%.  This year's election is going to go down to the wire.  With so much riding on the outcome, I expect each party to pull out all the stops to get their guy across the finish line with a victory.

Kevin Spires, CFA, FRM

M1 Money Supply Growth continues to decelerate.  The 13/52 Week Rate of Change is still very frothy at 16.87%, but the 13/13 Week rate of change is down to 5.97%.  Prior to the last recession, M1 growth was rather tepid and never made it above 5%.  If these measures continue to decelerate over the coming weeks, that would be a good indication that Helicopter Ben will succomb to pressure to institute QE3. 

M2 Money Supply growth is also decelerating.  The 13/52 Week rate of change is still very strong at 9.61% but the 13/13 Week rate of change has dropped to 4.92%.

Click on our weekly Money Supply Chart Package for more data and charts

Kevin Spires, CFA, FRM

Weekly claims rose to 387k from last week's initial report of 386k initial jobless claims.  Last week's report was revised higher to 389k.  The Bloomberg consensus was for 383k new claims.

While there has been a recent rise in jobless claims, it is difficult to distinguish the recent rise from seasonal adjustement noise.  Claims are 8.73% below their level 52 weeks ago and the 13 week moving average is 8.74% below its level 52 weeks ago.  Unfortunately, we won't know if the recent rise is noise or something more ominous until late July. 

There are two reasonable explanations for the recent rise in claims.  The first explanation is that employers are cutting to the bone in anticipation of higher taxes and increased health insurance costs that are due in 2013/2014.  The "Fiscal Cliff" and the uncertainty surrounding Obamacare have caused employers, even those flush with cash from record profits, to pare back or delay investments and hiring.  This uncertainty has led to other businesses seeing lower demand for their products and a need to reduce headcount which has led to the increased claims we have seen recently.

The second explanation puts the blame squarely on seasonal adjustment issues.  Due to the massive drop in activity from September to February of 2008/09 the seasonal adjustment figures are out of whack.  The adjustment problems are leading to data being adjusted higher in the fall/winter and then lower in the spring.  This adjustment problem can be "adjusted" for by looking at year over year trends or by looking at the changes in the unadjusted data. 

I am inclined to place equal weight on both explanations.  It is clear from looking at the year over year data (down 8.73% year over year) that initial claims are in a sustained downtrend and are nowhere near to signaling an ominous change in the underlying economy.  It is also clear that claims are still too high to support above trend economic growth.  Something is holding the economy back - whether uncertainty about future fiscal policy or whether the certainty of continued fiscal consolidation at the state and local governmet level is causing higher than expected claims.   Either way, we will have to get past the summer and well into the fall (and maybe past November 6th) to have a clearer picture for jobless claims.

Kevin Spires, CFA, FRM

Housing Starts & Permits were released yesterday.  Housing Starts were 708k on a seasonally adjusted annual rate (SAAR).  May Housing Permits were 780k on a SAAR basis.  May Starts were down 4.8% vs. the revised level of 744k in April while permits were up 7.8% to their highest level since September of 2008.

Overall, not too shabby a report.  Housing Starts are now running 26.0% above the first 5 months from last year while Permits are running 26.6% higher versus the first five months last year.  Housing is in a clear recovery.  The only question is how long it takes for the recovery to bring activity and employment up to pre-recession levels.  I expect that it will still take many years and we will still won't fully recover until after the next recession.

Kevin Spires, CFA, FRM
(Disclosure:  Bellaire Capital Management was long SPY on behalf of its clients at the time this was written)

The Stock Market (represented here by SPY, the S&P 500 Index ETF) has rallied up from the 200 day moving average back towards 135.  The last time the market was at this point, it was breaking down through the bottom of the upward channel the market had been in since last October.  If the market can close back above 135 on the SPY, it has a decent chance of running all the way back up the 140. 

The market may be getting a little ahead of itself and a little caution is in order.  I think it is too early for a retest of the recent highs and would expect a retest of the 200 day moving average at least one more time.  I think we are probably range bound until the elections are over in November.  If the elections (not to mention the European Debt Crisis) are resolved in a more market friendly direction, then a rally to new highs at 1450 or above on the S&P 500 could be considered.  Until then, the market will probably remain choppy with above average daily volatility. 

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.