Political Calculations
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October 8, 2015

On 21 September 2015, we wrote:

From a volatility standpoint, given the amount of vertical space between the likely trajectory of stock prices for investors focusing on either of these two future quarters, we can now reasonably expect that there will be quite a bit of volatility in the near term, which is due to the quantum-like characteristics of how stock prices behave.

That volatility will be highly dependent upon new information entering the market, as stock prices move rapidly from one expectation level to another as investors shifting their forward-looking focus from 2015-Q4 to the more distant future and less positive future of 2016-Q1 and back again in response to news events.

Keep in mind that this is not something new. We have already tracked one such Levy flight this year, and the Fed has created an environment where we may well see others in upcoming weeks until investors might have sufficient reason to stabilize their focus on one particular point of time in the future.

That is assuming that there will be no changes in the fundamental driver of stock prices: rational expectations of the amount of dividends that will be paid out in future quarters, which have been remarkably steady through most of the year to date. If and when that might change, the likely trajectory for stock prices will change dramatically, as we've previously observed back in late 2008 and 2009, and more recently in December 2012 and 2013.

And as for what to expect this week, in the aftermath of these events, and not considering any new information that what we hand at the close of trading on 18 September 2015, here you go:

Alternative Futures - S&P 500 - 2015Q3 - Rebaselined Model - Snapshot on 2015-09-18

Here is what the updated version of that chart looks like now that we're past the end of the third quarter of 2015:

Alternative Futures - S&P 500 - 2015Q3 - Rebaselined Model - Snapshot on 2015-10-01

And here is what the succeeding chart for the fourth quarter of 2015 now looks like, as of the close of trading on 7 October 2015:

Alternative Futures - S&P 500 - 2015Q4 - Rebaselined Model - Snapshot on 2015-10-07

The large and pronounced changes we have been observing in the level of stock prices is the result of what we'll call our quantum random walk hypothesis, which largely resolves and reconciles the fundamental and apparently incompatible differences in the theories advanced by such economists as Eugene Fama and Robert Shiller for how stock prices behave, for which they were jointly awarded the Nobel prize in economics (or whatever it's really called) in 2013.

And since today is the official beginning of the previous quarter's earnings reporting season, where we have the very real potential to see a major shakeup in the future expectations for the S&P 500's dividends per share, we might soon see how changes in the fundamental driver of stock prices that defines the "quantum levels" of future stock prices affects their likely projected trajectories.

Welcome back to the cutting edge!

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October 7, 2015

By now, we all know the stories of how the billionaires who own professional sports teams hold the cities of their teams hostage when they want to build new stadiums at public expense, threatening to move the team to another city if they don't get their way, and where all too often, state and local elected officials cave in to their demands.

The issue of public financing of sports stadiums comes up because of a bizarre and unintended consequence of the 1986 Tax Reform Act, where the U.S. Congress had sought to limit how much public financing could be used to build a stadium. Instead, they created a huge loophole for team owners, which created an extremely powerful incentive for them to exploit their connections with local politicians and their communities.

Here's how the loophole works. The U.S. Congress specified that no more than 10% of the revenue generated by a project built with public tax dollars could be repaid with revenues generated by the project, which for stadiums, would be money provided from the sales of tickets, concessions and parking. Because that was how the tax-exempt public financing that had previously been provided by taxpayers to build stadiums had been paid back, they thought that limit would cap the public's exposure to the growing costs of building more luxurious sports facilities.

Instead, it opened the floodgates because now, billionaire team owners could legally stick the public with up to 90% of the cost of their stadium building projects, because they're not allowed to provide more of a payback themselves under the law.

Combine that with the established role of sports teams in a community, which can extend to shaping its identity, and that's a recipe for exploitation, where instead of the cost of a sports stadium being paid by those who attend games is transferred to the general public, while the benefits go to the team.

The general public comes out on the short end of that deal, because that often means higher taxes and diverting funding away from other projects that the community would rather pursue and services they would rather have provided.

So what would happen if a city told the billionaire sports team owner playing that game to go ahead and leave town?

We know the answer to that question because there are two cities in Arizona that took very different paths with respects to the interests of major league sports teams that illustrate that alternative choice. The two cities are Chandler and Glendale, which are located on opposite sides of the Phoenix metropolitan area, where a number of major league baseball teams hold their annual spring training.

City of Phoenix: Maryvale Baseball Park - https://www.phoenix.gov/parks/sports/professional-sports/maryvale-baseball-park

The two cities have close to the same population and also have had very similar economic development paths, but the leaders of one, Chandler, had a choice back in the late 1990s to either give in to demands by the owners of the Milwaukee Brewers to either support building a new spring training facility in the city with public financing or deal with the situation of having the team pull up stakes and leave for other cities willing to pay for them to play in them. The city's leaders chose to let the Brewers leave.

In leaving, the Brewers obtained financial assistance to move to the city of Phoenix, where the city is reported to lose some $1.8 million annually in operating its Maryvale Baseball Park, where team's owner has continued to play the same hostage game - threatening to leave unless the city invests more taxpayer money in the facility.

Meanwhile, the leaders of the other city, Glendale, have pursued professional sports teams with a "borrow now and pay someday later" strategy, doing everything they can to bring as many professional sports teams and their facilities to the city as they can, which they've used as anchors for retail and other entertainment-related development projects aimed at drawing tourism dollars. Glendale has been very successful in achieving its leaders' major league professional sports dreams, attracting professional football, hockey and its own major league baseball teams for their spring training.

The difference between the two cities is that Chandler, freed of the blackmail strategies of the billionaire owners of professional sports teams, has boosted its public finances without the teams, focusing on expanding the diversity of its economic base with strong businesses rather than continually chasing sports-related tourism dollars. In the years since it told the owners of the Milwaukee Brewers "no", the city has improved its bond rating from AA- to AAA and has succeeded in doing other things to boost the community with the resources that had been tied up in the Brewers' old spring training facility, which has since been converted into a city park and is also where the old stadium has recently been razed to become the grounds for a new large residential development.

Glendale, on the other hand, has racked up so much public debt that the city's new leaders are being forced to make hard choices about what city services it will continue maintaining and how to fund them, as its bond rating has fallen from AA to BBB+ over time, which means it costs them more to borrow money as lenders and investors are increasingly skeptical of the city's ability to make good on its liabilities.

As a result, the city's leaders now live with the ongoing fear of having the teams they worked so hard to attract will walk out, thereby losing the sports and entertainment-related revenues they have become dependent upon to pay back the city's bondholders, as the city seeks to avoid bankruptcy court. The city, as some describe, ruined by sports, where outright hostility between the professional sports team owners and the city's officials has replaced the warm feelings that once defined their relationships.

The alternatives really don't get much clearer than that, do they?

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October 6, 2015
We live in a cynical world - Source: http://www.sec.gov/Archives/edgar/data/1355848/000101968715000196/genius_8k-ex9901.htm

Not long ago, John Whitehead reviewed one of our posts on the topic of junk science and opened a can of mild umbrage at one of the sites we linked to through a much older post as a resource for debunking bad science in the media.

Since that post was so six years ago, we thought it was long past time to update and expand that original list of resources, which we did both in our original post and now here for greater visibility.

  • Snopes.com - The Internet's premier reference for urban legends, folklore, myths, rumors and misinformation.
  • Quackwatch - If it's medical or health-related and not for real, you'll likely find it here.
  • Climate Skeptic - Like Quackwatch, but aimed at the poorly supported aspects of global climate change science.
  • JunkScience.com - Steven Milloy's site surveying a number of highly questionable scientific claims made in today's media reporting. Update 19 September 2015: Over time, we find that the site's quality in critiquing a number of science reports is mixed overall, combining a number of valid analyses with others that fall somewhat short. For an example of the latter, see John Whitehead's recent discussion of the site's coverage on the topic of contingent valuation, where negative conclusions about particular studies would appear to have been reached without necessarily being backed by sound evidence, or without consideration that the scientists behind the studies being criticized had addressed their points of criticism.
  • Junkfood Science - Sandy Szwarc's blog covering ongoing issues with media reporting of nutrition-based junk science.
  • Mythbusters - did you think we'd create a list like this and forget the Mythbusters?
  • John Stossel - the media's leading questioner of questionable claims, from consumer issues through politics, who also blogs.
  • Biggest Junk Science Stories of 2014 - Added 19 September 2015: Hopefully an annual tradition. RealClearScience offers a summary of the biggest junk science stories of 2014. (Here's 2013's edition.)
  • Bad Science - Added 19 September 2015: UK science columnist's Ben Goldacre's site on the topic of science that doesn't measure up.
  • Retraction Watch - Added 19 September 2015: An invaluable site that didn't exist when we first began assembling our list of resources. Retraction Watch focuses on the mistakes made by scientists who published erroneous results that subsequently required them to alert their peers and to withdraw their findings by retracting them. That, in itself, is the process of science working as it should, but the reasons for a number of retractions will periodically overlap into junk science territory (for example, conclusions based upon overly small sample sizes for statistical studies is a common theme). Of course, the difference between a real scientist and a junk scientist is that the real scientist has the honesty and integrity to own up to their errors in the interest of advancing understanding and progress within their fields of study. By contrast, the junk scientist will seek to sustain their flawed findings, even when confronted by directly contradictory evidence.
  • Wrongful Convictions (Junk Science Category) - Added 19 September 2015 - The negative effects of junk science don't just show up in scientific papers - they also show up in civil and criminal courtrooms. The lawyers behind the Wrongful Convictions blog discuss its impact and how to mitigate against it when it can affect real world judgments of innocence, guilt and liabilities.
  • Metabunk.org - Added 19 September 2015: A discussion forum "dedicated to the art and pastime of honest, polite, scientific investigating and debunking". If you've just seen it in the media, it is likely being discussed here!
  • Improbable Research - Added 19 September 2015: The home of the Ig Nobel Prize! This site is not about junk science at all, but is instead about recognizing valid scientific studies that would appear to offer precious little value in meeting any of humanity's needs.


October 5, 2015
Original Edition - S.A. Nelson - The A B C of Stock Speculation - Copyright 1902

Not long ago, we came across a first edition copy of Samuel A. Nelson's The A B C of Stock Speculation, copyrighted in 1902, and published as Volume V in Nelson's Wall Street Library series.

The book is significant because it collected a number of the columns that Charles Dow, the originator of the Dow Jones Industrial stock market index, had originally published in the Wall Street Journal on the subject of how to analyze stock prices to determine the best times to either buy or sell shares of stock.

Published after Dow's death, it was the world's introduction to what would become known as a result of the publication of this book as Dow Theory, which has proven to be amazingly influential and is still being actively applied by a number of stock market analysts today. Here is Barnes & Noble's overview for the 2007 reprint of the book:

"Speculation is a venture based on calculation."

First published in 1903, The ABC of Stock Speculation is a landmark achievement for the profession of stock speculation. This book not only established our modern view of the fundamentals of speculation, it did so through the precise and insightful writings of Charles H. Dow, coined in this book as Dow's Theory.

Nelson, friend and admirer of Dow (first editor of the Wall Street Journal and co-founder of the Dow Jones Industrial Average), sensed that Dow had developed a philosophy, some say subconsciously, which speculators and businessmen could adapt as a reliable guide for conducting their financial operations. After failing to persuade Dow to write his own book, Nelson spent long hours researching the Wall Street Journal for the most exceptional Dow editorials, 15 of which he included in this book.

It has been over 100 years-yet even in today's tech-heavy, volatile markets, the basic components of Dow Theory, technical analysis, price action, and market philosophy, still hold true. Nelson says it best, "Men rather than markets differ."

Needless to say, the book has been amazingly influential over the years and is still in print. You can buy your own modern copy via Amazon.com ($0.99 for the Kindle edition, $28.91 for Hardcover or $12.15 for paperback). Or you could read a scanned copy of the original edition online for free at the Internet Archive's openlibrary.org or via Google's ebook edition.

But when published in 1903, the book sold for $1.50, which in terms of the purchasing power of the dollars of 110+ years later, works out to be about $41.00. In 1907, a copy of the book could be purchased for less than half that, for $0.60, which surprisingly corresponds to purchasing power of $38.40 in the terms of today's dollars.

Today, a first edition copy like the one pictured above can have asking prices of anywhere from $350 to $650 depending upon how well it has held up over time. And for what it's worth, based on its condition, our original edition would fall somewhere in the middle of that range.

We see then that the price in dollars that one might pay to learn Dow's Theory in his own words ranges anywhere from $0 to $650.

So how much is Dow's Theory worth?

If it is just the words, you can have them for the price of an Internet connection and whatever electricity you consume as you review them or the price of whatever modern physical edition of the text that you might choose to purchase. If it is the first edition of the book that is what is valuable, then the question gets a lot more difficult to answer as you might consider it an investment worth speculating in as the value might rise or fall as time progresses.

Since that would mean that the problem has been reduced to a speculative calculation, could you use Dow's Theory to answer the question? And if you cannot, just how much is Dow's Theory worth?

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October 2, 2015

Normally, we would expect to see the advocacy of the multitasking use of ordinary power tools for the purpose of food preparation put forward such people as Alton Brown. Or perhaps Red Green.

But YouTube's Handimania makes a really good case for the use of hand drills to peel fruit.

HT: Core77, where Rain Noe (a.k.a. Hipstomp) reflects on what is perhaps the most useful way to employ a spade bit:

Yes, I know it's totally silly. But I have to admit that if my girlfriend left me alone in the kitchen after one of her annual apple-picking trips, she'd probably return to find an enormous mess (and me holding a drill with a dead battery). And it might be worth getting yelled at for.

It totally would!

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