Political Calculations
Unexpectedly Intriguing!
June 18, 2018

Last week, we listed three possible outcomes for how the trajectory of the S&P 500 would evolve after we reached the effective end of 2018-Q2.

Well, we reached the effective end of 2018-Q2 with a quadruple witching event on Friday, 15 June 2018, and we may have gotten an indication of where investors are investors will be shifting their forward-looking attention next: toward the distant future quarter of 2019-Q1.

Alternative Futures - S&P 500 - 2018Q2 - Standard Model - Snapshot on 15 Jun 2018

Truth be told, the jury is still out on whether that is really the case. It is still quite possible that investors are splitting their attention between 2019-Q1 and the nearer term future quarter of 2018-Q4, where they may just be putting a higher weight on the expectations associated with the more distant future quarter in setting today's stock prices. Which wouldn't be a bad outcome for investors because at least it doesn't coincide with a decline in stock prices.

As for the news of the week, which was described in some quarters as "the most important week of 2018", the market's reaction to all that news could be summarized as "meh", where even a new round of tariffs being imposed by the U.S. and China on goods exported by each to the other on Friday didn't contribute much more than a trivial level of noise to the market on the last day of the second full week of June 2018.

Monday, 11 June 2018
Tuesday, 12 June 2018
Wednesday, 13 June 2018
Thursday, 14 June 2018
Friday, 15 June 2018

Barry Ritholtz succinctly summarized Week 2 of June 2018's economic and market events, finding 8 positives and 5 negatives. If that doesn't intrigue you, there were also 5 "m/o/m" data points and one that was "w/o/w". (You really have to dig for points of interest on those "meh" weeks!)

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June 15, 2018

Michael Jackson was many things. One of the most popular entertainers of all time, with a career that spanned over four decades until his death at Age 51 in 2009, the proverbial "King of Pop" was an extraordinary musical talent who left an indelible mark on audiences around the world who remember him primarily through his sheer talent for singing, songwriting, and dancing, where his live performances often set new standards.

One reason why that was the case is because Jackson's creative ability didn't stop with singing, songwriting or dancing. Michael Jackson was a genuine inventive talent, who has a patent to prove it!

U.S. Patent 5,255,452 for a "Method and Means for Creating Anti-Gravity Illusion" was issued on 26 October 1993 to Michael Jackson and two co-inventors, Michael L. Bush and Dennis Tompkins. We'll let the patent's background section explain how the invention came to be:

In the past, a professional entertainer, one of the inventors herein, has incorporated dance steps in his recorded video performances, wherein he and other dancers would lean forward beyond their center of gravity, thereby creating an impressive visual effect. This effect was accomplished by the use of cables connecting a harness around the dancer's waist with hooks on a stage, thereby allowing the dancer to lean forward at the required degree. However, since this requires stagehands to connect and then disconnect the cables, it has not been possible to use this system in live performances. Moreover, the cables obviously restricted arm and body movements....

The present invention overcomes the above noted deficiencies of the previously employed cable system by providing specialized footwear and a moveable hitch or post to which the specialized footwear can be detachably engaged to allow the footwear wearer to lean forward on the stage, with his or her center of gravity well beyond the front of the shoes, thereby creating the desired visual effect.

The invention provides a new design for shoes which will allow his or her performing artist, by engaging the shoes onto an upstanding post positioned to project upwardly from a stage at a predetermined time, to lean forwardly to put his or her center of gravity beyond the front or rear of his shoes, thereby creating the desired gravity defying interesting visual effect.

That's a pretty dry description for the visual effect that could be achieved using Jackson's invention, so it might be better just to show a video clip of it in action during one of his live performances. If you want to skip ahead, you can see it at the 3:40 mark.

Compare that visual effect with how the dance move was originally executed with the use of a cable system in the official music video of the song, where you can catch it at the 7:04 mark.

Giving credit where it's due, we learned of Michael Jackson's patent from Cosmos' Andrew Masterson (via Newmark's Door), who wrote up the story of the research of a team of neurosurgeons who specialize in spinal biomechanics, who were investigating how Jackson and other dancers performing with him were able to execute the seemingly physics-defying stunt during live performances.

There was nothing at all like it before Michael Jackson, which is really the proof of true innovation.

Inventions in Everything: The Archives

We're in the final countdown for the issuance of the U.S. Patent and Trademark Office's 10,000,000th utility patent, which we expect to be released on Tuesday, 19 June 2018. And what better way to celebrate the spirit of American invention that has led to ten million utility patents than by sampling the handful of some of the more creative patents that the Inventions in Everything team has explored!


June 14, 2018

The risk of a national recession beginning in the United States anytime in the next year, from 13 June 2018 through 13 June 2019, has slightly increased by 0.2% over the last six weeks, where the odds now stand at 0.8%.

Obviously, that's still a very low probability, where the increase is mainly attributable to the Fed's recent series of quarter point rate hikes. At the same time, a very slight narrowing of the U.S. Treasury yield curve, as measured by the spread between the 10-Year and 3-Month constant maturity treasuries, has also made a small contribution.

Our Recession Probability Track shows where the recession risk for the U.S. stood at the end of 13 June 2018.

U.S. Recession Probability Track Starting 2 January 2014, Ending 13 June 2018

Since the Fed acted to hike short term interest rates in the U.S. again at the conclusion of its two-day June 2018 meeting, boosting the Federal Funds Rate to a new target range of 1.75%-2.00%, the risk of recession will soon rise above the 1% threshold.

But perhaps more significantly, the Fed indicated that it would be likely to increase short term interest rates in the U.S. twice more in 2018, near the end of the third quarter of the year and again near the end of the fourth quarter of the year.

That change in outlook was almost immediately reflected in the future expections of investors, as measured by the CME Group's Fedwatch tool, where the probability of a rate hike in the fourth quarter of 2018 increased from 46.5% at the beginning of the day to 52.2% by the close of U.S. markets.

If you want to get a good sense of where the recession probability track is likely to head next, you are more than welcome to take advantage of our recession odds reckoning tool, which is also based on Jonathan Wright's 2006 paper describing a recession forecasting method using the level of the effective Federal Funds Rate and the spread between the yields of the 10-Year and 3-Month Constant Maturity U.S. Treasuries.

Just plug in the most recent data available, or the data that would apply for a future scenario that you would like to consider, and compare the result you get in our tool with what we've shown in the most recent chart we've presented. The links below present each of the posts in the current series since we restarted it in June 2017.

Previously on Political Calculations


June 13, 2018

Things aren't going so well for Philadelphia's controversial soda tax in its second year of existence, which is under threat. Let's catch up with how it's doing in 2018:

The Pennsylvania Supreme Court will weigh the legality of Philadelphia's beverage tax in a Tuesday hearing as new data show the city is drawing in less revenue from the controversial tax in its second year than in 2017.

The city's monthly revenue collections show PBT brought in $5.8 million in January and $5.5 million in February. Receipts for each month are collected by the end of the following month. The $11.3 million total is about $817,000 less than the soda tax revenue generated in the same period a year ago, when the first two months of 2017 saw the Kenney administration buoyed by PBT's strong start.

The revised yearly estimate of $78.8 million averages out to a monthly expectation of $6.5 million, an amount the Mayor's Office exclusively told the Business Journal it will hit with March revenue.

Believe it or not, there's good news here! The city did indeed hit its 2018 average monthly target of $6.5 million for the Philadelphia Beverage Tax in March 2018. Unfortunately, that was over $521,000 less than what the city collected in March 2017, where the city is now cumulatively over $1.3 million short of its reduced soda tax revenue target of $19.2 million through the first calendar quarter of 2018. The following chart shows how Philadelphia's soda tax collections are faring:

Desired vs Actual Estimates of Philadelphia's Monthly Soda Tax Collections, January 2017 through March 2018)

At this point of time a year ago, the city was cumulatively over $1.8 million short of its original revenue target of $21 million for the first quarter of 2017, where 2018's first quarter revenue collections are now some $3.1 million below that level.

Now, we're going to say something surprising to those who have been following our ongoing series on Philadelphia's soda tax. We don't expect that ongoing underperformance in Philadelphia's soda tax collections will continue much farther into 2018.

Accepting that we could very well be wrong, here's what we're thinking. Starting with the observation that Americans consume the lowest quantities of the kinds of beverages that are subject to Philadelphia's soda tax during the first quarter of every year, we think that Philadelphia's revenues from its controversial tax were relatively elevated in the first three months of 2017 compared to 2018 because Philadelphians hadn't yet fully worked out all the strategies that they would come to employ to avoid paying the tax back when it first went into effect. Soda tax hacking strategies that included buying beverages that would be subject to the tax outside of the city or buying packets of sugary drink mixes that were not taxed by the city and making their own sugar-laden beverages.

By the second quarter of 2017 however, many Philadelphians had become adept at avoiding the tax, where the monthly tax revenue figures from April 2017 onward would be reasonable projections for the amount of revenue that would be likely to be collected over the remainder of 2018, aside from unique factors that may affect beverage sales and the corresponding tax collections, such as abnormally hot or cool weather conditions.

And then, there's the wild card of what the Pennsylvania Supreme Court may decide, which may make the entire issue of Philadelphia's revenue collections from its controversial soda tax moot. That court heard arguments in a case challenging the legality of Philadelphia's soda tax back on 15 May 2018. At this writing, the court has not yet indicated when it will issue a decision in the case.

The Philadelphia Beverage Tax's existence is also under threat from Pennsylvania's General Assembly, where legislation that would abolish the tax has been advancing through the legislature.

One issue that has been resolved however is which purported beneficiary of Philadelphia's beverage tax would "get stiffed" should city official accept the reality that the tax would not produce the revenue they had promised it would. The designated loser turned out to be Philadelphia Mayor Jim Kenney's "Rebuild" initiative to improve public parks, libraries and other city infrastructure, which has been dramatically scaled back from promised investments.

It was only ever a matter of time. Since the mayor has proposed hiking Philadelphia's property taxes to increase funding to support the city's public schools, it's likely that the Mayor's "free" pre-K program will be able to get the funds it would need to continue and to expand from that more stable source of revenue should the Pennsylvania Supreme Court rule against Philadelphia's soda tax. The way it should have been funded in the first place, if city officials had cared more about providing services to the public more than milking additional revenue out of the city's residents.

We probably shouldn't have said that last part. Philadelphia's politicians may start thinking about taxing milk as they might seek to close a "loophole" that they purposefully created when they originally crafted the city's controversial beverage tax.

Previously on Political Calculations

We've been covering the story of Philadelphia's flawed soda tax on roughly a monthly basis from almost the very beginning, where our coverage began as something of a natural extension from one of the stories we featured as part of our Examples of Junk Science Series. The linked list below will take you through all our in-near-real-time analysis of the impact of the tax, which at this writing, has still to reach its end.

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June 12, 2018

On Friday, 8 June 2018, General Electric (NYSE: GE) took a pass on cutting its dividend, as the company declared that it would sustain its current quarterly cash payouts to the company's shareholders at its current level of 12 cents per share.

In taking that action, GE's CEO John Flannery surprised the market by not taking the opportunity of cutting the company's dividends now, after having primed investors to expect such a move last month.

Not that investors aren't still expecting GE to cut its dividend. Although they breathed a sigh of relief and boosted GE's share price by 1% above its previous day's close at $13.93 per share, GE's market capitalization of $121 billion is consistent with investors still anticipating a 20-25% dividend cut in the future.

General Electric Market Capitalization versus Forward Year Aggregate Dividends at Dividend Declaration Dates from 12 June 2009 through 8 June 2018

Alternatively, the chart above suggests that if GE can avoid cutting its dividend, its stock price is likely to rise from its current level.

That GE is still likely to cut its dividend in the future is underscored by recent bearish analysis by JP Morgan Stephen Tusa, who argues that "the bottom line is that we see the need to de-risk substantially, which includes the need for cash and a cut to the dividend to help with operational de-levering." Overall, Tusa sees GE needing some $30 billion in cash to pay down its corporate debt to more sustainable levels to avoid having its corporate credit rating cut.

If GE were to eliminate its dividend entirely, it would free up some $4 billion in cash annually to meet that need, where GE would have to continue selling off its assets to reduce its liabilities by the full $30 billion target identified by Tusa. Selling its stake in oilfield services firm Baker Hughes could raise $25 billion, where the remainder could be accomplished by the sales of other, smaller assets that the company is already in the process of selling.

No matter what, General Electric is set to become a very different, and smaller, company from what it has been. Either GE or its dividend, and quite possibly both, are still set to continue shrinking.

Data Sources

Dividend.com. General Electric Dividend Payout History. [Online Database]. Accessed 9 June 2018.

Yahoo! Finance. General Electric Company Historical Prices. [Online Database]. Accessed 9 June 2018.

Ycharts. General Electric Market Cap. [Online Database]. Accessed 9 June 2018.

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