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July 31, 2015

Do you remember when President Obama said that the U.S. economy, "by every metric, is better" than when he took office?

In addition to that claim having been rated as "mostly false" by the left-leaning Politifact, the Bureau of Economic Analysis rained on the Obama-Stewart talking points parade by, once again, revising their estimate of the nation's GDP growth downward. This time, for every quarter since the second quarter of 2012.

But then, last year, they revised every quarter since the second quarter of 2011 downward too. Let's take an animated look at the U.S.' incredibly shrinking GDP for both those annual revisions.

Animation: 2014 and 2015 GDP Revisions, 2009-Q1 through 2015-Q1

In the chart above, the vertical lines correspond to the first quarter of each year indicated.

Examining the chart, it's rather amazing how bad 2012 looks now, especially in the third and fourth quarters, as the U.S. economy verged on entering into recession where only the Fed's third round of Quantitative Easing (QE) policies kept the nation's then-faltering economy from sinking into outright contraction at the time.

Meanwhile, it's pretty surprising at how large the new downward revisions are for 2013, especially in the first and second quarters of the year, which corresponds with the first six months during which President Obama's Social Security payroll tax hike and other income tax hikes took effect. If not for the Fed's significant increase of its QE program in December 2012, which was made after long anticipation of those tax hikes, we think that these quarters would also have been ones of contraction.

Speaking of which, we'll soon revise our estimate of the GDP multipler for QE where, based on these revised GDP figures, we would anticipate also revising our previous estimate downward to be less than 1.0.

Data Source

U.S. Bureau of Economic Analysis. National Income and Product Accounts Tables. Table 1.1.6. Real Gross Domestic Product, Chained Dollars [Billions of chained (2009) dollars] Seasonally adjusted at annual rates. Last Revised on: July 30, 2015. [Online Database]. Accessed 30 July 2015.


July 30, 2015

When did the earliest advertisement for Campbell's brand new line of condensed soups appear in a local U.S. newspaper?

Previously, we identified what we believe to be is the first newspaper advertisement ever for Campbell's Condensed Soup, but there's some uncertaintly with that ad because the maker of the "new concentrated soup" wasn't identified in the retailer's 12 January 1898 notice that it would be demonstrating the product.

And because of that uncertainty, we wondered when the first ad that ever specifically identified Campbell's condensed soups appeared in an American newspaper. After doing some digging, we have a pretty good candidate for an advertisement that local grocer J.H. Banman in Alton, Illinois placed in the Alton Evening Telegraph on 28 June 1898.

Alton Evening Telegraph (Alton, IL) Advertisement for Campbell's Condensed Soups - 1898-06-28

Speaking of firsts, we think we've identified the earliest local grocer ad featuring a discounted sale price for Campbell's Condensed Soups as the following one, which appeared for Jones Dry Goods in the Sunday, 14 August 1898 edition of the Kansas City Journal (see the third column, in the section for the sixth floor):

Kansas City Journal (Kansas City, MO) Advertisement for Jones Dry Goods with Campbell's Condensed Soups being sold at a discounted price - 1898-08-14

For a discounted sale price of 3 cents per can, a 70% markdown from the typical sale price of 10 cents per can, we're pretty confident this ad reflects the first time that a retailer ever sold cans of Campbell's Condensed Soups to the public at their wholesale cost.

Meanwhile, the first advertisement that featured a picture of a can of one of Campbell's Condensed Soups in an American newspaper would have to wait for the 7 October 1900 edition of the Chicago Daily Tribune, where the ad for Siegel-Cooper & Co.'s "The Big Store" featured a hand drawing of Campbell's Condensed Ox Tail Soup.

Chicago Daily Tribune (Chicago, IL) Advertisement for Siegel-Cooper & Co. 'The Big Store' with hand drawing of Campbell's Condensed Ox Tail Soup - 1900-10-07

It's interesting to note that in the two years from 1898 to 1900, the number of varieties of Campbell's Condensed Soups expanded from 5 to 17 varieties. As a side note, Campbell's had expanded their production from when they started sometime in 1897 of about 10 cases per week, which would work out to be an annual rate of production of 12,480 cans, up to 400 cases per week in 1900, which works out to be an annual production figure of 500,000 cans.

Since Campbell's Condensed Tomato Soup was already established at this point as its leading product, we were surprised that the first artistic rendering of one of its iconic soup cans would feature its Ox Tail variety, but remember that it's Chicago. They've always been somewhat weird about the food they eat there.

Another interesting bit of trivia is that Campbell's was extremely thrifty with their advertising budget, where it focused its limited advertising dollars putting ads on streetcars, which it began doing in 1899. The company wouldn't pursue direct print advertising venues until 1905, and until that time, it left all of its print advertising in the hands of local grocers throughout the country. Most significantly, through the newspaper ads of the Great Atlantic and Pacific Tea Company, a.k.a "A&P", as the following advertisement announcing that the regional grocer would now be handling Campbell's 10 varieties of its condensed soup products in the 3 September 1899 edition of the Atlanta Constitution:

Atlanta Constitution (Atlanta, GA) Advertisement Now Handling Campbell's Condensed Soups - 1899-09-03

Over a century ago, A&P was something like the Trader Joe's of its day. Last week, the remnants of the grocer filed for bankruptcy for the second time in the last five years, which will likely mark the end of the story of that company in the annals of U.S. commerce.

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July 29, 2015

Based on preliminary data, it appears that the second U.S. housing bubble may have entered a new phase. If the trends we observe in the data hold, it would mark the third phase of the bubble, which originally began to inflate in July 2012.

Trailing Twelve Month Average of Median U.S. New Home Sale Prices, July 2012 through June 2015

The initial inflation phase of the second U.S. housing bubble was caused by the sudden influx of investment from a number of hedge funds and real estate investment firms, who made the strategic decision to acquire distressed properties in the U.S. residential real estate market. That first phase lasted a year until the supply of available distressed properties was reduced to the point where they found it difficult to continue their rate of acquisitions as prices rose, where they would no longer have easy returns on their investments.

Trailing Twelve Month Average of Median U.S. New Home Sale Prices vs Trailing Twelve Month Average of Median Household Income, December 2000 through June 2015

During that first phase, U.S. homebuilders largely abandoned the production of less expensive homes for the low end of the market, which is what caused U.S. home prices to escalate at rates that were faster than those recorded during the inflation phase of the first U.S. housing bubble in the period from November 2001 through December 2005. The second U.S. housing bubble then entered its second phase, where U.S. new home sale prices began rising at a slower, but still escalated rate.

That second phase now appears to have lasted up until February 2015. A third phase, in which U.S. homebuilders would once again appear to have begun producing a larger number of new homes for the lower end of the market, with the results of that change in business strategy beginning to show up in the national level data after February 2015.

We do not as yet have enough data to quantify the new phase that would appear to be developing for new home sale prices, as the data we do have is still subject to revision. As a general rule, it takes a minimum of six data points to do so, so with monthly data, we should be able to do so after the data for August 2015 is reported.

Alternatively, if we were completely unconcerned by random variation in the data, we could simply project a linear trend by drawing a line through the two most recent data points, but that's clearly a less than reliable approach.

Let's next look at the bigger picture of where the current trends for median new home sale prices with respect to median household income with all the available data we have going back to 1967.

Trailing Twelve Month Average of Median U.S. New Home Sale Prices vs Trailing Twelve Month Average of Median Household Income, December 2000 through June 2015 (Monthly) and 1967 through 2014 (Annual)

As of June 2015, we estimate that the median sale price of a new home in the U.S. is about 27% above the level that would have been consistent with the relationship between new home prices and median household income in the years from 1967 through 1999.


Sentier Research. Household Income Trends: June 2015. [PDF Document]. Accessed 24 July 2015. [Note: We have converted all the older inflation-adjusted values presented in this source to be in terms of their original, nominal values (a.k.a. "current U.S. dollars") for use in our charts, which means that we have a true apples-to-apples basis for pairing this data with the median new home sale price data reported by the U.S. Census Bureau.]

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 24 July 2015.


July 28, 2015

Today, we're going to do some quick, back-of-the-envelope style economics to answer the question of whether the supply or the demand for new homes is what is behind the recent falling trend for their prices. First, let's visually establish that yes, both average and median U.S. new home sale prices have been falling since October 2014:

Median and Average Monthly U.S. New Home Sale Prices, January 2000 through June 2015

Next, lets tap the Federal Reserve's Economic Data to see how the monthly supply of new homes has been changing, as measured by the number of months it would take for all new homes to be sold at their current rate of sales:

Here, we find that the supply of new homes has been rising since February 2015. We now have the information we need to use our tool for telling whether supply or demand factors are behind the change in the prices for new homes in the U.S.

Price and Available Quantity Data
Input Data Values
How has the price of the item changed over a given period of time?
How has the available quantity of the item changed over that same time period?

What's Behind the Change in Price?

What we find is that the prices of new homes have been falling because of an increase in their relative supply. As for the current state of the U.S. home builders, we find that the industry's market capitalization has been increasing, although the most recent data suggests its growth may be starting to decelerate.

Trailing Twelve Month Average New Home Sales Market Capitalization, Constant June 2015 USD, December 1963 through June 2015

After adjusting for inflation, as measured by the Consumer Price Index for all urban consumers in all U.S. cities, it would appear that the U.S. new home market has recovered approximately to the level it was in 1994 and 1995, when it last rose to surpass a market capitalization of $14 billion in terms of June 2015's U.S. dollars.

Data Sources

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 24 July 2015.

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 24 July 2015.

U.S. Department of Labor Bureau of Labor Statistics. Consumer Price Index, All Urban Consumers - (CPI-U), U.S. City Average, All Items, 1982-84=100. [Online Application]. Accessed 24 July 2015.

Federal Reserve Economic Data. Monthly Supply of New Homes. [Online Database]. Accessed 24 July 2015.

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July 27, 2015

How different would the value of the S&P 500 be if not for the amount of stock buybacks that have taken place in the U.S. stock market since the end of 2008?

We're asking that question today because of the recent suggestion that "Wall Street's new drug is the stock buyback":

In the first quarter of 2015, companies in the S&P 500 index returned more money to shareholders than they earned. The last time that happened was in the fourth quarter of 2008, when the entire S&P 500 reported a slight loss for the quarter but still spent $110 billion on dividends and buybacks.

“This is not a normal trend,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “This is a large amount of money being returned with the majority of it in buybacks.”

In the first quarter, S&P 500 companies spent $237.69 billion on dividends and buybacks, while reporting operating earnings of $228.36 billion, according to data compiled by Silverblatt.


According to recent data from S&P, total buybacks and dividends (assuming those dividends were reinvested) have accounted for 35% of the buildup in market cap for the S&P 500 since it bottomed out in 2009. Without dividends, buybacks alone have accounted for 21% of the market cap’s rise.

To approximate what that change means in terms of the value of the S&P 500 index, we're going to treat the S&P 500 index as if it were a single company, which means that we will not be accounting for the market cap-based weighting of the buybacks that a number of the index' component firms have executed since the end of 2008.

We then calculated the S&P 500's equivalent number of shares by dividing its market capitalization at the end of each quarter since 2008 for which S&P has provided data (Excel Spreadsheet) by the index's value at the end of each quarter (Excel Spreadsheet). We then applied the same math to determine the equivalent number of shares that would have been bought back during each quarter.

Then, starting with the equivalent number of shares we calculated for the S&P 500 at the end of the fourth quarter of 2008, we progressively added the net change in the number of equivalent shares between each subsequent quarter and its preceding quarter to that base figure, while also adding back the equivalent number of shares that were consumed by buybacks for each quarter.

Our last step was to take each quarter's reported market capitalization and to divide it by the number of equivalent shares from our hypothetical "no stock buyback" parallel universe to calculate what the value of the S&P 500 index would be in that alternate reality. Our results are visualized in the following chart.

Quarter-Ending Value of S&P 500 Index, 2008-Q4 through 2015-Q1, With and Without Stock Buybacks

What we see from our highly simplified, back-of-the-envelope math is that through the end of the first quarter of 2015, the most recent for which S&P has reported data at this writing, the value of the S&P 500 would be about 324 points, or nearly 16%, lower if not for the progressive impact of share buybacks over the last seven years.

The actual impact of share buybacks over this period of time though would be less than that amount, because what we would really want to calculate is the impact of "surplus" share buybacks, which would be the difference between the number of share buybacks that have occurred with the number that would otherwise have occurred under "normal" economic and market conditions. And over the last several years, those conditions have been anything but normal, especially given what has been described as an "interesting coincidence" in how many companies came to have the cash needed to execute their share buyback plans in recent years.

Part of the reason for that cash hoard has been QE and near-zero interest rates, which have made it more attractive to take on debt to help fund share repurchases.

While there is no direct relationship between the two, the price tags on QE and buybacks offer an interesting coincidence: S&P 500 companies have spent about $2.41 trillion on buybacks over the course of the current bull market, according to S&P data, compared with a $2.37 trillion rise in the Fed’s balance sheet since the start of QE.

What does that mean for the market going forward? We'll let a JPMorgan analyst's comments from May 2013 (via ZeroHedge) explain:

"The other side effect of elevated dividends and share buybacks is that these distributions to shareholders may reduce the long term potential of the company to grow relative to the alternative of capital spending."

Two years later, that dynamic would be a major reason why the upward growth of the S&P 500 has largely stalled out through the first seven months of 2015, which through Friday, 24 July 2015, is less than 1% higher than it was at the end of 2014. It likely took longer than they expected, but scenario described by JPMorgan's analyst arrived all the same.

Data Sources

Standard and Poor. S&P 500 Buybacks Report. [Excel Spreadsheet]. Accessed 24 July 2015.

Standard and Poor. S&P 500 Earnings and Estimates. [Excel Spreadsheet]. Accessed 24 July 2015.

Update 28 July 2015: Readers should be aware that there are inherent flaws in treating the S&P 500 index as if it were a single company, where the analysis we presented above would only be applicable if it were. We'll have additional discussion on that topic sometime next week, but if you want a primer, see S&P's discussion of the math behind the index!

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