Political Calculations
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July 26, 2017

It's still early in the third quarter of 2017, but compared to the third quarter of a year ago, distressed U.S. firms experiencing distress are cutting their dividends at a slightly accelerated pace.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter, 2016-Q3 vs 2017-Q3

Compared to the two previous quarters of 2017 however, 2017-Q3 is seeing a faster pace of dividend cuts than 2017-Q2 did, but is about on the same pace as 2017-Q1.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter in 2017, 2017-Q1 vs 2017-Q2 vs 2017-Q3, Snapshot on 2017-07-25

Looking at the firms that have announced dividend cuts in 2017-Q3 into 25 July 2017, all but one are concentrated in the oil and gas sector of the U.S. economy. The one that wasn't in that industry is the Blackstone Group (NYSE: BX), a private equity firm that has been recognized as being "the largest owner of real estate in the world", which acquired much of its current holdings with the active assistance and encouragement of both the Obama administration and the Federal Reserve during what we've previously described as the initial inflation phase of the second U.S. housing bubble.

Data Sources

Seeking Alpha Market Currents. Filtered for Dividends. [Online Database]. Accessed 25 July 2017.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 25 July 2017.

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July 25, 2017

In June 2017, sales of naturally and artificially-sweetened beverages in Philadelphia subject to the city's plummeted to be more than 40% below their estimated pre-tax quantities.

That wasn't what Philadelphia's political leaders were expecting to happen, where the following chart shows how many millions of ounces of sweetened beverages were estimated to have been sold in Philadelphia in each month before the city's controversial beverage tax took effect in January 2017, how many ounces city officials expected to be sold after the tax went into effect, and finally the actual quantity of sweetened beverages subject to the city's tax in its first six months of existence.

Estimates of Quantity of Sweetened Beverages [Millions of Ounces] Subject to Philadelphia Soda Tax, 2017

Even though months of actual data were shouting that Philadelphia Beverage Tax collections were falling short, it wasn't until 13 June 2017 that city officials finally acknowledged that the depressed sales of sweetened beverages subject to the city's new beverage tax would result in the city missing its $46 million revenue target for the tax in its first six months of being in effect. The city subsequently moved the goalposts for its first six-months estimate to $39.7 million later in the month.

We can now confirm that Philadelphia appears set to miss that lowered mark by several hundred thousand as well, where data recently provided by the city after the 20 July 2017 payment date for beverage taxes imposed through the end of June 2017 indicates it will have collected just $39.3 million in the first half of 2017. The following chart shows our estimate of the amount of revenue that Philadelphia city officials would have reasonably expected to collect each month from the beverage tax based on the seasonal pattern for soft drink distribution in the U.S. along with the amount the city has reported collecting in the tax' first six months of being enforced.

Desired vs Actual Estimates of Philadelphia's Monthly Soda Tax Collections, Jan-2017 through Jun-2017

The sad part is that June is typically the peak month for soft drink distribution in the United States, which then typically remains elevated through August each year, before entering a steady downtrend as seasons change from summer, to fall, and then to winter. If the volume of soda being distributed in Philadelphia in June 2017 is any indication of where those sales will reach their typical seasonal peak in 2017, we anticipate that the city can expect that severe shortfalls in its expected beverage tax collections will persist over the next several months.

As recently as 18 July 2017, city officials would appear to be in severe denial of that reality. Here is a report noting the view of the Philadelphia Beverage Tax by the Pennsylvania Intergovernmental Cooperation Authority (PICA), who recently reviewed and approved the city's budget for its 2017-2018 fiscal year, which captures the reaction of Philadelphia's City Finance Director, Rob Dubow, which can be taken as a direct indication of the mindset of Philadelphia Mayor Jim Kenney and Philadelphia City Council members (emphasis ours):

The new sweetened-beverage tax also received some criticism. PICA staff said there is financial risk associated with the $92 million revenue estimate for the beverage tax.

“In particular, there is uncertainty related to the size of the tax base, the impact of the tax on consumption, and the rate of enforcement,” the staff wrote, noting that in the first six months of the tax, the city lowered its initial projection of $46 million to $39.7 million. City officials said the slow start was due to the transition implementing the tax and “seasonality,” meaning that people consume more soda during the summer months and during the November and December holiday season.

During Tuesday’s meeting, Dubow said the city still expects to make the $92 million mark.

Based upon all our observations to date, we can say with some confidence that no, the city will not make the $92 million mark for the full calendar year of 2017, nor will it make the mark over its fiscal year from July 2017 through June 2018. Absent significant inflation, subsidy, or other compensating factor, it will instead fall well short of that mark.

The next question that Philadelphia's city leaders will have to address is who is going to be disappointed because it will fall short of its revenue estimates and won't be able to pay everything that they've promised to pay with the beverage tax proceeds. Will it be the families of the remaining 4,500 of the 6,500 children who were promised their kids would be enrolled at no cost in the city's new all-day pre-K program? Will it be the "massive Philly parks and recreation upgrade" that the city's voters were promised? Or will it be city employees, including policemen and firefighters, whose unions are looking for raises like the ones that other city employees got last year just after the city first passed its beverage tax?

Or better yet, will it be some combination of all three or some other beleaguered interest within the city? Stay tuned!

Previously on Political Calculations

Presented in reverse chronological order....

Coming Soon

The Philadelphia Beverage Tax is facing legal challenges that are currently working their way through Pennsylvania's state courts. However, we think there may be a valid federal case against it, the litigation for which has yet to begin, which will impact other cities that have either implemented similar taxes or are considering doing so.

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July 24, 2017

In Week 3 of July 2017, the S&P 500 continued to set new all time highs, with the newest peak closing value of 2473.83 set on Wednesday, 19 July 2017.

No real surprise there, right? With investors apparently focused on 2018-Q1, the S&P 500 is behaving pretty much as our dividend futures-based forecasting model anticipated.

Alternative Futures - S&P 500 - 2017Q3 - Standard Model - Snapshot on 21 July 2017

Coming into the fourth week of July 2017, we anticipate that our dividend forecasting model will be affected by the echoes of past volatility in stock prices during this week and the next, where we expect that our model's projections will fall on the high side of the actual trajectory of the S&P 500. This is an artifact of our model's use of historic stock prices as the base reference points from which we project future stock prices, where we've found that simply "connecting the dots" of the projections on either side of the period affected by the volatility echoes has worked well as a tool to correct the effect. Because of the short duration of the upcoming echo, we'll leave that as an exercise for you!

To help save time and effort, you'll only want to do that with the projections associated with how far forward in time investors are currently focusing their attention. While you can use our alternative futures chart to help determine which point of time in the future investors are focusing upon, we're test driving the CME Group's FedWatch Tool for that purpose.

Here, you will be looking for the timing of when investors are betting real money that the Fed will change its Federal Funds Rate. Currently, the FedWatch tool is indicating the following probabilities of the Fed changing short term U.S. interest rates from their current range of 100-125 basis points (bps, or 1.00%-1.25%) at each of their meetings near the end of upcoming quarters:

  • 2017-Q3 - 20 September 2017
    • Maintain at 100-125 bps = 92.2%
    • Increase to 125-150 bps = 7.7%
    • Increase to 150-175 bps = 0.1%
  • 2017-Q4 - 13 December 2017
    • Maintain at 100-125 bps = 53.0%
    • Increase to 125-150 bps = 42.8%
    • Increase to 150-175 bps = 4.0%
    • Increase to 175-200 bps = 0.1%
  • 2018-Q1 - 21 March 2018
    • Maintain at 100-125 bps = 42.2%
    • Increase to 125-150 bps = 44.5%
    • Increase to 150-175 bps = 12.0%
    • Increase to 175-200 bps = 1.2%
    • Increase to 200-225 bps = 0.1%

Looking at these probabilities, we see that it is not until 2018-Q1 that investors will give the greatest likelihood that the Fed will act to change the Federal Funds Rate by increasing it by 25 bps, which would make that the future point of time to which investors are currently focusing their attention.

Expectations about the Fed's plans for short term U.S. interest rates is however just one of many factors that can affect how far into the future investors are looking today. New information about the business environment for U.S. companies can also drive investors to shift their forward-looking focus to different points of time in the future, which will be a factor throughout the current earnings season now underway, so it will to your advantage to also keep up on that kind of news.

Speaking of which, here are the potentially market-moving headlines that caught our attention during the past week.

Monday, 17 July 2017
Tuesday, 18 July 2017
Wednesday, 19 July 2017
Thursday, 20 July 2017
Friday, 21 July 2017

For a short list of the week's positive and negative markets and economy news, Barry Ritholtz has you covered!

On an afternote, we incorrectly identified last week as Week 3 of July 2017, which we've since corrected in that previous post. This is an unfortunate consequence of our spending much of our time in the future, where we occasionally lose track of exactly where we are when we shift back to the present (it's timey-wimey, wibbly-wobbly stuff - just bear with us and we'll eventually get it sorted out!)

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July 21, 2017

If you work for a modern American corporation, whether at an office or from home, you have the kind of conference calls that only today's modern Internet technologies make possible: really awful ones.

You know what we mean, and so do the creative minds at I-am-bored, who posted the only possible way to make it through the ordeal of interacting with your professional colleagues in the online world with any shred of your sanity intact: by turning each Skype, Lync or Facetime meeting into a game of Conference Call Bingo!

Here's the basic game card:

Conference Call Bingo Card

Armed with this card, rather than multitasking as most Americans workers might attempt during such an event, you now have an incentive to hang on every word spoken during each conference call so you can catch every one of the typical statements made by the attendees of today's conference calls as they make them, where we encourage you to shout "Bingo" if you get five in a row. Or get all four corners and the center square. Or, for a real challenge, see if you can completely fill your card during the duration of the call!

Of course, you should set your headset or microphone to mute when you announce each victory. Your managers will greatly appreciate your concentrated focus on the matters being discussed during their calls and presentations, but even though they and your company's IT department are the ones who hooked you up to today's online meeting technology, we're afraid that because they did, they're not eligible to play....

Previously on Political Calculations

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July 20, 2017

Last November, the USDA published a report that provides some insight into the kinds of food and drink items that recipients of its Supplemental Nutrition Assistance Program (SNAP), which used to be called "Food Stamps", are buying up with their government-issued EBT cards.

In the chart below, we've taken the Top 10 items from Exhibit 6 of the report, which lists the millions of dollars of eligible food and drink commodities that SNAP recipients were determined to have bought in transactions using their EBT cards, and shown how the spending for those items compares to the total amount of spending that was counted in the study.

The Value of What's in the Shopping Carts of SNAP Benefit Recipients, 2016

Together, SNAP benefit recipients purchases of the Top 10 food and drink categories accounted for over one-quarter of all the spending on eligible food and drink items captured in the report. The most popular category, soft drinks, alone accounted for over 5.4% of all purchases, or about $1 of every $18.38 spent.

It's important to recognize that SNAP recipients will often use a combination of their regular income and their SNAP benefits to purchase groceries. For example, a single individual in New York City who has $825 in income per month can augment that income with a monthly SNAP benefit of $194 per month (a lower amount of SNAP benefits can be obtained for such single, childless, working-age individuals with incomes of as much as $1,285 per month).

Since these benefits are exempt from federal, state and local income taxes, and are also exempt from state and local sales taxes, SNAP recipients can maximize their benefits by using them to buy items that would otherwise be subject to state and local sales taxes. For example, in New York once again, items like carbonated soft drinks, candy and grocer-prepared food like sandwiches, are subject to the state's sales tax rate of 4%, where the city of New York would pile on an additional local sales tax rate of 4.49%, which makes it possible for SNAP benefit recipients to buy 8.49% more of these kinds of groceries in New York City with their benefits than they can with their regular income.

And for that matter, that much more than what people who don't receive SNAP benefits can buy with the same amount of cash, although the amount of this kind of extra tax-free benefit will vary by state, city and county!

Data Source

Garasky, Steven, Kassim Mbwana, Andres Romualdo, Alex Tenaglio and Manan Roy. Foods Typically Purchased by SNAP Households. Prepared by IMPAQ International, LLC for USDA, Food and Nutrition Service, November 2016. [PDF Document].

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