Political Calculations
Unexpectedly Intriguing!
August 17, 2018

There are certain things that are understood without having to be said, because they're very obvious. Things like "never get involved in a land war in Asia" or "never go against a Sicilian when death is on the line" are examples of these kinds of things. Other examples can be found in the kinds of things that Captain Obvious might say, such as "the sky is blue" or "Philadelphians sure drink a lot of alcohol".

But what drives Philadelphians to drink so much alcohol?

The short answer is that outside of prohibition, Philadelphians have always consumed large quantities of alcohol. And as many Philadelphians might point out, prohibition wasn't much of an obstacle for the city's dedicated alcohol consumers.

When it comes to alcohol consumption then, the city of Philadelphia is starting out with a strong base. So what might prompt already heavy-drinking Philadelphians to boost their alcohol consumption to even higher levels?

Believe it or not, the city's controversial tax on soft drinks would appear to be behind the city's recent surge in alcohol sales. Last August, Scott Drenkard and Courtney Shupert of the nonpartisan Tax Foundation found that Philadelphia's "high tax rate on nonalcoholic beverages makes them more expensive than beer in some cases", which they believed was "likely to drive consumers to more alcoholic beverage consumption".

Philadelphia's monthly liquor tax collections confirm that this outcome has come to pass, where the revenues from the city's 10% tax on alcoholic beverage sales is documented within its tax reports for School District revenue collections. The following chart, which covers the City of Philadelphia's last five fiscal years, reveals that in the 18 months since the implementation of the city's controversial tax on all naturally and artificially-sweetened beverages distributed for retail sale within the city went into effect, the city's has been collecting an average of $6.5 million per month from its alcohol taxes, up from the average of $5.5 million per month it collected in the 18 months preceding the soda tax implementation, an increase of $1 million per month on average.

Philadelphia Liquor Tax Collections by Month, July 2013 to June 2018

The same phenomenon is not evident on the opposite side of Pennsylvania, where Allegheny County's revenues from its 7% tax on alcoholic beverage sales indicate no meaningful difference in the level of alcohol sales in that region of the same state over the same period of time (the data for June 2018 is preliminary).

Philadelphia Liquor Tax Collections by Month, July 2013 to June 2018

The two observations together are important because Allegheny County, being in the same state as Philadelphia and thereby subject to all of the same state laws and regulations on the sale of alcohol, represents the control in what amounts to a natural experiment for measuring the effect of Philadelphia's soda tax upon liquor sales.

And what a difference it appears to be. Doing the math to work out the corresponding level of liquor sales, Philadelphia's residents would appear to have increased their average monthly consumption of alcoholic beverages from an average of $55 million to $65 million, an increase of $10 million in the sales of taxed alcoholic beverages per month.

Tax Foundation (Ben Rickards): 4 Janauary 2017 Sale Price of 12-Pack of 12-Oz Bottles of Icehouse Beer

Let's put that figure into a more fun context! In January 2017, just after Philadelphia's soda tax went into effect, the Tax Foundation documented that the sale price of a 12-pack of Icehouse beer, which had just become cheaper than a 12-pack of non-alcoholic Propel sports drinks, was $7.99 in Philadelphia. For the sake of argument, let's say that after Philadelphia's soda tax went into effect, Philadelphia's residents began exclusively consumed $10 million worth of Icehouse beer per month at this price. How many extra bottles of beer per month is that?

Dividing the average increase of $10 million per month by $7.99 for the 12-pack of Icehouse beer, we find that corresponds to the equivalent of roughly 1.25 million 12-packs per month, which works out to be about 15 million extra 12-oz bottles of beer consumed in the city. Per month.

Philadelphia's total population in July 2017 was estimated to be 1.581 million people. So, after the City of Philadelphia imposed its sweetened beverage tax in January 2017, every man, woman and child living in the city responded by increasing their consumption of Icehouse beer by 9.5 bottles per month. Multiplied by 12 months, that's an increase of 114 bottles per year.

Of course, that's a ridiculous number, because Pennsylvania prohibits the sale of alcoholic beverages to individuals under the age of 21. That prohibition blocks some 26% of the city's population from even being able to buy Icehouse beer, assuming that the law is actively enforced against Philadelphia residents under that age. If we do the back-of-the-envelope math to estimate how many extra equivalent 12-fluid-ounce bottles of Icehouse beer that Philadelphia's adult population is consuming, we come up with a monthly increase of 12.9 bottles per legal drinking-age Philadelphian, or over 154 bottles of Icehouse beer per adult in the city per year.

Icehouse Beer - Source: Utah Alcohol Control Board - https://abc.utah.gov/about/documents/81st_annual.pdf

If we convert 12-fluid-ounce bottles of Icehouse beer into the equivalent number of calories, we find that at 149 calories per 12-fluid ounce container, Philadelphia's adults are drinking in an additional 1,916 calories per month, or just over 22,989 calories per year.

Since a 12-ounce bottle of Coca-Cola has 140 calories, that's a nearly one-for-one swap where calories are concerned, so there's no realized health benefit from calorie reduction for the portion of Philadelphia's adult population who have changed out sugary soft drinks for beer. For consumers who switched from low-to-no calorie soft drinks to beer, their calorie consumption would have substantially increased.

That of course doesn't consider the impact of other potential health and safety issues that city health officials believe would go along with the increased alcohol consumption in Philadelphia that have come about as a direct consequence of the city's controversial soda tax.

No matter what, one solid fact holds true. Philadelphians sure drink a lot of alcohol, and since the city's soda tax went into effect, they are sure drinking a lot more!

Update 8:34 PM EDT: Here's a chart showing the overall trend for the trailing 12-month total for Philadelphia's liquor tax collections from July 2014 through June 2018.

Trailing 12 Month Philadelphia Liquor Tax Collections, July 2014 to June 2018

You can see Philadelphia's liquor tax collections accelerate from their previous growth rate beginning in January 2017 through December 2017. The peak values in the chart occur in January and February 2018 which, if you think about what was going on in Philadelphia in those specific months, have their own special contributing factor to boosting alcohol consumption in the city! Since then, Philadelphia's liquor tax collections have largely leveled out at an elevated level with respect to the trend that existed before Philadelphia's soda tax went into effect.

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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August 16, 2018

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.

This time round, we find that the projected future for S&P 500 earnings has softened through the end of 2018, but has strengthened through the end of 2019.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2014-2020, Snapshot on 10 August 2018

Compared to the previous quarter, a mixed picture.

Perhaps the biggest contributor to that downward adjustment in the near term expected future for earnings was Facebook (Nasdaq: FB), which TheStreet described as a "complete outlier" after they reported their earnings and outlook at the end of July 2018.

Earnings blowouts from Caterpillar (CAT - Get Report) and Amazon (AMZN - Get Report) look like the norm this earnings season, not the Facebook (FB - Get Report) earnings call meltdown.

"The tone on earnings calls remains positive - mentions of "better" or "stronger" relative to "worse" or weaker" is still above-average (despite being down from the last few quarters' highs), and mentions of optimism are also above average (and up from last quarter)," says Bank of America Merrill Lynch strategists.

Facebook's "Black Thursday" was in large part fueled by an earnings call littered with concerns about future growth rates.

We'll see how things change three months from now, with the fourth quarter of each year being historically the most popular period for when companies announce any significant changes in their future business outlook.

Data Source

Silverblatt, Howard. Standard & Poor. S&P 500 Earnings and Estimates. [Excel Spreadsheet]. 14 August 2018.

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August 15, 2018

How will your annual income change over your life?

That's a difficult, if not impossible, question to answer for an individual, considering that it depends upon specific details like your education, your experience, whether you work, how often you might change jobs, experience a layoff, get promoted, when you retire, et cetera. Statistically however, we can get a pretty good idea from income data collected by the U.S. Census Bureau.

We recently completed a project where we looked at income data for the total population for every year from 2000 through 2016, where we found a pretty unique pattern hidden within each year's data - the average income for the reported age groups follows a fairly predictable and stable trajectory from year to year.

In the following chart, we've graphed four curves, where each curve corresponds to a different level of educational attainment. To generate each trajectory, for each level of education in each year, we first converted the average incomes listed for each age group into a percentage of the average income reported for the Age 18-24 cohort. We then calculated the average percentage income for each age group over all the years from 2000 through 2016.

Lifetime Average Income Trajectories as Percent of Average Mean Income for Age 18-24 Cohort, by Educational Attainment, Based on Income Data from 2000 through 2016

For each data point, the "Reference Age" in the horizontal axis represents the middle of the age cohort for which the income data was reported, which for Age 18-24 is 21, for Age 25-29 is 27, and so on....

Right away, you can see the similarities between the income trajectories by age, which all fall within a relatively narrow range of one another. And that's despite the great differences between the average incomes reported for each education level for the Age 18-24 cohort, which we've indicated for 2016 in the inset in the chart above.

What kind of difference does that base average income set by education level have on a the average American's lifetime income trajectory and earnings?

In the next chart, we do the math, pairing the 2016 average income of the Age 18-24 group with the average income trajectories for all years from 2000 through 2016.

Lifetime Average Income Trajectories by Educational Attainment, Based on Income Data from 2000 through 2016, with 2016 Age 18-24 Base Incomes

The curves for each education level don't match the actual income trajectories of each for 2016, but they're not all that far off either.

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August 14, 2018

The third quarter of 2018 is nearly half over, which makes it a good time to see how the number of dividend cuts that have been announced over the previous six weeks compare with the same points of time in the third quarter of 2017 and also the previous two quarters of 2018!

Let's start with the year-over-year comparison of the third quarters of 2017 and 2018 from our two near-real time sources for these dividend declarations.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter in 2018, Snapshot 2018-06-27

Compared to 2017-Q3, the pace of dividend cuts announced so far in the current quarter of 2018-Q3 is running well behind, which represents an improved situation for publicly traded companies in the U.S.

Likewise, when we compare 2018-Q3 against both 2018-Q1 and 2018-Q2, we find that dividend cut announcements in the third quarter of 2018 is so far keeping pace with what was recorded during the first quarter, but is slower than what we saw during the second quarter. Again, that's good news.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter, 2018-Q2 vs 2017-Q2, Snapshot 2018-06-27

Through Friday, 10 August 2018, we've recorded the following 17 dividend cut announcements for 2018-Q3.

Tallying up the 2018-Q3 list of dividend cuts to date, over half are firms (9) in the oil and gas industries, six are financial firms or Real Estate Investment Trusts (REITs), one (R.R. Donnelley & Sons) is a provider of business services and one last one (Pentair) may not really count as a true dividend cut, where the company recently span off its electrical products division into a new dividend-paying company called nVent Electric (NYSE: NVT).

[We haven't confirmed that the combined dividend paid out by both companies equals or exceeds Pentair's previous dividend payout, which is why we're still including the dividend cut announcement for Pentair in our tally of dividend cuts.]

All in all, the relative absence of dividend cut announcements is a positive indication for stock market investors.

Data Sources

Our near-real time sampling of dividend cut announcements is obtained from the following two sources. While we seek to capture 100% of such announcements, they often represent just a fraction of the total announcements for the U.S. stock market, which we report on in our Dividends by the Numbers series!

Seeking Alpha Market Currents. Filtered for Dividends. [Online Database]. Accessed 10 August 2018.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 10 August 2018.


August 13, 2018

The second full week of August 2018 was mostly uneventful for the S&P 500 (Index: SPX). From Monday, 6 August 2018 through Thursday, 9 August 2018, the index teased the possibility of topping its previous high record of 2,872.87 that was set back on 26 January 2018.

And then, for lack of a better description, Turkey happened, and the S&P 500 retreated by 0.7% on Friday, 10 August 2018 to close the week at 2,833.28.

Alternative Futures - S&P 500 - 2018Q3 - Standard Model with Redzone Forecast for 2019Q1 Focus between 20180808 and 20180911 - Snapshot on 10 Aug 2018

To be fair, Turkey didn't so much happen as it finally started catching up to what has been happening to the country under the hands of its increasingly dictatorial ruler over the past five years, where the collapse of its currency on Friday, 10 August 2018 sent shock waves through the world's equity and emerging markets. Emerging markets, because of an elevated risk of contagion not seen since Greece's economy imploded earlier in the decade. Equity markets, because of the exposure of financial institutions to that contagion.

That's a short summary of the view from 30,000 feet. Here are the main market-moving headlines we noted for Week 2 of August 2018.

Monday, 6 August 2018
Tuesday, 7 August 2018
Wednesday, 8 August 2018
Thursday, 9 August 2018
Friday, 10 August 2018

Looking at the bigger picture, Barry Ritholtz found that there were more negatives than positives in the week's economy and markets news.

Sharp-eyed readers will note that we've added one of our redzone forecasts to the spaghetti forecast chart we use to anticipate the future for the S&P 500 based on our dividend futures-based model, which we do to account in part for the volatility in the historic stock prices that we use as the base reference points from which we project future stock prices.

Here, we're assuming that investors will continue to split their forward-looking focus between 2018-Q4 and 2019-Q1 in setting stock prices in the period from 8 August 2018 to 11 September 2018, but will tend to more heavily weight that more distant future quarter in setting their expectations. We've also drawn the new redzone forecast more narrowly than we did earlier in the quarter, so that it reflects the historically typical level of volatility that we've seen in stock prices during the past seven decades.

Given current market circumstances, that new redzone forecast may be drawn too narrowly, where we may see the trajectory of the S&P 500 move outside of that range without necessarily confirming a true shift in the forward-looking focus of investors. On the plus side, if that does happen, we'll have a nice visual confirmation that stock prices are experiencing extreme volatility.

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