Political Calculations
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August 31, 2017

For July 2017, our estimate of nominal U.S. median household income ticked upward to $58,340 from our previous estimate of $58,258 for June 2017. The following chart picks up on the format that Doug Short pioneered using the median household income estimates originated by Sentier Research, who terminated their coverage after reporting the data for May 2017.

Median Household Income in the 21st Century: Nominal and Real Estimates, January 2000 to July 2017

In terms of current U.S. dollars, the median household income in the U.S. has been slowly rising since January 2017. However, after adjusting the nominal income data to be in terms of inflation-adjusted, constant July 2017 U.S. dollars, we can see that the trend since January 2017 has been flat after having trended slowly downward from its most recent "real" peak at the beginning of 2016. Our estimates of median household income since January 2000 indicate that this measure of the well-being of the typical American household has not recovered to the peak levels recorded in either late 2000 with the peak of the Dot-Com Bubble or the peak that was reached during the Great Recession that coincided with the failures in the U.S. automotive and financial industries in the last quarter of 2008.

The methodology for the approach we've developed to generate these replacement estimates is described here. In generating the July 2017 update for the Median Household Income in the 21st Century chart above, we've used the Consumer Price Index for All Urban Consumers (CPI-U) to adjust the nominal median household income estimates for inflation.

Notes

The BEA revised its aggregate wage and salary personal income data for the period from January 2017 through June 2017. For June 2017's revised data, our methodology produces an estimate for median household income of $58,266, which is just $8 higher than our previous estimate for that month.

Data Sources

U.S. Bureau of Economic Analysis. Table 2.6. Personal Income and Its Disposition, Monthly, Personal Income and Outlays, Not Seasonally Adjusted, Monthly, Middle of Month. Population. [Online Database (via Federal Reserve Economic Data)]. Last Updated: 31 August 2017. Accessed: 31 August 2017.

U.S. Bureau of Economic Analysis. Table 2.6. Personal Income and Its Disposition, Monthly, Personal Income and Outlays, Not Seasonally Adjusted, Monthly, Middle of Month. Compensation of Employees, Received: Wage and Salary Disbursements. [Online Database (via Federal Reserve Economic Data)]. Last Updated: 31 August 2017. Accessed: 31 August 2017.

U.S. Bureau of Labor Statistics. Consumer Price Index for All Urban Consumers: All Items, Monthly, Not Seasonally Adjusted. [Online Database (via Federal Reserve Economic Data)]. Last Updated: 11 August 2017. Accessed: 31 August 2017.

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August 30, 2017

Median U.S. new home sale prices continued to trudge slightly upward last month, continuing on their slow, upward trajectory after flattening somewhat last month.

The following chart shows the latest updates in the relationship between the trailing twelve month average of median new home sale prices against the trailing twelve month average of median household income from December 2000 through a preliminary projection for July 2017.

U.S. Median New Home Sale Prices vs Median Household Income, Annual: 1999 - 2015 | Monthly: Dec-2000 to Jul-2017

Let's next zoom out to take in the panorama view of the data, this time going all the way back to 1967. The dashed red box in the upper right hand corner corresponds to the data shown in the first chart.

U.S. Median New Home Sale Prices vs Median Household Income, Annual: 1967 - 2015 | Monthly: Dec-2000 to Jul-2017

Next, let's consider the relative level of affordability of the median new home for a typical American household, which we simply show in the following chart as the ratio of median new home sale prices to median household incomes.

Ratio of Trailing Twelve Month Averages for Median New Home Sale Prices and Median Household Income, Annual: 1967 to 2015 | Monthly: December 2000 to July 2017

Going by the latter measure, the median price of a new home sold in the U.S. reached its peak level of unaffordability in January 2017, when they reached their record peak value of 5.45 times the trailing twelve month average of U.S. median household income.

Data Sources

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [PDF Document]. Accessed 30 August 2017.

U.S. Bureau of Economic Analysis. Table 2.6. Personal Income and Its Disposition, Monthly, Personal Income and Outlays, Not Seasonally Adjusted, Monthly, Middle of Month. Population. [Online Database (via Federal Reserve Economic Data)]. Last Updated: 1 August 2017. Accessed: 1 August 2017.

U.S. Bureau of Economic Analysis. Table 2.6. Personal Income and Its Disposition, Monthly, Personal Income and Outlays, Not Seasonally Adjusted, Monthly, Middle of Month. Compensation of Employees, Received: Wage and Salary Disbursements. [Online Database (via Federal Reserve Economic Data)]. Last Updated: 1 August 2017. Accessed: 1 August 2017.

Sentier Research. Household Income Trends: January 2000 through May 2017. [Excel Spreadsheet with Nominal Median Household Incomes for January 2000 through January 2013 courtesy of Doug Short]. [PDF Document]. Accessed 22 June 2017. [Note: We've converted all data to be in terms of current (nominal) U.S. dollars.]

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August 29, 2017

In case anyone ever wonders why so many cities and states are so willing to borrow billions of dollars to be paid back over decades with taxpayer dollars to build professional sports stadiums, the motive describing the thinking of public officials was captured earlier this year, in the city of Pittsburgh, as the city's professional hockey team was on its way to winning Lord Stanley's Cup in consecutive years, for the second time in the team's history. Pittsburgh Post-Gazette columnist Brian O'Neill got an estimate of how the city's government values the sport.

I called Paul Leger, the city's finance director, to find how much playoff loot the city collected in 2016. That was such a great year, with the Penguins playing 13 of a possible 15 home playoff games in April, May and June. They also won this big silver punch bowl kind of thing that looks way cool when you watch it go by in a parade, but that's not my point here.

Those playoff games brought in more than $1.8 million in amusement taxes, nearly $106,000 in the facility usage fee charged to the hockey players who don't live in the city, another $72,000-plus in payroll taxes and nearly $130,000 in parking taxes on all those fans' cars, according to Mr. Leger.

That comes to more than $2.1 million. Divided by the 13 games, it works out to about $163,000 per contest, and tickets haven't gotten any cheaper since.

That's the benefit of a championship season. Now, as good as the Pittsburgh Penguins have been in recent years, when they've been among the best teams of all time, they've only made it through to the championship finals in six seasons, where they've won the Stanley Cup five times.

They've been playing in the NHL since the league expanded in the 1967-68 season. In the 49 completed seasons since, the Pens have....

  • Missed the playoffs altogether 17 times (35%)
  • Were eliminated from the playoffs in the first round 13 times (25%)
  • Made it as far as the second round of the playoffs 10 times (20%)
  • Made it past the second round 8 times (16%)

Making it to the playoffs certainly appears to be nice for the city government's coffers, but the real question is how much of those tax collections came at the expense of other economic activity within the city and adjacent communities that would also have generated tax revenue? Did Pittsburgh's city government struggle badly to balance its books in the long years where the team didn't make it into the NHL playoffs? Will the city or Allegheny County have to raise their taxes if the Penguins go through the same kind of dry spell that characterized over one third of all the seasons they've played in their history?

Or do the Penguins' post-season playoff appearances simply shift where a portion of the economic activity that is occurring within Pittsburgh's metropolitan area is happening? Say from the suburbs down to the neighborhoods surrounding the government-financed $321 million PPG Paints Arena.

Don't get us wrong - business in that part of town can be really good when the Penguins make it into the post-season.

It's not just city hall that makes a windfall from playoff hockey. The Carlton restaurant opened in BNY Mellon Center in 1984, Mario Lemieux's rookie season, and ever since its fortunes have risen and fallen with the Penguins.

Kevin Joyce, The Carlton's owner, will tell you he’s a six-minute walk from the arena, downhill both ways. Really, he says, there's a way to do it and he'll be happy to explain the to-and-from routes to you. He also has a limo shuttle for customers who don’t care to hear about that.

"It means so much," he said of a long post-season run. "I fill my restaurant for every home playoff game. I do big numbers."

All three dining rooms and the lounge fill, and he more than doubles his staff from 14 to 31. White tablecloth restaurants such as his generally don’t do as well in the summer months, so it's ironic that a hockey team can make or break his June.

"And don’t forget the drink tax," Mr. Joyce said.

Mr. Joyce hates the 7 percent Allegheny County tax on alcoholic beverages. If the Penguins go all the way this year, maybe I'll call the county to see if anyone can tally the uptick in the drink tax on hockey nights in Pittsburgh. That there is one, no one should doubt.

We can't speak for specific hockey nights, but we can pull the alcoholic beverage tax revenue date from the Allegheny County Controller's web site.

We looked at the last four years, where the Penguins played in each post-season, but only through the second round in 2014 (playing into May 2014), the first round in 2015 (only playing into April 2015), and into the Stanley Cup finals in both 2016 and 2017 (playing into June in both years).

Following the logic that revenues from the county's alcoholic beverage tax are higher in the months where the Penguins make it farther into the post-season, which typically covers the period from April through June each year, we would predict that the tax collections during these months would see the following patterns:

  • Alcohol tax collection shown for May in each year from 2014 through 2017 would be about the same as each other.
  • Alcohol taxes reported for the month of June in the years 2014, 2016 and 2017 would be about the same, but June 2015 would fall short (since the Penguins were eliminated earlier that year).

  • The county's alcohol tax revenues in July 2016 and 2017 would exceed the collections in July 2014 and 2015. (Note: At this writing the data for July 2017 has not yet been reported, so we can only consider 2016).


The chart below reveals what we found for the monthly alcohol tax collections for the four years 2014 through 2017.

Year Over Year Comparison Allegheny County Alcoholic Beverage Tax Collections by Month, Fiscal Years 2014 - 2017 (YTD), Not Adjusted for Inflation [Current U.S. Dollars]

The chart above shows nominal tax revenue data, as reported by the county controller's office in each year, which lags one month behind when the alcoholic beverage tax is assessed (for instance, taxes assessed in April would be collected and reported in May). If you want to see the data to be adjusted for inflation, we can accommodate you, but it's not significantly different for the months in question.

Testing our hypothesis for the reported alcohol beverage tax revenue figures, we find that...

  • For May, three of the years (2014, 2016 and 2017) are about the same as each other, but 2015 falls surprisingly short. We had hypothesized that the values would be similar for all years for this month.
  • Looking at June, we would have expected the data for 2015 to fall short, but we see that 2014 did instead, while 2015, a year where the Penguins last game was in April, had alcoholic beverage tax collections that are directly comparable to what the county collected during the Penguins' Stanley Cup winning years.
  • For July, we see that both 2014 and 2015's county alcohol tax revenues are similar and fall below 2016's Stanley Cup year, which is in line with what we would have expected, and is the only month that outcome is the case.

What these results tell us is that other factors likely have a greater influence over the county's alcoholic beverage tax revenues than the Pittsburgh Penguins post-season play, where we suspect that the relative strength of the local economy has a stronger influence. Determining how much influence each factor might have would require much more detailed data, which may not be available. Given the data we have available today, this analysis is about as far as we can take it.

Notes: The title of the version of this article that appears on our site, "The More the Penguins Skate, the More the City Takes", is borrowed from the headline of the Pittsburgh Post-Gazette article by Brian O'Neill that inspired this analysis!

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August 28, 2017

The fourth week of August 2017 provided an almost textbook example of how stock prices behave when investor expectations are closely aligned with the signals being sent by the economy's major players.

Specifically, we're referring to what appears to be a very strong focus by investors on the distant future quarter of 2018-Q2 in setting the week's stock prices. In the latest update to our chart showing the alternate trajectories that the S&P 500 would be most likely to take when investors are focused on different points of time in the future, we find that the trajectory associated with 2018-Q2 most closely corresponds with the actual trajectory that the index took throughout Week 4 of August 2017.

Alternative Futures - S&P 500 - 2017Q3 - Standard Model - Snapshot on 25 August 2017

With the Federal Reserve's annual Jackson Hole vacation/meeting going on during this week, the statements being issued by Fed officials would draw close attention by investors looking for any potential changes for what to expect in the central bank's monetary policies in upcoming quarters, where the main messages coming out from the week is to expect no major changes until sometime in the first half of 2018, and most likely, in 2018-Q2.

That assessment is mirrored in the probability of changes in the Federal Funds Rate being announced at various points of time in the future, as given by the CME Group's FedWatch tool. The table below summarizes the snapshot of what those probabilities are as of the close of trading on Friday, 25 August 2017.

Probabilities for Target Federal Funds Rate Falling Within Indicated Basis Point Range at Selected Upcoming Fed Meeting Dates
FOMC Meeting Date 100-125 bps 125-150 bps 150-175 bps 175-200 bps 200-225 bps
20-Sep-2017 (2017-Q3) 98.6% 1.4% 0.0% 0.0% 0.0%
13-Dec-2017 (2017-Q4) 58.0% 39.9% 2.1% 0.0% 0.0%
21-Mar-2018 (2018-Q1) 48.2% 43.0% 8.5% 0.4% 0.0%
13-Jun-2018 (2018-Q2) 39.8% 43.9% 14.5% 1.8% 0.1%
Current target range is 100-125 bps.
("bps" = Basis Points. 100 basis points corresponds to an interest rate of 1.00%.)
Shaded rows indicate greater than 50% probability of change from current target range.
Boldface font indicates target range with highest expected probability.
Data in table taken from CME Group FedWatch Tool as of 25 August 2017.

For additional context, the expectation that the Fed's next change in short term U.S. interest rates won't happen until 2018 is also strongly suggested in the week's market-moving news headlines.

Monday, 21 August 2017
Tuesday, 22 August 2017
Wednesday, 23 August 2017
Thursday, 24 August 2017
Friday, 25 August 2017

At The Big Picture, Barry Ritholtz summarizes the positives and negatives for the U.S. economy and markets in Week 4 of August 2017.

As new information becomes available, investor expectations for the future will shift accordingly, and so will stock prices. It's the random part of the nature for how stock prices work.

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August 25, 2017

Did the Babylonians develop tables for doing the math of trigonometry centuries before Hipparchus made the kinds of tables that two millennia of trig students might recognize?

It's an intriguing possibility that's currently making the rounds of science, math and archaeological news sites. The following video features the University of New South Wales' Daniel Mansfield making the argument that an ancient clay tablet that was already notable may be more significant than anyone previously realized.

At this point, it's not a slam dunk that the new interpretation of the inscriptions on the clay tablet represents the Babylonian equivalent of trigonometric tables.

If the new interpretation is right, P322 would not only contain the earliest evidence of trigonometry, but it would also represent an exact form of the mathematical discipline, rather than the approximations that estimated numerical values for sines and cosines provide, notes Mathieu Ossendrijver, a historian of ancient science at Humboldt University in Berlin. The table, he says, contains exact values of the sides for a range of right triangles. That means that—as for modern trigonometric tables—someone using the known ratio of two sides can use information in the tablet to find the ratios of the two other sides.

What's still lacking is proof that the Babylonians did in fact use this table, or others like it, for solving problems in the manner suggested in the new paper, Ossendrijver says. And science historian Jöran Friberg, retired from the Chalmers University of Technology in Sweden, blasts the idea. The Babylonians "knew NOTHING about ratios of sides!" he wrote in an email to Science. He maintains that P322 is "a table of parameters needed for the composition of school texts and, [only] incidentally, a table of right triangles with whole numbers as sides." But Mansfield and Wildberger contend that the Babylonians, expert surveyors, could have used their tables to construct palaces, temples, and canals.

Mathematical historian Christine Proust of the French National Center for Scientific Research in Paris, an expert on the tablet, calls the team’s hypothesis "a very seductive idea." But she points out that no known Babylonian texts suggest that the tablet was used to solve or understand right triangles. The hypothesis is "mathematically robust, but for the time being, it is highly speculative," she says. A thorough search of other Babylonian mathematical tablets may yet prove their hypothesis, Ossendrijver says. "But that is really an open question at the moment."

Indeed it is, but then, that's how science is supposed to work!

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August 24, 2017

There really isn't anything much more boring than insurance, except perhaps discussions about insurance.

Reinsurance - Created by Political Calculations using wordclouds.com from http://chirblog.org/whats-difference-reinsurance-high-risk-pool-two-approaches-insuring-pre-existing-conditions/

So that's why we're going to go meta and crank the knob of boringness all the way to 11 and discuss insurance for insurers, which is better known as reinsurance!

Reinsurance is a tool that insurance companies use to cover the cost of big payouts to their customers if they should experience an unexpectedly large number of claims or perhaps just some very large claims. Or both, as can often occur with a large scale natural disaster, such as a hurricane or an earthquake, where they can use their reinsurance policy to come up with the large sums of money that they need to pay out on short notice to make their customers whole.

It's a deadly dull business, but it's also a big business - and in the case of one of America's biggest billionaires, their main business.

We're thinking about reinsurance today because of the growing death spiral dynamic in Obamacare, where the original defects written into the law are contributing to adverse selection, where rising premiums are driving healthy Americans out of the market while the people who actually buy the Affordable Care Act's subsidized health insurance are the ones who need and use it more because they're sicker.

That dynamic is leading health insurers to adopt strategies that either boost their premiums to cover the cost of their sicker-than-average population of customers or to develop low quality health insurance coverage that is specifically designed to be undesirable to such customers as a way to screen them out in the market.

Part of the dilemma here is that the Affordable Care Act requires health insurers to sell health insurance to everyone, regardless of whether they have any costly pre-existing conditions, and then limits how much they can charge. That combination, combined with the death spiral dynamic, is a major reason why health insurers are increasingly leaving the Affordable Care Act's exchanges, where the cost of doing business is often greater than their revenue from the business.

This is where the concept of reinsurance might provide a solution to the problem of costly customer pools for health insurers. What if every customer was initially covered by health insurance policies as if they had no pre-existing condition, but which would make full payouts to the patient so that they could cover the actuarial lifetime cost of having a condition after being diagnosed? Including if they had costly and chronic conditions, which could involve big payouts for the insurers.

The kind of payouts that would be provided through reinsurance policies taken out by the health insurers themselves. Because the money is paid out to the policy holding customer, say into their Health Savings Account, both they and the health insurer would effectively never have to bother with their having a pre-existing condition again, because it has already been accounted for. The same would be true if they were to change health insurers, where the new health insurer could afford to disregard the costs of their pre-existing condition because the customer's previous insurer had already covered it.

Believe it or not, one of the advantages of having the Obamacare death spiral underway is that the people still seeking Affordable Care Act health insurance coverage would constitute a high-risk pool - one that can be separated from the main bulk of the health insurance market making it possible for health insurers to offer lower cost insurance coverage to healthier Americans who were driven out of Obamacare because of skyrocketing premiums.

It certainly would be better than the situation we have today, where Obamacare premiums and costs to U.S. taxpayers can only rise because of the Affordable Care Act's inherent death spiral problem. We would expect it to be a major part of any legislation that might be introduced to repair Obamacare's multitude of defects.

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August 23, 2017

In California, age plays a big factor in how one might see the health of the state's job market, where adults see very different prospects for collecting paychecks than the state's teenagers do.

For example, the current state of the state's job market for adults Age 20 and older might be described as "California Stalling".

California Non-Teen (Age 20 and Older) Labor Force and Total Employed, Trailing Twelve Month Average, January 2004 - July 2017

While for teens from Age 16 through 19, the best way to describe the state of the job market in 2017 is "California Falling".

California Teen (Age 16-19) Labor Force and Total Employed, Trailing Twelve Month Average, January 2004 - July 2017

For a state that has been boasting about possibly having surpassed the United Kingdom to become the fifth largest economy in the world as recently as a month ago, its economy sure is showing signs of increasing strain.

References

State of California Economic Development Department. California Demographic Labor Force Summary Tables, July 2017 (and previous editions). [PDF Document]. Accessed 22 August 2017.

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August 22, 2017

Since the end of the first quarter of 2016, the trajectory of the S&P 500 with respect to its trailing year dividends per share has mostly behaved in an orderly manner.

S&P 500 Index Value vs Trailing Year Dividends per Share, 30 September 2015 Through 21 August 2017

Since the current period of relative order began on 31 March 2016, we've had two episodes where we've seen statistical outliers in the data, which coincided with the 27 June 2016 outcome of the Brexit vote in the United Kingdom and the 4 November 2016 "pre-election jitters" that the market had when it was widely believed that Hillary Clinton would become the U.S. President.

Aside from those outlier episodes, the variation of stock prices about its mean trend curve with respect to trailing year dividends per share has largely followed a normal distribution, albeit with much less of a genuinely random walk than would be expected for such a relationship.

That relative order however now appears to be at risk of breaking down, where a downward move of 20 points, or rather, a drop of less than 1% of the current value of the S&P 500, would be all it would take for the current trend to either break down or register a new outlier episode.

Should order break down, it would mark a clear sell signal for investors, although one that would likely pale in comparison to the ultimate sell signal that this kind of analytical method would have generated if it had existed during the most significant event in U.S. stock market history.

On the other hand, if stock prices should only drop below the lower outer dashed red curve shown in the chart above for a short period of time, such a short decline could actually represent a buy signal for investors.

Which signal is being sent is something that investors would have to bet upon based upon their best guesses, where only the passage of time can definitively answer which scenario will be the one that plays out.

That does lead to some interesting questions. How would you as an investor place your bets to take advantage of this kind of information? Would you bet the house that such a move is only an outlier and that the trend will resume? And if reverting to the mean is not in the cards, how would you manage your investments to either maximize your returns or to minimize your losses to account for the potential of a sustained breakdown of order in the market?

Update 9:38 AM EDT: A partial answer, at least this morning, via Reuters... Wall Street opens higher on bargain hunting.

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August 21, 2017

For the S&P 500, the third week of August 2017 looked an awful lot like the second week of the month.

Alternative Futures - S&P 500 - 2017Q3 - Standard Model - Snapshot on 18 August 2017

Specifically, if you look at the period from the close of trading on Monday to the close of trading on Friday, the S&P 500 almost repeated the same trajectory that it did a week earlier, as it moved sideways from Monday through Wednesday, dropped 1.5% on Thursday, then moved sideways within a narrow band on Friday.

That kind of pattern raises an interesting question: Is the current period of relative order in the market, which has been in place since 31 March 2016, now breaking down?

We'll tackle that question at greater depth tomorrow, however the short answer to it is "potentially", where the answer may very well change to "yes" if the S&P 500 should drop by another 17-18 points below its Friday, 18 August 2017 close sometime during this upcoming week.

Now that we've shaken you up a bit, let's look backwards to understand the context that applied to the U.S. stock market in Week 3 of August 2017.

Monday, 14 August 2017
Tuesday, 15 August 2017
Wednesday, 16 August 2017
Thursday, 17 August 2017
Friday, 18 August 2017

For more context of the positives and negatives seen in the U.S. economy and markets in Week 3 of August 2017, Barry Ritholtz has you covered!

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August 18, 2017

As it might be seen in 3D... from space! (HT: TimeandDate):


If you want to see how the Monday, 21 August 2017 eclipse might look from Earth, and more specifically, from any zip code in the United States, Time has an app for that! (HT: Mark Perry)

Update 26 August 2017: NASA has video of the Moon's shadow crossing across the Northern Hemisphere from multiple vantage points in space!

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August 17, 2017

Now that we're just past the halfway point for the third quarter of 2017, let's take a quick look to see how the pace of dividend cuts in 2017-Q3 compares with the year-ago quarter of 2016-Q3. The following chart shows the data we compiled for both periods from Seeking Alpha's Dividend News resource and the Wall Street Journal's Dividend Declarations database.

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

Compared to the third quarter of 2016, the pace of dividend cuts in the third quarter of 2017 are slightly ahead of the pace set a year ago, with the current level being consistent with recessionary conditions being present within the U.S. economy.

Looking to see which companies among the 26 that have announced dividend cuts at this point of 2017-Q3 can tell us where those recessionary conditions might be found, where we find a strong concentration in two industries of the U.S. economy: the oil and gas production sector with 19, and the financial industry with 6, although most of these are firms with significant real estate holdings, such as Real Estate Investment Trusts (REITs).

If you're doing the math at home, the dividend cuts announced in those two industries add up to 25. The remaining firm in our sample is gun manufacturer Sturm Ruger (NYSE: RGR), which reflects the decline in U.S. gun sales since President Obama's exit from office, which has also negatively impacted sporting goods retailers.

Considering the elephant in the room however, we can identify the decline oil prices during 2017 as the primary contributing factor to the increase in distress in the U.S. oil and gas industry, where sustained crude oil prices below $50 per barrel have been putting that industry's margins under pressure.


As for the REITs, the Federal Reserve's series of interest rate increases since November 2016 would appear to be pinching the profit margins in that sector of the economy, although the exposure to distress appears limited at this time.

Finally, comparing the pace of dividend cuts in 2017-Q3 to what we observed during the first two quarters of 2017, we find that the current level of announced dividend cuts is about the same at this point of time as what we saw in both 2017-Q1 and 2017-Q2, although it had been slightly faster during the earlier part of the quarter.

Data Sources

Seeking Alpha Market Currents. Filtered for Dividends. [Online Database]. Accessed 16 August 2017.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 16 August 2017.

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August 16, 2017

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500 at approximately the midpoint of the current quarter, shortly after most U.S. firms have announced their previous quarter's earnings. Today's snapshot of the trailing year earnings per share for the S&P 500 confirms that the stock market's earnings have continued to rebound off their 2016-Q3 bottom, where they have now finally surpassed their pre-earnings recession levels.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2014-2019, Snapshot on 10 August 2017

The recovery in the S&P 500's earnings has been a significant factor in boosting the value of the S&P 500 since the index bottomed at 1829.08 on 12 February 2017. The index has since gone on to set its all time record closing value of 2477.83 just three weeks ago (26 July 2017).

As a general rule, the picture of the S&P 500's forecast earnings per share provided by Standard and Poor snapped at any give time tends to be quite optimistic, where the earnings growth indicated by their future trajectory will most likely not be as robust as projected.

Data Source

Silverblatt, Howard. S&P Indices Market Attribute Series. S&P 500 Monthly Performance Data. S&P 500 Earnings and Estimate Report. [Excel Spreadsheet]. Last Updated 10 August 2017. Accessed 13 August 2017.

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August 15, 2017
Pennsylvania Supreme Court Room - Source: http://www.bop.pa.gov/PublishingImages/supreme-court-harrisburg-pennsylvania-usa.jpg

In Philadelphia, the city's controversial soda tax has reached the state of Pennsylvania's Supreme Court after being upheld in two lower state courts, but a new legal threat to the city's highly regressive tax may be gaining traction in an unlikely place: Chicago.

Like Philadelphia, the leaders of the city of Chicago have sought to impose a tax on the distribution of naturally and artificially-sweetened beverages within the city, regardless of their calorie content, which means that the tax applies to both regular and diet versions of sweetened beverages that are sold by local retailers, with the dedicated purpose of generating tax revenue for each city's coffers. While some soda tax supporters have claimed that imposing such a tax might produce public health benefits through reducing the consumption of calorie-laden sweetened beverages in favor of "healthier" drinks, and thus reducing the incidence of obesity-related conditions that are believed to be affected by soft drink consumption, the way that Philadelphia and Chicago have structured their sweetened beverage taxes to apply on the sales of both calorie-laden drinks and their closest low-and-no-calorie substitutes ensures that any such benefits will be minimal at best.

In addition, an early study has indicated that no statistically significant change in average individual caloric intake has been realized in Berkeley, the city that pioneered local soda taxes in the United States, which calls the claim of achievable health benefits through taxation into question, although additional studies will be needed to quantify what public health benefit, if any, might be realized from targeting taxes to this class of beverages and to determine if it in any way counteracts their additional economic negatives.

That discussion aside for now, Chicago's attempt to implement its soda tax has repeatedly run afoul of both Illinois' and federal law, for many of the same issues that have been raised in the challenge of the legality of Philadelphia's soda tax.

The rollout of a soda tax in Cook County, Illinois, has been a complete fiasco.

Much to the frustration of businesses and taxpayers in a county that includes Chicago, officials have repeatedly vacillated on applying the soda tax to purchases made with food stamps.

They haven't been able to decide how the tax will be administered or determine how much revenue the tax will generate....

County officials, however, had initially planned to tax distributors, who would pass along the cost in the final sale price of a sweetened beverage. Last Thursday they cancelled that plan when the Cook County Revenue Department pointed out the sales price would still be subject to a sales tax.

A tax on a tax is illegal in Illinois.

A tax on a tax is also illegal in Pennsylvania, which then leads to the legal question of why both courts and public officials in Illinois are making very different legal assessments of the legality of Chicago's soda tax that their peers in Pennsylvania making decisions about the legality of Philadelphia's beverage tax are not. The following excerpts following the first court decision on the legality of Philadelphia's soda tax indicates some of the judicial legal reasoning being applied in Pennsylvania.

Philadelphia Court of Commons Pleas Judge Gary S. Glazer dismissed a lawsuit the American Beverage Association and local retailers and distributors filed against the City of Philadelphia Monday. The soda tax levies a 1.5 cent per ounce tax on distributors of sodas, diet sodas, juices and other sugar-sweetened beverages and is being used to fund pre-K programs, the renovation of recreation centers and to fill in holes in the city's budget....

The ABA and others argued the tax was unconstitutional mostly for two reasons. First that it violated the state's uniformity clause by favoring distributors that sell high-priced lower-volume beverages (a $5 Starbucks drink) will owe less than those who sell low-priced higher-volume beverages (a two-liter bottle of soda). Glazer compared the soda tax to taxes on alcohol and fuel, which can also lead to an unequal tax burden depending on how much they are sold for.

A second argument stated Pennsylvania already taxed soft drinks 6 percent as part of a different tax and that this tax would illegally duplicate the state tax. Glazer wrote Philly's soda tax was not duplicative of the Pennsylvania Beverage Tax because Philly's tax is levied on the distributor and that it was irrelevant that the tax would likely get passed on to consumers, therefore taxing the same subjects — those who purchase beverages — as the state tax.

An argument that SNAP benefits would be used to pay a sales tax was also thrown out by Glazer for the same reason: because the tax is collected on distributors.

The difference in legal outcomes for these cases may be attributed to whether the courts are willing to recognize the economic concept of tax incidence, which recognizes the difference between who is required by legal statute to pay a tax and who is really bearing the cost of paying the tax, where the actual economic burden of paying the tax is shifted in full or in part from one party to another.

What you can see in the Philadelphia court's decision is the deliberate dismissal of the concept of tax incidence, where the legality of its soda tax depends almost entirely upon the arbitrary disregard of that real world factor.

That's not the case in Chicago, where authorities have confirmed that taxing the distributors of sweetened beverages results in part or all of the tax being passed through to retail customers through the prices they pay, which is then subject to sales taxes, rendering that approach to taxing sweetened beverages to be illegal under that state's constitutional prohibition against imposing taxes on taxes.

The difference extends also to the way that recipients of SNAP (food stamp) benefits are now being subjected to Chicago's soda tax, where the city's attempted workaround to impose the tax without being duplicative appears to be in violation of federal policy.

The U.S. Dept. of Agriculture has warned Illinois government if Cook County continues to collect sweetened beverage taxes from food stamp recipients, it could lose millions in funding.

USDA is taking a hard line when assessing what constitutes a violation.

Say you're a SNAP client, you buy a soda, you are charged the tax but you get an immediate refund. You may think no harm, no foul, but Illinois Retail Merchants Association Vice President and General Counsel Tanya Triche Dawood disagrees.

"It is absolutely a violation of our (Illinois) SNAP contract," she tells WBBM's Bob Roberts. "The USDA has been clear about that since Day 1. We've been clear about it since Day 1."

The rule in question forbids food stamp clients from being charged any form of tax on the sweetened beverages. The county has offered merchants the immediate refund as a workaround, but Dawood said the prohibition is absolute and not curable by an immediate refund.

The federal rules for exempting SNAP benefits from state and local taxes applies to all goods eligible to be purchased using the charitable welfare benefits provided by the U.S. government. It does not just apply to sweetened beverages.

Where the situation with Chicago's soda tax creates legal jeopardy for Philadelphia's legal tax lies in the almost opposite ways in which public officials and judges in each jurisdiction are assessing the legality of the tax, which would appear to be a direct outcome of one jurisdiction's arbitrary dismissal of the economic concept of tax incidence and the other jurisdiction's acceptance of its legal applicability. While Pennsylvania's seven Supreme Court judges have yet to weigh in on Philadelphia's soda tax at this writing, should they allow the tax to continue, the wildly different judicial assessments and implementation of similar taxes and provision of welfare benefits in different states will likely result in the legality of state and local soda taxes being decided in federal courts.

Seven Angry Jurists: Do any of these Pennsylvania Supreme Court judges believe in the concept of tax incidence?

The ball, as they say, is now in the hands of Pennsylvania's Supreme Court.

Previously on Political Calculations

Presented in chronological order....

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August 14, 2017

The U.S. stock market has been on what we've described as a boring trend over the last several weeks, even as it has hovered near records highs.

That chain of boredom was broken with the S&P 500 in Week 2 of August 2017, when stock prices hovered at its high level just a few days longer than our dividend futures-based model suggested it could, where it found itself in a scenario similar to that of Wile E Coyote after having run off the edge of a desert cliff, hanging in open space until he looks down....

Metaphorically speaking, and from a behavioral finance standpoint, that's pretty much exactly what happened on Thursday, 10 August 2017.

Alternative Futures - S&P 500 - 2017Q3 - Standard Model - Snapshot on 11 August 2017

Fortunately, stock prices didn't have far to fall. We can however confirm that investors would appear to have locked their focus upon the distant future quarter of 2018-Q2, which matches not only what our dividend futures model is telling us, it also matches what the CME Group's FedWatch tool is telling us. Mike Shedlock has snapshots of what the FedWatch tool is communicating, but here is the short summary of the probabilities for what investors are expecting for the timing of the Fed's next change in short term U.S. interest rates after last week.

  • 2017-Q3 (20 September 2017)
    • Decrease to 75-100 bps: 4.1%
    • Unchanged at 100-125 bps: 95.9%
  • 2017-Q4 (13 December 2017)
    • Decrease to 75-100 bps: 2.6%
    • Unchanged at 100-125 bps: 61.5%
    • Increase to 125-150 bps: 35.2%
    • Increase to 150-175 bps: 0.7%
  • 2018-Q1 (21 March 2018)
    • Decrease to 75-100 bps: 2.2%
    • Unchanged at 100-125 bps: 52.7%
    • Increase to 125-150 bps: 39.1%
    • Increase to 150-175 bps: 5.9%
    • Increase to 175-200 bps: 0.2%
  • 2018-Q2 (13 June 2018) (Now Most Likely Quarter for Change in Federal Funds Rate)
    • Decrease to 75-100 bps: 1.7%
    • Unchanged at 100-125 bps: 41.3%
    • Increase to 125-150 bps: 41.8%
    • Increase to 150-175 bps: 13.5%
    • Increase to 175-200 bps: 1.7%
    • Increase to 200-225 bps: 0.1%

2018-Q2 is when the combined odds of the Fed hiking its Federal Funds Rate above its current range of 100-125 basis points (1.00 to 1.25%) finally exceeds 50%, where that action is not expected until the Fed's 13 June 2018 meeting.

The headlines for the week in the markets had a good amount of noise in them, particularly related to North Korea, which really says more about the media's interests than what's motivating the markets.

Monday, 7 August 2017
Tuesday, 8 August 2017
Wednesday, 9 August 2017
Thursday, 10 August 2017
Friday, 11 August 2017

Elsewhere, Barry Ritholtz summarized the positives and negatives for the U.S. economy and markets for the week that was.

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August 11, 2017

Can you tell that we're getting closer to the first day of school?

Real analysis is way realer than I expected.

Via XKCD: Existence Proof

Wait until they get past composition of functions and enter into the realm of convolution!

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August 10, 2017

Let's analyze some of the news coming out from Philadelphia regarding its poorly performing tax that the city's leaders imposed upon naturally and artificially sweetened beverages distributed to be sold by retailers in the city.

The Current Challenge to the Soda Tax in Court

Source: ZeroHedge

The City of Philadelphia is facing lawsuits from beverage manufacturers and distributors regarding the constitutionality of its Sweetened Beverage Tax (SBT), one of which has already reached the state of Pennsylvania's highest court. The plaintiff in the case, the American Beverage Association (ABA), has argued that the tax isn't legal under the state's constitution, which prohibits municipalities from applying local taxes on top of items that have already been taxed at the state level.

Two lower courts have ruled in favor of the City of Philadelphia already, finding that since the tax is assessed against beverage distributors rather than beverage consumers, the tax is not duplicative, which would be directly prohibited by Pennsylvania's state constitution.

The judicial findings in these two lower court decisions are largely based on the letter of the law, by which we mean that that they have not considered the real world issue of tax incidence, where the people and businesses who might be mandated by legal statutes to pay a tax are not necessarily the ones whose money is being collected by the government. Most often, they will pass as much of the cost of the tax as they can onto their customers through increasing the prices of the goods and services they might sell to them, so that in effect, their customers become the ones who are really paying the cost of the tax.

For the Philadelphia Beverage Tax (PBT), we've found examples where the city's beverage consumers are paying anywhere from two-thirds to nearly all of the the city's new soda tax, where much of the difference from one store to the next might really be attributable to the extent that the retailers or beverage manufacturers are willing to subsidize the cost of the tax to consumers through their advertising and marketing budgets to generate discounted sale prices.

Some retailers have made it clear on their receipts how much of the cost of the beverages they sell is being passed through to their customers (Image Credit: ZeroHedge). As we're about to see, the higher costs being passed on to them are, particularly for small retailers, having a negative effect on their businesses.

A Family-Owned Bakery Goes Under

In Philadelphia, the Orlando family has owned and operated a bakery since 1948 in the Overbrook neighborhood at the intersection of Lebanon Ave. and Kenmore Rd. Sunday, 6 August 2017 was its last day in business, and the last day of work for its five employees.

Over the years, it survived every economic challenge that came its way, but one.

"The soda tax was the kill shot," said Anthony Voci Jr., a grandson of Christopher Columbus "Chick" Orlando and now a lawyer in Philadelphia.

Chick Orlando started in the baking business with his father in the 1930s with a shop in West Philadelphia, and ran several shops in the city and Delaware County until he was killed by a drunken driver while making a delivery shortly before Christmas 1971. His sons David and Robert took over Orlando's.

The business' last owner, Tyler Orlando, 32, also a grandson, said business was off 60 percent since the soda tax went into effect Jan. 1 – a difficult situation for a low-margin business. Orlando said his customers simply crossed the nearby city line to avoid the higher prices for juices, milk and other sweetened drinks typically purchased with doughnuts and pastries. "I'd see my customers in there," he said. "I don't blame them."

The actions of consumers to avoid the burden imposed by the true tax incidence of Philadelphia's soda tax is not surprising. It is human nature to want to get the most for one's money, so we should expect that people will change their long-established shopping patterns to avoid having to pay an outlandish increase in prices, when they can easily buy exactly the same product just a little way down the road for a lot less.

Nor is it surprising that Philadelphia is experiencing the rise of an organized black market that is thriving on exploiting the differences in the prices for soft drinks in Philadelphia and its surrounding suburbs.

A Boom in Bootlegging

When we've talked about bootlegging in the past, it has typically been in the context of cigarette and other kinds of so-called "sin taxes" that are supposed to produce positive benefits by reducing consumption. But that only matters to the extent that consumption is actually reduced, where the business of bootlegging both allows the "undesired" consumption to remain higher than it might otherwise be while it also damages the expected tax collections that would be realized if the sin tax was achieving its desired results.

On 23 June 2017, Danny Grace, the Secretary-Treasurer of the Teamsters Local 830 union, testified before a Pennsylvania Senate committee on the direct negative impact of Philadelphia's soda tax on the members of the union, where he counts 155 lost jobs (10 more than we tallied back in May 2017). In doing so, he also shown a light on a negative externality being experienced by members of the union because of the increased profits for bootleggers whose profits are made possible because of the tax and their ability to avoid paying it, and also the impact to the city's poorest residents because of the soda tax' highly regressive nature (emphasis ours).

The definition of a regressive tax is one that disproportionately affects the very people who can least afford to pay it. The city's poor don't have the financial means to absorb a tax that has more than doubled the costs of their favorite sodas, juices, iced teas, sports drinks, flavored milks and countless other beverages. The tax has been applied to virtually every beverage sold in the city. The working poor also don’t have the ability to drive to the nearby suburbs or South Jersey to buy their beverages and avoid the outrageous tax, like many other city residents are doing. This situation – which the Teamsters predicted – has forced many low income Philadelphians to forego sweetened drinks altogether or purchase them through the many illegal black market operations that have sprung up across the city. We have seen evidence of people purchasing hundreds of cases of sweetened drinks in nearby suburban areas such as Upper Darby in Delaware County, loading them in unmarked vans, and driving them into Philadelphia to be sold out of nondescript warehouses or right out of the vans.

The Kenney administration's stated assumption that lost sweetened beverage sales would simply be filled in with increased sales of water and other non-sweetened drinks has been proven false. Consumers don't behave that way. Consumers can make the choice today to abandon sweetened beverages for water and other non-sweetened drinks, but they haven't done so nor will they.

As a direct result of the beverage tax, there has been a huge drop-off in sales of sweetened beverages in the city, just as we predicted. The damage the tax has already done to our union has been significant. As of this moment, 155 of our union brothers and sisters have been laid-off - 80 members at Pepsi, 40 at Coke and 35 at Canada Dry. And these are family-sustaining jobs we’re talking about.

The beverage tax has caused a disastrous domino effect within Teamsters Local 830. The tax has resulted in drastically fewer products being sold in the city, which means less trucks needed for deliveries, which means less Teamsters drivers needed. Fewer delivery trucks on the roads means less need for Teamsters' mechanics to maintain and repair the trucks. Less products being sold also means less need for Teamsters' production and warehouse personnel. And decreased sales of beverages means less need for Teamsters' merchandisers in corner convenience stores and supermarkets.

That's more practical insight into the nature of externalities than one may ever find in the lecture halls of today's universities. We will point out that when Grace refers to a "huge drop-off in sales of sweetened beverages in the city", he's referring to the sales of sweetened beverages to which Philadelphia's beverage tax has been applied, where bootlegging operations and the actions of Philadelphia's consumers to shift their purchases of these products outside of the city's limits to legally avoid having to pay for the highly taxed products are sustaining a far higher level of consumption within the city than the amount of taxed sales would suggest.

Additional Notes

  1. There are several acronyms that we've used in this post that apply to Philadelphia's soda tax, which are really all referring to the same thing, but which appear in different reports. These acronyms include PBT (Philadelphia Beverage Tax), SBT (Sweetened Beverage Tax, Sugary Beverage Tax).
  2. There's an as-yet little noticed legal argument that might severely dent the administration of Philadelphia's soda tax, which could effectively crash both its revenues and the city's plans for what it would do with that money if it proves to have any traction. We'll explore that idea sometime next week, but will be drawing on the information presented here!

Previously on Political Calculations

Presented in chronological order....

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