Political Calculations
Unexpectedly Intriguing!
March 22, 2017

Since we first uncovered the importance of dividend futures for anticipating future stock prices, we've been keeping track of that data on a regular basis.

Doing that has been a valuable exercise, not just because of our primary use for the data, but also because it gives us the ability to recreate what the future expectations of investors were on any trading day in the past for which we have the data.

For the Chicago Board of Exchange's dividend futures contracts, that history extends back to when they were first rolled out back in early 2010. We thought it might be interesting to compare what the future for dividends in each quarter looked like on the first day that the dividend futures contract for a given future quarter went into effect (one year before the futures contracts for it expires on the third Friday of the month ending the quarter for which it applies) and the value of the amount of dividends paid out during that quarter on the last day before its dividend futures contract expired.

The results are presented in the following chart:

First Day Forecast and Last Day Values Recorded for CBOE Dividend Futures, 2011-Q1 through 2017-Q1, with Forecast Values Through Quarters Ending in 2018-Q1

The chart begins with a comparison of the results between the dividend futures data for 2011-Q1 that was first published in March 2010 and the value of the dividend futures contract indicating the amount of the S&P 500's dividends per share would be paid out by the time that the dividend futures contract for 2011-Q1 expired on the third Friday of the March 2011.

Aside from the CBOE's dividend futures contracts' first year and a half, where the final day's dividend values had risen well above their initially recorded values, we see that there has generally been pretty close agreement between the initially forecast value and the value recorded on most dividend futures contracts' final day.

There are however two exceptions that stand out. The first is the event we've describes as "The Great Dividend Raid of 2012", where if you want to find out more about how the fear of higher dividend tax rates that were set to take effect in 2013 caused dividend payouts (and stock prices) in 2012-Q4 to surge so much higher than their initially forecast values, be sure to follow the link!

The other exception applies to the quarter whose dividend futures contract just expired last Friday, 2017-Q1, which has coincided with much of what the financial media has called the "Trump Rally", where the better than initially forecast results appear to have been fueled by improved earnings.

Sometime in the near future, we'll use our historic data on future expectations to take a closer look at the so-called Trump Rally.

Data Sources

EODData. Implied Forward Dividends March (DVMR). [Online Database]. Accessed 21-Mar-2017.

EODData. Implied Forward Dividends June (DVJN). [Online Database]. Accessed 21-Mar-2017.

EODData. Implied Forward Dividends September (DVST). [Online Database]. Accessed 21-Mar-2017.

EODData. Implied Forward Dividends December (DVDE). [Online Database]. Accessed 21-Mar-2017.

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March 21, 2017

How well can dividend forecasts for individual stocks predict their future prices?

That's a question that we took on earlier this year, where we resuscitated an old stock price prediction technique to see how well it might work to identify potential investment opportunities for five companies, whose stocks had been identified as strong candidates for dividend increases during 2017-Q1. The five stocks and their dividend increase forecasts were:

  • Comcast (NASDAQ: CMCSA) - 15% increase
  • Home Depot (NYSE: HD) - 14% increase
  • Cisco Systems (NASDAQ: CSCO) - 15% increase
  • TJX Companies (NYSE: TJX) - 16% increase
  • Vulcan Materials (NYSE: VMC) - 25% increase

We then took annual dividend data and the stock prices recorded for each of these firms on the first day of trading in each year going back over the last several years, and plotted a relationship between them. We then used that relationship to identify if any stock prices in early 2017 were either potentially overvalued or undervalued with respect to the trends we identified. And then we sat back until we had results to see how the stock prices for each changed after they declared their dividends during the quarter.

We now have the results for 4 of the 5 companies, where we're only awaiting TJX's next dividend declarations to officially close the books on this experiment. The following chart shows the historical data we used to generate the trendlines for each stock, their forecast annual dividend for 2017, where their stock prices went on the day they declared their dividends and also where they were as of the close of trading on 20 March 2017.

Projected Trends for Stocks Forecast to Boost Dividends in 2017 Forward Annual Dividends Per Share vs January Price Per Share, Update 2017-03-20

In our original forecast, we had only identified two stocks that offered any sort of investment potential based on the value of their stock prices with respect to their trendlines: Home Depot (NYSE: HD), which looked to be undervalued, and Vulcan Materials (NYSE: VMC), which looked to be overvalued.

In the nearly two months since that analysis, we see that both assessments were correct. In VMC's case, we see that as VMC's dividend came in as expected, its stock price has moved downward to converge with its trendline. In Home Depot's case however, we see that company's dividend hike was far in excess of what had been forecast for it as the company reported a blowout quarter, where its stock price has risen, but not as strongly as its trendline would have suggested it might. And in truth, it has been diverging away from its historic trendline even as it has risen, which perhaps suggests that older trend may no longer be in effect and needs to be redrawn.

There was one real surprise for the quarter where these five stocks were concerned. Bucking the best-laid plans of professional dividend forecasters, Comcast (NASDAQ: CMCSA) pulled a fast one and split its stock on a 2:1 ratio, halving its dividend and very nearly also its stock price! The fun part of that change is that the stock price appears to have continued to track along its trendline, although it is now on the high side of it, suggesting that the stock is somewhat overvalued. Meanwhile, the stock price for Cisco Systems (NASDAQ: CSCO) behaved almost exactly as expected, keeping comparatively close to both its forecast and its historic trendline.

After TJX has declared its next dividend, which we think will be in April, we'll update the original version of this post on our site.

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March 20, 2017

The third week of March 2017 was an up week for the S&P 500, where the index closed at 2,378.25 on Friday, 17 March 2017, just 5.65 points (0.24%) above where it closed at the end of the prior week of trading.

In the middle of the week that was Week 3 of March 2017, the Fed followed through and did exactly what it had been strongly signalling that it would do over the last several weeks, and boosted short term interest rates by a quarter percent, putting the Federal Funds Rate into a range between 0.75% and 1.00%.

From our perspective, both events were expected, where stock prices continued to fall within the range we first predicted two weeks ago (but didn't explain until last week).

Alternative Futures - S&P 500 - 2017Q14 - Standard Model with Connected Dots Between 2017-03-03 and 2017-03-21 - Snapshot on 17 March 2017

That doesn't mean however that we weren't surprised. For the Fed to have drawn such a strong focus where it would be using its influence to affect the expectations that investors have for the future, we should have seen a stronger upward movement in U.S. stock prices on Wednesday, 15 March 2017 than what the market saw.

That's because nearly all the Fed's officials have been doing everything they can to set the expectation that they will be hiking U.S. interest rates again in the very near future, which would put the timing of their next hike sometime in 2017-Q2, and which would most likely be announced at the end of the FOMC's June 2017 meeting.

Given where stock prices have been, since the expectations for the change in the year over year growth rates for S&P 500 dividends would place the S&P 500 higher than it currently is, for the Fed to have been successful in setting that focus would have coincided with a much larger jump in stock prices than what was recorded on Wednesday, 15 March 2017. At the very least, it should have moved to the middle of our echo-effect adjusted forecast range (indicated by the red-lined box on the chart above).

We would have expected that result because we have observed exactly that kind of behavior in stock prices following previous FOMC meetings where the Fed has directed the attention of investors to focus upon specific points of time in the future. So much so that we've used the timing of the FOMC's announcements to check the calibration of our dividend futures-based forecasting model.

So what gives now in Week 3 of March 2017? Why would stock prices appear to be behaving differently now than they have on the occasion of the Fed's previous announcements? Why would stock prices stay so much lower than what we would expect from even our echo-effect adjusted forecast?

We think the key to understanding what's going on with stock prices came out during Janet Yellen's post-FOMC announcement press conference, where Bloomberg's Kathryn Hays asked a pointed question:

KATHLEEN HAYS. Chair Yellen, Kathleen Hays. Oh excuse me, Kathleen Hays from Bloomberg. I'm going to try to take the opposite side of this because, on this question about market expectations and how the markets got things wrong, and then how you say the Fed suddenly clarified what it already said. But, for example, if the--if you look at the Atlanta Fed's latest GDP tracker for the first quarter, it's down to 0.9 percent. We had a retail sales report that was mixed, granted the, you know, upper divisions of previous months make it look better, but the consumer does not appear to be roaring in the first quarter, kind of underscoring the wait-and-see attitude you just mentioned. If you look at measures of labor compensation, you note in this statement that they're not moving up. And, in fact, they are--and if you look at average--there are so many things you can look at. And you, yourself, have said in the past that the fact that that is happening is perhaps an indication there's still slack in the labor market. I guess my question is this, in another sense, what happened between December and March? GDP is tracking very low. Measures of labor to compensation are not threatening to boost inflation any time fast. The consumer is not picking up very much. Fiscal policy--we don't know what's going to happen with Donald Trump. And, yet, you have to raise rates now. So what is the, what is the motivation here? The economy is so far from your forecast, in terms of GDP, why does the Fed have to move now? What is this signal, then, about the rest of the year?

CHAIR YELLEN. So, GDP is a pretty noisy indicator. If one averages through several quarters, I would describe our economy as one that has been growing around 2 percent per year. And, as you can see from our projections, we, that's something we expect to continue over the next couple of years. Now that pace of growth has been consistent with a pace of job creation that is more rapid than what is sustainable if labor force participation begins to move down in line with what we see as its longer run trend with an aging population. Now, unemployment hasn't moved that much, in part because people have been drawn into the labor force. Labor force participation, as I mentioned in my remarks, has been about flat over the last 3 years. So, in that sense, the economy has shown, over the last several years, that it may have had more room to run than some people might have estimated, and that's been good. It’s meant we've had a great deal of job creation over these years. And there could be, there could be room left for that to play out further. In fact, look, policy remains accommodative. We expect further improvement in the labor market. We expect the unemployment rate to move down further, and to stay down for the next several years. So, we do expect that the path of policy we think is appropriate is one that is going to lead to some further strengthening in the labor market.

KATHLEEN HAYS. Just quickly then, I just want to underscore. I want to ask you, so following on that, you expect it to move. What if it doesn't? What if GDP doesn't pick up? What if you don't see wage measures rising? What if you don't, what if the core PCE gets stuck at 1.7 percent, would you, is it your view, perhaps, that if there's a risk right now in the median forecast for dots, that it's fewer hikes this year rather than the consensus or more?

CHAIR YELLEN. Well, look, our policy is not set in stone. It is data dependent and we're, we’re not locked into any particular policy path. Our, you know, as you said, the data have not notably strengthened. I, there's noise always in the data from quarter to quarter. But we haven't changed our view of the outlook. We think we're on the same path; not, we haven't boosted the outlook projected faster growth. We think we're moving along the same course we've been on, but it is one that involves gradual tightening in the labor market. I would describe some measures of wage growth as having moved up some. Some measures haven't moved up, but there's some evidence that wage growth is gradually moving up, which is also suggestive of a strengthening labor market. And we expect policy to remain accommodative now for some time. So we're, we’re talking about a gradual path of removing policy accommodation as the economy makes progress, moving toward neutral. But we're continuing to provide accommodation to the economy that's allowing it to grow at an above-trend pace that's consistent with further improvement in the labor market.

We're kind of in a unique position in that we recognized, very early in 2017-Q1, that the Fed could get away with hiking short term interest rates as they did during Week 3 of March 2017, with almost no negative effect from shifting the forward-looking focus of investors from 2017-Q2 (where it had been focused) to the nearer term future of 2017-Q1 because the expectations for changes in the year over year growth rate of dividends per share in 2017-Q1 have been nearly identical with the expectations for 2017-Q2 for months. That similarity between those sets of expectations has meant very little impact to stock prices for investors shifting their focus back and forth between the two quarters.

But that's also occurred as the lagging effects from the 2014-2016 economic slowdown have become more pronounced in the economic data, as described by Kathryn Hays in her question to Fed Chair Janet Yellen. That deterioration in the economic data is increasingly leading investors to set their attention toward 2017-Q3, which given where stock prices are today, would tend to weight them down, where investors are betting that the negative economic data will cause the Fed to back off from hiking short term interest rates again until that more distant future quarter.

The result then is a split in the forward-looking focus of investors, where they would appear to now be dividing their focus between 2017-Q2 and 2017-Q3 in setting today's stock prices, with the outcome of stock prices that have been mostly moving sideways to slightly upward.

In this environment however, otherwise minor news about that economic data that would ordinarily not be of much concern to investors can have an outsized impact. Good numbers on the economy will lead investors to favor 2017-Q2 for the timing of the Fed's next rate hike, with stock prices rising as a result. Bad numbers will tend to direct investors to focus on 2017-Q3, sending stock prices lower as they bet the Fed will delay its next rate hike.

That dynamic is setting up just as the S&P 500 is reaching a near record period of relatively low volatility, in which it hasn't seen a decline of at least 1% during the past 108 trading days. We think that's going to change in a very noticeable way in the very near future, especially as the underlying trajectories for the basic path of future stock prices is also about to change from generally upward to generally downward (more on that next week!) Until then, get ready to hang onto your hats!

The other news that stood out to us during the Week that Was Week 3 of March 2017 is linked below!

Monday, 13 March 2017
Tuesday, 14 March 2017
Wednesday, 15 March 2017
Thursday, 16 March 2017
Friday, 17 March 2017

Elsewhere, Barry Ritholtz recaps the week's positives and negatives for the U.S. economy and markets.

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March 17, 2017

One of the more surprisingly popular posts that we've featured this year was "A Centrist's Guide to Media Bias and Usefulness", in which we featured a chart that ranks general news reporting web sites by the information quality of their reporting and a more accurate indication of their relative position on today's political spectrum than an earlier version that had gone viral.

So we were intrigued when we found that RealClearScience's Ross Pomeroy and Tom Hartsfield had joined with the American Council on Science and Health's Alex Berezow (formerly of RealClearScience) to create a similar chart for science news web sites.

Although here, they adapted the measure of information quality to focus more on how strongly evidence-based the stories covered by the science news sites they evaluated were, which they then assessed against a non-political spectrum that assesses how accessible or compelling each sites' stories would be to a general audience. Here's the chart they developed:

ACSH-RCS Infographic: Evidence-Based Science Reporting vs General Readability, 2017

Overall, their rankings are pretty solid, though we might tweak the placement of some of the sources (we would rank Wired slightly higher on the "compelling" measure for example, although that's attributable to the kinds of science news stories that we find interesting.

As for what sites we'd like to see added to the rankings, we would put Phys.org on the list, although it has considerable overlap with LiveScience as a news aggregator, it covers more fields of science. Its downside is that a lot of the stories it picks up read like press releases, so for a lot of stories, it would only fall in the "sometimes compelling" categorization.

We'd also look to add more maths into the mix, which though it falls outside the focus on evidence-based science, where mathematics news is concerned, there are considerably fewer sites that generate anything close to what might make for compelling reading by a general audience. And really, we'd recommend just three for that kind of consumption: Quanta and +Plus, for written word reporting, and BBC Radio 4's More or Less, which is presented in audio format.

Previously on Political Calculations

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March 16, 2017

Richard Feynman, offering amazing insight, back in 1981:

HT: Luboš Motl.

Sadly, not much has changed for social sciences in the intervening three and a half decades, where if the series of fresh junk science examples that we compiled during the last six months of 2016 is any indication, the same problems that Feynman noted back in 1981 are still pervasive in these fields - and the reason why is still the same: it takes much less effort to generate junk science than the care and attention it takes to generate the real thing!

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