Political Calculations
Unexpectedly Intriguing!
April 21, 2017

We're playing with a new online data visualization tool (for us): Datawrapper, where we've taken data from a press release issued by the American Society of Plastic Surgeons indicating the average cost and number of cosmetic procedures performed in the U.S. during 2016 and visualized it. The results are below....

If you're accessing this article on a site that republishes our RSS news feed, please click here to see the chart (we won't know until after this post has gone live which, if any, republishing sites will have any issues displaying it - it's all part of the test drive process!)

Now, for good measure, here's a map we generated that indicates each U.S. state's most searched cosmetic procedure according to the Plastic Surgery Portal.

Same rules apply as before!


April 20, 2017

The U.S. stock market has, for the most part, behaved in a very orderly fashion since the first quarter of 2016 ended just over a year ago.

But since 1 March 2017, when the S&P 500 reached its all-time record peak closing value of 2,395.96, the S&P 500 has dropped diagonally by three standard deviations from that peak value with respect to its fundamental trendline, as determined from the relationship between its value and the S&P 500's trailing year dividends per share.

S&P 500 Index Value vs Trailing Year Dividends per Share, 30 September 2015 through 19 April 2017, with period of order since 31 March 2016

To be fair, some would call that reverting to the mean, but since the S&P 500 peaked on 1 March 2017, the news that influences investors expectations for the future has been characterized by two main themes:

With all these things going on, a good question to ask might be how much more would it take for the S&P 500's nearly 13-month old period of order to finally break down?

As you can see in the chart, the answer is something of a moving target, but if it were to happen today (20 April 2017), it would take a decline of 56 points, or 2.4%, from its 19 April 2017 closing value of 2,338.17.

That also assumes that order in stock prices can be described by something that looks like a normal distribution with respect to the mean trend line of the relationship between stock prices and their underlying trailing year dividends per share, which is not strictly true, but does make for occasionally useful observations.

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April 19, 2017

One of the crazier things about the U.S. national debt is that it often takes a lot of months after the end of a given fiscal year for the U.S. Treasury to sort out who the U.S. federal government owes money, particularly when when that money is owed to foreign entities.

So here we are, just over halfway through the federal government's 2017 fiscal year, before we have a good idea of how much U.S. government-issued debt was held by its major foreign creditors at the end of the U.S. government's 2016 fiscal year, which ended on 30 September 2016! The following chart reveals who the biggest holders of the U.S. national debt were as of that time:

FY 2016: To Whom Does the U.S. Government Owe Money?

Officially, the U.S. government's total public debt outstanding is divided up into two parts: the "Public" portion of the national debt....

FY 2016: Who Owns the Public Portion of the U.S. National Debt?

And the so-called "Intragovernmental" portion of the national debt, where the latter category represents money owed to various trust funds established and operated by the U.S. government.

FY 2016: Who Owns the Intragovernmental Portion of the U.S. National Debt?

Right now, we can see that Social Security's Old Age and Survivors' Insurance Trust Fund accounts for a little over half of the Intragovernmental portion of the U.S. national debt, which works out to be nearly $2.8 trillion, or about one-seventh of the U.S. government's total public debt outstanding.

If Social Security's Trustee's are right, that number will steadily shrink to zero over the next 17 years, as that debt is cashed in to pay retirement benefits to Social Security recipients. When that number does reach zero, Social Security's Trustees have indicated that the program will be forced to revert to the program's original Pay-As-You-Go basis, where benefits can only be paid out of the payroll taxes that fund Social Security. When that happens, they predict that all Social Security benefits will need to be cut by 21%, unless Social Security's payroll taxes are increased from 12.4% of earned income (which is currently equally split between employers and employees) up to 15.78% of earned income.

Data Sources

U.S. Treasury. The Debt To the Penny and Who Holds It. [Online Application]. 30 September 2016.

Federal Reserve Statistical Release. H.4.1. Factors Affecting Reserve Balances. Release Date: 6 October 2016. [Online Document].

U.S. Treasury. Major Foreign Holders of Treasury Securities. Accessed 13 April 2017.

U.S. Treasury. Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2016 Through September 30, 2016. [PDF Document].

Social Security Board of Trustees. The 2016 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. [PDF Document]. 22 June 2016.

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April 18, 2017

April 18th is U.S. Income Tax Day in 2017, and what better way to mark the day that all Americans' income taxes are due than by providing another form for you to fill out!

Why would you want to do this? Because if you don't, you'll never know just how much you would have been taxed when the original Form 1040 was first issued by the IRS back in 1913....

Our tool below is based upon the first page of the original Form 1040, which originally consisted of just four pages: the summary sheet modeled below (Page 1), the Gross Income calculation sheet (Page 2), the General Deductions sheet (Page 3) and finally, one page of Instructions (Page 4). Yes, you read that right. Just one page of instructions!

We'll make it just a bit easier still. All you need to do is to enter the indicated data (shown in boldface type) below with your figures from this year, and we'll take care of the math:

IRS Form 1040, Circa 1913
Return of Net Income Received or Accrued During the Year Ended December 31, 191_
1. Gross Income (see page 2, line 12)
2. General Deductions (see page 3, line 7)
3. Net Income  
Deductions and exemptions allowed in computing income subject to the normal tax of 1 per cent.
4. Dividends and net earnings received or accrued, of corporations, etc., subject to like tax. (See page 2, line 11)
5. Amount of income on which the normal tax has been deducted and withheld at the source. (See page 2, line 9, column A)
6. Specific exemption of $3000 or $4000, as the case may be. (See Instructions 3 and 19)
Total deductions and exemptions (Items 4, 5, and 6)
7. Taxable Income on which the normal tax of 1 per cent is to be calculated. (See Instruction 3)
8. When the net income shown above on line 3 exceeds $20,000, the additional tax thereon must be calculated as per schedule below:
1 per cent on amount over $20,000 and not exceeding $50,000
2 per cent on amount over $50,000 and not exceeding $75,000
3 per cent on amount over $75,000 and not exceeding $100,000
4 per cent on amount over $100,000 and not exceeding $250,000
5 per cent on amount over $250,000 and not exceeding $500,000
6 per cent on amount over $500,000
Total additional or super tax
Total normal tax (1 per cent of amount entered on line 7)
Total tax liability

Excerpts from the Instructions

3. The normal tax of 1 per cent shall be assessed on the total net income less the specific exemption of $3,000 or $4,000 as the case may be. (For the year 1913, the specific exemption allowable is $2,500, or $3,333.33, as the case may be.) If, however, the normal tax has been deducted and withheld on any part of the income at the source, or if any part of the income is received as dividends upon the stock or from the net earnings of any corporation, etc., which is taxable upon its net income, such income shall be deducted from the individual's total net income for the purpose of calculating the amount of income on which the individual is liable for the normal tax of 1 per cent by virtue of this return.

19. An unmarried individual or a married individual not living with wife or husband shall be allowed an exemption of $3,000. When husband and wife live together they shall be allowed jointly a total exemption of only $4,000 on their aggregate income. They may make a joint return, both subscribing thereto, or if they have separate incomes, they may make separate returns; but in no case shall they jointly claim more than $4,000 exemption on their aggregate income.

Well, wasn't that a fun exercise! Are you ready for the "improved" modern version of the same thing now?

Or if you're up for a real challenge, you could try your hand at designing an even simpler tax code for Americans this year and beat President Trump while you're at it!

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April 17, 2017

The second week of April 2017 had bigger negatives than positives for the U.S. economy and markets, with stock prices behaving accordingly during the week. In this case, we think that those negatives led investors to bet that the Fed would delay the timing of its next expected rate hikes into the third quarter of 2017, which pulled the S&P 500 closer toward where our dividend futures-based model projects that stock prices would be if investors were fully focused on that period of time in the future.

Alternative Futures - S&P 500 - 2017Q2 - Standard Model - Snapshot on 13 April 2017

In the chart above, we observe that investors are still splitting their forward-looking focus between the current quarter of 2017-Q2 and 2017-Q3, where the weighting between these two quarters is now tilted slightly more heavily toward 2017-Q3.

The big reasons for that change are evident from the news for the week. First, from the perspective of economic fundamentals, banking stocks declined because of an apparent deceleration in the rate of growth for their lending operations.

The second reason has more to do with the effect of noise, in this case, arising from geopolitical concerns. Here, our thinking is the increase of tensions between the U.S. and Syria, increasing tensions with North Korea, and also the deployment of the U.S.' largest aerial-delivered ordnance in Afghanistan during the week is contributing to the future outlook of investors in that they are betting that the U.S. Federal Reserve will be more likely to pursue a policy of greater stability with respect to U.S. interest rates, which would be realized by the Fed keeping interest rates steady for a longer period of time.

Combined, these two events, one fundamentally-driven and one noise-driven, led investors to collectively refocus their attention away from 2017-Q2 and toward 2017-Q3 instead.

The interesting thing about this dynamic is that our model indicates that stock prices have considerably more room to move toward either quarter than was the case for the investing outlook during 2016-Q4 and 2017-Q1, when investors could shift their forward-looking attention between the future quarters of 2017-Q1 or 2017-Q2 without any noticeable impact on stock prices. We estimate that there's currently a potential 300 point spread between the alternative trajectories for the two quarters, where as of 13 April 2017, stock prices could fall by more than 130 points if investors were to fully focus on 2017-Q3.

But whether it might will depend upon what new information investors learn during the weeks ahead. As for what news influenced investors in Week 2 of April 2017, just scroll down for our summary of what we identified as the week's more significant headlines.

Monday, 10 April 2017
Tuesday, 11 April 2017
Wednesday, 12 April 2017
Thursday, 13 April 2017

Barry Ritholtz summarized the holiday-shortened week's positives and negatives for the U.S. economy and markets.

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April 13, 2017

Self driving cars are getting a lot of attention these days, but are they really solving the kind of problems that drivers care most about?

Consider the following commercial that proposes the kind of solution hat many drivers would love to have today, but where we're happy to report that the technology behind today's autonomous vehicles fortunately isn't anywhere close to providing. The first features a science fiction solution to the problem of how to deal with that slower moving vehicle in front of you.

Being able to take control of the slower-moving vehicle in front of you seems like a cool thing, right? But since the car being moved over to the slow lane is clearly the one with the self-driving capability, if that's your car, how would you feel about having control of your vehicle taken from you without your permission and manipulated by other drivers on the highway? Or for that matter, by teenage hackers hanging out in their basement lair?

Or how about by cyberintelligence agents employed by a national government or a terrorist organization? That's something that has been alleged to have already happened.

In 2010, Professor Tadayoshi Kohno of the University of Washington and Professor Stefan Savage of the University of California, San Diego published a paper entitled “Experimental Security Analysis of a Modern Automobile” which outlined the possibility that cars could be hacked. They pointed out that, once hacked, cars could be remotely controlled to produce sudden braking, brake failure or sudden acceleration. Later, at the Def Con conference in August, 2013, well-known hacker and security engineer for Twitter, Charlie Miller, demonstrated how a car’s steering could also be remotely controlled and that it wouldn’t take that much know-how. That led to some to conclude that there may have been a connection between car hacking and the death of journalist Michael Hastings two months earlier.

Michael Hastings was an award winning, though controversial, journalist. It was he who exposed the negative attitudes of the military, and especially General Stanley McChrystal, towards government officials. Hastings became more interested in government surveillance and his last story was called, “Why Democrats Love to Spy On Americans”. Just before his death, he told friends he thought he was being investigated by the FBI and worried that his car was being tampered with. At the time, he was preparing an article on CIA director John Brennan. He claimed to friends that he was working on a big story. But before this story could appear, he died in a fiery car crash.

The subsequent investigation into Hastings' death in the 2013 crash still poses more questions than have been provided definitive answers. Wikileaks' release of documents related to the CIA's cyber intelligence operations earlier this year has rekindled interest in the case, where the potential capability of hackers to seize control of modern automobiles is feeding both fears among conspiracy theorists and more importantly, ethical concerns based on the hypothetical potential of that situation among more serious people.

We think that the latter, along with the risk of exposure to the liability for having knowingly producing vehicles capable of being hacked in this fashion, will influence the development of the coding and technology of self-driving vehicles to ensure that the potential likelihood for their being taken over by people with hostile intentions lies somewhere between minimal and non-existent.

If we have learned anything from decades of science fiction, it is that modern engineering is as much about ethics as it is about producing the wonders of tomorrow. The challenge of developing self-driving cars is providing the latest proof of that contention.

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April 12, 2017

In January 2017, the trailing year average of the year-over-year change in atmospheric CO2 concentrations peaked at 3.47 parts per million, representing the fastest rate at which carbon dioxide was added to the Earth's atmosphere since Janauary 1960. Since then, that rate of change has fallen to 3.28 parts per million for data reported by the Mauna Loa Observatory through March 2017.

The chart shows that change, along with how that correlates with periods where human activities provide some explanation for the rate at which the concentration of carbon dioxide in the Earth's air changes.

Trailing Twelve Month Average of Year-Over-Year Change in Parts per Million of Atmospheric Carbon Dioxide, January 1960-March 2017

Normally, when the year over year change in the concentration of atmospheric carbon dioxide falls, it represents a negative turning point for the Earth's economy.

In this case however, it represents a more positive development: the dissipation of additional carbon dioxide that was put into the Earth's atmosphere by widespread wildfires in Indonesia back in 2015.

That additional contribution peaked in the Mauna Loa Observatory's measurements of atmospheric CO2 concentration back in April 2016, so we should see a more rapid dropoff in the trailing year average for this data beginning next month. The decline will be similar to that observed in 1999 following 1997's larger Indonesian wildfires. The two events are connected by having occurred in especially strong El Niño years, which created conditions conducive to the outbreak of wildfires in Indonsesia. That's something that can then produce an outsized effect with respect to atmospheric CO2 levels because of that region's large deposits of carbon-rich peat.

We should also note that the interpolated CO2 concentration data that provides the raw data for the trailing twelve month average values presented in the chart above has gone through a substantial revision, where most of the previously reported data for the period between May 1974 and December 2014 was modified sometime between 22 December 2016 and 5 April 2017.

Changes in Interpolated Atmospheric Carbon Dioxide Concentration Recorded At Mauna Loa Observatory for Period Spanning Jan-1960 Through Nov-2016, for Data Reported in December 2016 and in April 2017

The NOAA's Earth System Research Laboratory provides the following comment about data revisions for the MLO's CO2 data:

NOTE: In general, the data presented for the last year are subject to change, depending on recalibration of the reference gas mixtures used, and other quality control procedures. Occasionally, earlier years may also be changed for the same reasons. Usually these changes are minor.

The average revision was an increase of 0.03 parts per million, where the largest revision were over 10 times that amount, with the largest upward revision of +0.35 ppm for August 1984 and the largest downward revision of -0.37 ppm for March 2005. We were surprised to see that data going back over 40 years had been revised during the last several months.

Data Sources

National Oceanographic and Atmospheric Administration. Earth System Research Laboratory. Mauna Loa Observatory CO2 Data. [File Transfer Protocol Text File]. Updated 5 April 2017. Accessed 9 April 2017.

National Oceanographic and Atmospheric Administration. Earth System Research Laboratory. Mauna Loa Observatory CO2 Data. [Internet Archive Copy of File Transfer Protocol Text File]. Updated 5 December 2016. Archived 22 December 2016. Accessed 9 April 2017.


April 11, 2017

"America's imports from China tumble by a record amount".

We're borrowing the lead sentence for this article from the headline that Business Insider attached to a Reuters news article in describing the U.S. Census Bureau's just-released data for the value of goods and services traded between China and the U.S. in February 2017.

And a record amount it was! In January 2017, the U.S. imported nearly $41.4 billion worth of stuff, things and items from China, which dropped to nearly $32.8 billion in February 2017, marking a record month-to-month decline of just over $8.6 billion worth of imported Chinese goods.

Value of U.S. Imports from China, January 1985 - February 2017

In percentage terms however, we find that the month-to-month change from January to February 2017 only ranks seventh among the biggest month over month declines in goods imported to the U.S. from China since January 1985, so as records go, it's not as impressive as it could be.

While Business Insider's version of the article cited "slowing domestic demand" as the culprit, the Reuters article correctly recognized that "seasonal factors were likely behind the dramatic drop". We know that second scenario is the case because of the timing of this year's New Year/Spring Festival in China, which took place from 28 January 2017 through 2 February 2017, where the China's port facility workers who load goods onto U.S.-bound cargo ships were on holiday for the entire week. Combined with the two-to-three weeks that it takes America-bound goods to be transported from China's ports to their primary destination of U.S. west coast ports, February 2017 would have seen the amount of Chinese goods being unloaded in U.S. ports reduced by one week's worth of Chinese cargo ship traffic.

Taking the monthly value of China's imports to the U.S. for the past year and dividing by 4 (as the number of weeks in each month) would suggest that we should have expected the value of goods to drop by somewhere around $9.7 billion. Instead, they dropped by $8.6 billion, which means that the U.S. may have imported more goods from China than might have been reasonably expected for a month bearing the full effects of China's week-long New Year/Spring Festival holiday.

In any case, when we look at the exchange rate-adjusted, year-over-year growth rate for the value of goods exported from the U.S. to China and imported by the U.S. from China, we can reasonably expect the measured growth rate to rebound sharply in March 2017.

Year Over Year Growth Rate of Exchange Rate Adjusted U.S.-China Trade in Goods and Services, January 1986 - February 2017

The U.S.' official trade data is coming out at the same time as China's Premier, Xi Jinping, is meeting with U.S. President Donald Trump to address trade issues, where the Chinese Premier has come bearing gifts, with concessions providing better access to China's markets for the U.S. financial service industry and eliminating a 2003 ban on U.S. beef. At the same time, the FT also reported over the weekend that the U.S. and China have agreed to a 100-day plan to resolve a number of other trade issues, which has taken the prospect of a trade war breaking out between the Earth's two largest national economies off the table.

Data Sources

Board of Governors of the Federal Reserve System. China / U.S. Foreign Exchange Rate. G.5 Foreign Exchange Rates. Accessed 5 April 2017.

U.S. Census Bureau. Trade in Goods with China. Accessed 5 April 2017.


April 10, 2017

Sometimes, for the S&P 500, the more things stay the same, the more they change.

By staying the same, we're referring to the relative lack of change in the closing value of the S&P 500 on each trading day of the first week of April 2017.

Alternative Futures - S&P 500 - 2017Q2 - Standard Model - Snapshot on 07 April 2017

But over Week 1 of April 2017, we see a change in the future expectations that investors have. Specifically, investors would appear to have flipped the relative probabilities that they were assigning to the likelihood that the Fed will next hike interest rates in 2017-Q2 and 2017-Q2 from where they had set them a week earlier.

At that time, we estimated that they were giving a 55% chance of the Fed's next short term interest rate hike taking place in 2017-Q3 and a 45% chance that it would happen in 2017-Q2.

This week, thanks to the heavier weight of positive economic news that came out during the week, it appears that those relative probabilities have reversed to where investors are giving a 55% chance that the Fed will hike U.S. interest rates before the end of the quarter, and a 45% chance they'll hold off on doing so until the next quarter.

And all stock prices had to do to communicate that change in expectations was to mostly drift sideways to slightly lower as investors modestly reacted to the non-market moving news released throughout the week, where even the surprise U.S. bombing of Syria following reports of its government's use of chemical weapons in its civil war did little to roil the U.S. stock market.

That's not to say that other markets were not greatly affected by other news that came out during the week, but since we focus on the S&P 500, we have to play the cards that we've been dealt....

Speaking of which, here are the headlines that stood out from the pack for Week 1 of April 2017.

Monday, 3 April 2017
Tuesday, 4 April 2017
Wednesday, 5 April 2017
Thursday, 6 April 2017
Friday, 7 April 2017

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

Finally, on a programming note, since U.S. markets will be closed on Friday, 14 April 2017, so will we! Have a great, short week!

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April 7, 2017

It's National Beer Day in the United States, which for Inventions in Everything, means its time to focus on the technology that makes popping the top on a can of beer something that people can actually do!

It wasn't always that way, and Core77 has a great article that describes how the "greatest technological challenge of the 20th century" was solved by the invention of the steel beer can, which initially came with some great advantages.

Cans were easier to stack, ship and carry, weighed less than glass bottles and were less prone to breakage. One drawback was that you could not break a can over a counter and brandish it during a saloon brawl, but this was offset by the fact that you could crush one against your forehead, which never failed to impress the ladies and establish you as "a real character."

Alas, the new technology came with new problem for inventors to solve: how to open the can to get the beer.

For flat topped steel cans, that took a unique tool, which was invented by John M. Hothersall and Dewitt F. Sampson of the American Can Company, for which U.S. Patent 1,996,550 A was issued in 1935. If you recognize it, you should, it's the modern triangular-head "church key" container opener that has been used ever since to punch holes into the tops of steel cans.

U.S. Patent 1996550 A - Figures 1 through 5

1935 also saw the invention of the "cone-top" steel beer can, which could be topped with the same kind of "crown cork" that had been used since being invented in 1892 by William Painter to cap the top of glass bottles, which itself had been immortalized by U.S. Patent 468,258 A.

U.S. Patent 468258 A - Figures 1 through 7

But it still required a special tool for consumers to be able to access the contents within the containers it topped!

For the next two and a half decades, that was the state of the art for beer stored in containers sized for individual consumption. Until one day in 1959, when necessity once again birthed a new invention!

... an engineer named Ermal Fraze was on a family picnic and forgot to bring a church key. Fraze was forced to open his beer cans using his car bumper, like some kind of alcoholic MacGyver. He subsequently invented the pull-tab:

Core77: Pop Top

Fraze patented it in the 1960s and sold the rights to Alcoa, and it became the standard can aperture.

By eliminating the need to have a specialized tool to open beer cans, Ermal Fraze significantly advanced the technology of beverage cans.

But the technological improvement also came with a new problem: what to do with that removable pull tab? Far too often, the tab added to the problem of litter, or more seriously, created personal safety issues where people would be at risk of cuts from its sharp edges or ingesting the tab if they dropped it into the can before consuming its contents.

The near-ultimate solution came in 1975, when Daniel F. Cudzik invented the design for the modern pop-top can, where the tab remains attached to the top of the can, for which he was awarded U.S. Design Patent D244,915.

U.S. Patent D244,915 - Figures 1 through 4

But the invention came with a new challenge to overcome, as wonderfully noted by Core77's Rain Noe:

This "Sta-tab," as it was originally called, created no waste. But again there was, of course, a downside. (For chrissakes why is drinking beer so hard?!? It's like the gods are against us.) The aperture was relatively small... and with no means of airflow, pouring the stuff into your mouth can be turbulent. While it creates an amusing glug-glug-glug noise, that loses its charm pretty quickly.

In the 1990s can manufacturers finally began widening the mouth... which ameliorates, but does not completely solve, the glugging issue. In my own experience I've found that it's very difficult not to spill beer on your shirt after having just ten or eleven of these.

Ah yes, first world problems. Rain's frustration is such that he invited Core77's readers to take on the challenge of finally perfecting the pop-top for beer cans, and within a few days, the wife of one of Core77's readers may very well have achieved that result.

After seeing our post on The Design Evolution of Beer Can Openings, reader Devin Sidell's wife may have designed the perfect beer can aperture. To get you up to speed, we were discussing how a single opening in a can leads to "glugging," i.e. turbulence while drinking since there's no airflow. Users of early flat-top beer can designs thus punched two holes in them....

Well, Sidell took the time to Photoshop up this clever way to solve the problem using the modern-day tab:

Core77: Mrs. Sidell's Solution

Pretty brilliant, no? "The top being for the intake of air and the bottom for drinking, of course. The tab can already swivel so it can perform the same action twice.

"I'm sure this has already been done," Sidell writes, "but I'm just curious why it's not on cans already."

If it has been done, we can't find it.

And so, the march of American innovation continues with the simple and very possibly patentable solution for a glug-free pour for a can of beer. There is no great beer stagnation.

Previously on Political Calculations

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April 6, 2017

Stock Market Chaos... Run for your lives!
The S&P 500 had something of a volatile day on 5 April 2017, gapping up by 7.52 points to open higher than the previous day's close of 2,360.16, then going on to peak at the day's high of 2,378.36 around 10:23 AM EDT, after which it hovered within a 5-point wide range below that level until 2:00 PM.

And then, the Fed released the anxiously awaited copy of the minutes to their March 2017 meeting of its Federal Open Market Committee (FOMC) meeting. After that, U.S. stock prices began nosing over before diving by more than 27 points to hit the day's low value of 2,350.52 at 3:34 PM EDT, before bouncing around and closing the day at 2,352.95.

As for the catalyst for the sudden swing, ZeroHedge's Tyler Durden fingered the Fed:

It started off so well: the blistering ADP payrolls report, the highest in over two years (despite disappointing PMI and ISM reports), sent stocks soaring off the bat with the Dow jumping nearly 200 points higher, rising as high as 20,887, and the S&P knocking on the all time high 2,400 door again, and AMZN to new all tim highs, and making some wonder if the reflation trade had returned.

It was not meant to be, because while it took the market some time to digest the Fed's minutes, the FOMC delivered one of its loudest warnings to date that it was focusing not so much on inflation or employment, but was seeking to deflate what even "some members" of the FOMC agree is a stock bubble, warning that stock prices are "quite high", and warning that its forecasts face "downside risks" if "financial markets were to experience a significant correction."

With a total swing of less than 1.2% from high to low value on the day, we would describe the market's volatility during the day as being consistent with what we would describe as a "typical" level of noise that might be seen in stock prices on a daily basis.

But that didn't stop the more excitable among the market's analysts from blaring the "stock market bubble alert" horn (much like More Or Less' Banana Siren)! Here's a sampling of headlines featured on ZeroHedge from various contributors:

It wouldn't be on ZeroHedge if it weren't both gloomy and doomy. In all honesty however, all these analysts are mostly guilty of is overdramatizing the more neutral comments of the Fed officials, who never-the-less have clearly flagged high equity prices as being among their concerns for the future.

In their discussion of recent developments in financial markets, participants noted that financial conditions remained accommodative despite the rise in longer-term interest rates in recent months and continued to support the expansion of economic activity. Many participants discussed the implications of the rise in equity prices over the past few months, with several of them citing it as contributing to an easing of financial conditions. A few participants attributed the recent equity price appreciation to expectations for corporate tax cuts or to increased risk tolerance among investors rather than to expectations of stronger economic growth. Some participants viewed equity prices as quite high relative to standard valuation measures. It was observed that prices of other risk assets, such as emerging market stocks, high yield corporate bonds, and commercial real estate, had also risen significantly in recent months. In contrast, prices of farmland reportedly had edged lower, in part because low commodity prices continued to weigh on farm income. Still, farmland valuations were said to remain quite high as gauged by standard benchmarks such as rent-to-price ratios.

Now that have specified this concern, let's do a quick review of the S&P 500's recent history of both order and chaos in the U.S. stock market, where we can identify exactly where the bubbles driving the excitable market analysts so mad have really occurred (be sure to click the image below to see a larger version of the following chart):

S&P 500 Average Monthly Index Value vs Trailing Year Dividends per Share, December 1991 through March 2017

By our definition, a bubble can be said to exist whenever the price of an asset that may be freely exchanged in a well-established market first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might be realized from owning or holding the asset in question.

Applied to stock prices, a bubble may be said to exist when the price of stocks changes at a rate that is not coupled with the growth rate of dividends, the payments investors might receive from holding stocks. And for what it's worth, over the last 26 years of stock market history, we can only find three instances where a bubble could reasonably be said to have existed:

We're not even really confident of that last example, in that it only modestly disrupted the longer term period of order in the S&P 500 in which it occurred, where we can argue that it doesn't pass the test for being sustained over a long enough period of time to qualify as a full-on bubble.

Still, when we review the current just over one-year-old trend for the S&P 500 as established from 31 March 2016 through the present against its underlying trailing year dividends per share, we can't say that we see anything like what we would even less-than-confidently call a bubble in the S&P 500's equity prices.

In terms of the relationship between stock prices and their dividends per share, we would say that the current trend is similar to, but not as strong as, the trend that ran from December 1991 to April 1997. It shows rapid stock price growth, but growth that is clearly coupled with the growth of dividends per share at the same time.

Keep in mind that we don't even need to have a bubble in stock prices for the market to crash, which should be plainly evident from what we can see in the chart above for the lead up to, and the aftermath of, the 2008 Crash.

So if you're an overly excitable market analyst or a Fed official, just chill a bit before laying on talk of high valuations for stock prices as measured by price earnings ratios or other antiquated metrics as for why you personally believe stock prices are in a bubble. Chances are that all you're doing is clueing the public in on the direct evidence that you don't have a firm grasp of how stock prices work in the first place. And if you're a Fed official doing that in sharing your "knowledge" with overly excitable traders, just turn your belated resignation in now.

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April 5, 2017

We're going to try to tell a remarkable story that spans just over a year of stock market history with just one chart. Enjoy!

S&P 500 Index Value vs Trailing Year Dividends per Share, 30 September 2015 Through 4 April 2017, with Period of Order from 31 March 2016 through 4 April 2017

The current period of order in the S&P 500 has nearly fallen apart on three separate occasions thanks to nearly globe-rocking events in the year from 31 March 2016 through 4 April 2017, but it has managed to endure through its one-year anniversary.

That's not to say that it all won't end tomorrow (probably not), but at the very least, we can guarantee that there will be no mistaking when it does end!

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April 4, 2017

In March 2017, 76 U.S. firms collectively declared that they were cutting their dividends, marking an increase of 41 firms over the level recorded one month earlier and an increase of six over the number of dividend cuts that were reported in March 2016. For the first quarter of 2017 (2017-Q1), the number of dividend cuts totaled 158, which is a significant reduction over the 189 that were declared in the first quarter of 2016 (2016-Q1).

Going by just that measure, dividend cuts in the U.S. are sending a mixed picture of the relative health of the U.S. economy. Looking at the bigger picture, the following chart shows the number of dividend cuts announced in the U.S. each month from January 2004 through March 2017.

Monthly Number of Public U.S. Companies Announcing Dividend Cuts, 
January 2004 through March 2017

Digging deeper into the data by sampling the 39 dividend cuts by U.S. firms that were reported through either Seeking Alpha or by the Wall Street Journal, we obtained the following breakdown of economic distress by industrial sector.

Sampled Dividend Cuts in U.S. by Industrial Sector, 2017-Q1

Compared to what we observed in the fourth quarter of 2016 (2016-Q4), the number of negatively impacted industries has been cut in half, from 12 to 6.

However, the concentration of distress by industrial sector has significantly changed. While the oil and gas industry continued to account for the greatest number per the industries we track, the number of firms in this industry continued to decline, falling to 16 firms in 2017-Q1, down from 18 in 2016-Q4 and more remarkably, down from 45 in 2016-Q1.

There was a surge in the number of Real Estate Investment Trusts (REIT), and particularly mortgage REITs (mREIT) during the first three months of 2017, as these very interest-rate sensitive firms were negatively impacted by the Fed's rate hike that were announced in December 2016. We anticipate that any negative impact from the Fed's newest rate hike announced in March 2017 will become more evident over the next several months, if not fully by the end of 2017.

Combined with the closely related finance industry, dividend cuts in these two industries outnumbered those recorded in the U.S. oil & gas sector for the first time since oil prices began to crash in July 2014. The recovery and stabilization of oil prices after bottoming in February 2016 accounts for much of the year-over-year improvement for dividend cuts in the U.S.

The story for dividend increases is complex. The number of U.S. firms that declared that they would increase their cash dividend payments to their shareholders in March 2017 was 141, which is down from the 287 that were announced in February 2017 and slightly down from the 145 that were announced a year earlier in March 2016.

For the entire first quarter, 2017-Q1 saw 727 dividend increases, which is up from the 479 reported three months ago for 2016-Q4, but down from the 762 recorded in the year ago quarter of 2016-Q1.

Monthly Number of Public U.S. Companies Increasing or Decreasing Their Dividends, 
January 2004 through March 2017

While down from 2016-Q1, perhaps the more important trend to notice here is that the now four-years long decline in the number of dividend cuts appears to be decelerating. Mostly, this is due to the improvement in the U.S. oil and gas industry, where much of the bleeding from the collapse of global oil prices from mid-2014 through early 2016 has stopped. Just not enough as yet to contribute very much to the number of U.S. firms announcing dividend increases.

There were two other numbers of note for March 2017. First, the number of dividend declarations during the month reached 4,041, which is the fourth highest figure on record for data that goes back to January 2004. The next three higher number of dividend declarations in a single month were each recorded in December for the years 2016 (4,252), 2014 (4,286) and 2015 (4,422).

More distressing however was the number of dividend cuts for March 2017, which tied with April 2009 as the fourth worst-month ever for the number of declared dividend cuts in the U.S., lagging behind the Great Recession market-bottoming months of February 2009 (79) and March 2009 (81), and also the Great Dividend Raid of December 2012 (93).

Data Sources

Silverblatt, Howard. Standard & Poor. S&P Market Attributes Web File. [Excel Spreadsheet]. Accessed 3 April 2017.

Seeking Alpha Market Currents Dividend News. [Online Database]. Accessed 3 April 2017.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 3 April 2017.


April 3, 2017

The fifth and final week of March 2017 ended on an upnote for the S&P 500, at least compared to where it closed out the fourth week of March 2017, which we attribute to the week's positive news events for the U.S.' markets and economy.

We think that positive news directed investors to focus their forward-looking attention on 2017-Q2 as the most likely timing of the U.S. Federal Reserve's next hike in short term interest rates, thanks in good measure to multiple public statements by Fed officials indicating their willingness to do so throughout the week.

The following chart shows how the S&P 500 closed out the first quarter of 2017 against the backdrop of where our dividend futures-based model would place stock prices given how strongly focused they might be on any particular future quarter at any point of time throughout the quarter.

Alternative Futures - S&P 500 - 2017Q1 - Standard Model - Snapshot on 31 March 2017

Overall, our model performed well in anticipating where the S&P 500 would go for much of the quarter, even during the periods where we used our "connect-the-dots" method to account for the effect of the "echo" of past volatility on the accuracy of its projections, which arises as a direct result of the model's use of historic stock prices as the base reference points from which it project the alternative future trajectories that the S&P 500 based on how far into the future investors are looking ahead.

The exception to that however came on 21 March 2017, when investors suddenly shifted more of their attention toward 2017-Q3 as poor economic news led more investors to speculate that the timing of the next Fed rate hike might be pushed back to 2017-Q3.

The quarter ended with investors splitting their forward-looking focus between 2017-Q2 and 2017-Q3, where as of 31 March 2017, we would say that stock market investors are slightly favoring 2017-Q3 (55%) as the quarter in which the Fed would next hike U.S. interest rates.

Now, let's take our first look at what lies ahead for 2017-Q2:

Alternative Futures - S&P 500 - 2017Q2 - Standard Model - Snapshot on 31 March 2017

2017-Q2 looks significantly cleaner than 2017-Q1 with respect to the echo effect from past stock price volatility. However, the alternative trajectories projected by our model suggest an overall downtrend through the middle of the quarter, after which, the trajectories would be likely to flatten out through the end of the quarter.

However, what we see for those overall trends may be a moot observation. With such a large vertical distance between the alternative trajectories that the S&P 500 might take if investors were to more closely focus on either 2017-Q2 or 2017-Q3, conditions will be ripe for considerable volatility to take place in U.S. stock prices during the quarter. We think that volatility factor will have a lot more sway over the actual trajectory of stock prices during the quarter - at least until sufficient news comes out to more strongly prompt investors to focus their attention on just one future quarter.

That difference will make 2017-Q2 very different from either 2016-Q4 or 2017-Q1, where investors were often focused on either 2017-Q1 or 2017-Q2, and which had virtually no difference in the expectations for the change in the year-over-year growth rate if dividends per share between them, which proved to be a recipe for record low levels of volatility in U.S. stock prices. At least, all the way up until 21 March 2017, when investors first glanced toward 2017-Q3, finally breaking our weeks-long run for reasonably predicting the course of the S&P 500's actual trajectory.

It is possible that investors might focus their attention upon other future quarters such as 2017-Q4 and 2018-Q1, but we think that's unlikely until the Fed firmly commits to the timing of its next rate hikes.

So that's what we anticipate for 2017-Q2. If you're an investor who uses our analysis to inform your investing decisions, the question for you is how would you play these particularly chaotic dynamics that we anticipate for the quarter?

That question asked, here are the headlines that we considered to be significant for their market-moving potential during Week 5 of March 2017.

Monday, 27 March 2017
Tuesday, 28 March 2017
Wednesday, 29 March 2017
Thursday, 30 March 2017
Friday, 31 March 2017

Meanwhile, award-winning Barry Ritholtz categorizes the week's positives and negatives for the U.S. economy and markets at The Big Picture. (Congratulations to Barry and the Ritholtz Wealth Management team!)

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