Kevin Spires, CFA, FRM

The Housing Recovery is for real.  Housing Starts have been up over 20% Y/Y for all of 2012.  Housing Inventories are down, rental and home vacancies are down, but household formation is up 1.7% Y/Y.  As a result, home construction is finally starting to recover.

I would expect the Housing Sector to continue to be a bright spot in the US Economy over the next 6-12 months.  Builders Sentiment is at a 5 year high and Home Prices are starting to stabilize.

Current levels of growth in Housing are normally associated with above trend growth in the US Economy. But the current level of Housing Starts is so low that while the contribution will be positive, it won't be anywhere near as powerful as usual due to the still large inventories of extra homes built during the Housing Boom.

Click on the Monthly Housing Chart Package for more information.

With the advance release of Q2 GDP, it is a good time to review Yale Professor Ray Fair's two party vote prediction model.  While Professor Fair hasn't yet updated his page with the Q2 GDP results, you can input values into his model at this link and calculate the expected vote share for President Obama.  Fair's model uses mostly economic inputs such as Real GDP growth and inflation to predict the expected vote split between the two main parties.  The incumbent's party gets the blame for bad data and the credit for good data.

Using third quarter GDP of 2.5%, Fair's model generates a vote total of President Obama of 48.57% and 51.43% for Mitt Romney.  A close, but clear win for Romney appears likely at this point.  If the third quarter should happen to see a drastic reacceleration in growth - to say 3.5%, then the vote total expectation would be close to 50/50.  To say the least, a lot is hinging on the next 6-8 weeks of economic data.

Kevin Spires, CFA, FRM

Initial jobless claims were 353k for the week ending July 20th down from an upwardly revised 388k last week.  The four week moving average dropped to 367k, very near to a cycle low.

Initial claims have been marred by seasonal adjustment issues for the past 4-5 months.  There was been a second quarter bump in claims that many believe was due to seasonal adjustment issues and now the current claims are tainted by the lack of normal layoffs in the auto industry.

I have been looking at the 13 week moving average versus the 13 week moving average 52 weeks ago.  Claims on this basis are down over 11% versus last year - and have been down over 10% on this basis for over a month.  In general, this is not a "slowly" improving job market, but a steadily improving job market that has the potential to produce some very strong employment growth if the trend continues.

Kevin Spires, CFA, FRM
(Bellaire Capital Management, LLC was long SPY in client accounts at the time this piece was written)

The SPY ETF (S&P 500 Index ETF) is at a critical juncture.  The 200 day moving average (blue line in the chart at the left) and the upward trend from last October are converging near current price levels.  A drop of the SPY below the 200 day moving average might cause a wave of additional selling.

Summer sell offs have a tendency to over shoot, so I would cautious about entering buy and hold positions - even if the 200 day moving average should hold.  I am expecting the market to have difficulties making new highs until after the November elections.

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

The latest update to the NAHB/Wells Fargo Housing Market Indicator (HMI) was reported as 35 this morning.  This is above the consensus level of 30.  In this survey, 50 is considered to be normal conditions for the single family housing market.

While the level of 35 is still very weak, The HMI has been accelerating at a very rapid pace over the past 9 months.  Housing Starts, which have been up over 25% in the first five months of 2012 versus the first five months of 2011, should continue to grow strongly over the rest of 2012 as the HMI tends to lead Housing Starts by 3-5 months.  Despite all the worries about Europe and China's economic growth, the worst housing market since the beginning of record keeping is clearly recovering and will tend to support (although not guarantee) above trend growth for the next 3-5 years.

The idea that the U.S. is entering a recession, based on this one indicator, is laughable.  The Housing Sector is now growing at 20+% real rates in 2012 and the 2MM+ construction jobs lost from 2006 through 2011 should slowly be regained.

As I write this post, Ben Bernanke is giving his semi-annual report on Monetary Policy to congress.  Based on the trends in housing, I would not expect Bernanke to embark on QE3.  Of course, I think Bernanke wants to increase the pace and level of the recovery, so QE3 should not be ruled out based on any one indicator.

Kevin Spires, CFA, FRM

M1 growth rates continue to decelerate.  The M/M growth rate is 3.53% (All figures Seasonally Adjusted Annual Rates or SAAR).  The Q/Q growth rate is 5.58%, while the Y/Y growth rate is still quite frothy at 16.72%

The downward trend has been in place for months with no clear bottoming in sight.

M2 growth has followed a similar path, but has seen a bit of stabilization over the past month.  The M/M growth rate is 7.80% - higher than the Q/Q growth rate of 4.99%, but still lower than the healthy Y/Y growth rate of 9.57%

If the M2 growth rate can rebound in the absence of further quantitative easing then the economy is probably a lot stronger than the gloomier economists are projecting.

Kevin Spires, CFA, FRM

It is stories like this -  "Tennessee Tax Revenues Soar above Estimates" (Hat tip to Glenn Reynolds at Instapundit.com) - that remind me that State & Local Government Tax Revenues have been growing at a moderate pace of 3-4% for the past year. 

Revenue growth is followed by employment growth by 4-5 quarters and it is reasonable to expect that State & Local Government employment growth will resume in the next few quarters.

While the response of government employment to economic growth has been muted this cycle due to the buildup of excess employees during the Housing Bubble, the excesses appear to have been purged and continued economic growth will lead to an increase in government payrolls.

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

SPY (an S&P 500 Index ETF) has dropped 5 out of the past 6 days and is starting to look very weak technically.  The jobs report last Friday really took the wind out of its sails.

There is potential for more downside in the near term.  The recent lows in early June and the 200 day moving average are potential downside targets.  Likewise, the Stochastic Oscillator I like to follow (bottom panel of the chart to the left) still hasn't indicated oversold conditions.

Overall, it is probably too early to establish new longs.  There is more downside risk in the short run and until the market enters oversold conditions, lower prices look likely.

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

In the chart to the left, one can see how today's Initial Jobless Claims release of 350k is a new cycle low.  Down 26k from last week's 376k, the low number is being blamed on seasonal adjustment issues.  Auto plant and textile plant shutdowns that normally take place in July and result in layoffs are lower than usual.

Year over year, claims are down 14.63%, and the four week moving average is down 10.53% year over year.  The jobless claims data is not consistent with an economy growing 1.5%

The seasonal adjustment issues have been well publicized, but the overall trend has clearly been down, as the claims number has made lower highs and lower lows over the past 3 years. 

The odds that Obama would be reelected (from www.intrade.com) and the Equity markets have been positively correlated - following the whole idea that reelection campaigns are referendums on the incumbent's (Obama's) job performance - specifically with regard to issues like unemployment, inflation and wealth creation. 

In the chart to the left, the odds of Obama's reelection have a 75% correlation to the price of the SPY - which seems to validate that a decent economic environment would increase Obama's odds, while a poor economic environment would decrease Obama's reelection odds.  I think the election is too close to call and will turn on the next quarter of Economic data.