For a publicly-traded company to be able to pay out dividends to its shareholders, it has to have two things going for it:

1. Earnings (also known as Profits)
2. Cash Flow

If a company doesn't have these two things going for it, it's not going to be able to sustain paying out dividends on a regular basis for very long.

Combined, these two things provide a big reason why dividends are so important to investors in assessing the health of a company. That's also why a company's stock price will often take a major hit whenever a company's management announces that they are going to cut the cash dividends they had previously indicated they would pay - they're acknowledging that they don't expect to have either the earnings or the cash flow to pay them.

As a result, because cutting dividends has such a negative effect upon stock prices, which can make up a large share of the compensation of the leadership at publicly-traded companies, the managers of these companies will seek to avoid dividend cuts until their business situation makes them unavoidable.

That's what makes dividend cut announcements such a big deal. They don't happen unless things aren't going the way the leaders of the companies that are forced to announce them had expected when they set their dividend policies.

All this background is extremely relevant today, because the number of dividend cuts announced for S&P 500 companies, the 500 largest publicly-traded companies in the United States, in the month of February 2013 has hit a level that has not been seen since the U.S. economy fell into recession after December 2007:

Through 25 February 2013, five S&P 500 companies have announced dividend cuts during the month. The last time there were that many S&P 500 level companies announcing dividend cuts was in July 2009, just one month after the "official" end of the so-called "Great Recession" in June 2009.

In the chart above, we can also see that the number of dividend cuts announced by S&P 500 companies frequently spiked to more than three per month after December 2007 that coincides with the period of time defining the "Great Recession".

As such, the number of dividend cuts announced monthly for the companies that make up the S&P 500 index may work very well as an early indication of any period of time that the U.S. economy may be officially declared to be in recession by the National Bureau of Economic Research.

That focus differs from our previous looks at the number of companies announcing dividend cuts each month, which is drawn from the full list of all 6,000+ publicly traded companies in the United States. We have been using that data to simply determine whether the U.S. economy is experiencing recessionary conditions.

We'll be updating that analysis as soon as the data for February 2013 becomes available after the end of this month. As for what to expect, we'll simply observe that S&P 500 companies through this point in February 2013 have already accounted for half the number needed for us to determine that recessionary forces are at work in the U.S. economy.

Data Source

Standard and Poor. S&P 500 Dividend Rate Change. [Excel Spreadsheet]. Accessed 25 February 2013.

Last March, we estimated what the natural unemployment rate for the United States was given the number of employed and unemployed Americans as well as the job turnover rates for which Americans were being hired into new jobs or let go from their old ones. Here's what we found:

In the tool, the labor market is considered to be overheating when the official rate of unemployment is below the natural rate of unemployment. That's definitely not the case for January 2012, with a natural rate of unemployment of 7.87% and an official rate of unemployment of 8.26%.

The natural unemployment rate of 7.87% also suggests that the current pace of job creation as given by the JOLTS data will not be sufficient to significantly lower the official rate of unemployment, which we've already seen with the February 2012 employment situation report, where the official rate of unemployment came in at 8.27%, up slightly from the previous month.

Let's do the math again, this time with the data available through the end of 2012:

Running the numbers for December 2012, we find that the unemployment rate at the end of 2012 was 7.85% - just a hair below the 7.87% natural rate of unemployment that we estimated with the January 2012 data we used in our previous calculation. Or rather, the pace of job creation throughout 2012 was not sufficient to significantly lower the official rate of unemployment, just as we expected.

But then, we also find that natural rate of unemployment through December 2012 is 7.63%. When compared to December 2012's official unemployment rate of 7.85%, that suggests that the pace of job creation as given by the JOLTS new hire and new separation data will not be sufficient to significantly lower the official rate of unemployment, which we've already seen with the January 2013 employment situation report, where the official rate of unemployment came in at 7.9%, up slightly from the previous month.

That outcome agrees with our tool's finding for the data of December 2012: there's not a lot of slack in the U.S. job market, so there will be little prospect of significantly altering the official unemployment rate data in the short term.

With that being the case, we can expect little improvement in the official unemployment rate this year, which unless something happens to upset the economy, should slowly converge with the natural unemployment rate. Believe it or not, that's consistent with what President Obama's economic forecasters have predicted for 2013, who foresaw back in July 2012 that the U.S. would have a 7.6% unemployment rate by the end of 2013.

Want to Run Other Numbers for Yourself?

You can get the most recently reported data through the links below!

Employment Situation (EMPSIT)

This report is produced monthly and contains the number of employed and the number of unemployed for the total U.S. civilian workforce. The appropriate data is found in Table A-1 in the data section of the report.

Job Openings and Labor Turnover (JOLTS)

This report is produced quarterly and provides the numbers of those newly hired or who have recently separated from their previous employment in the civilian workforce. This data is found in Table A of the main body of the report.

Just remember not to mix and match the data for different months!

Our favorite chart, updated through the futures for 25 February 2013:

Where Did the More Room to Run in the Near Term Come From?

The actions last week by Wellpoint (NYSE: WLP), Halliburton (NYSE: HAL) and Coca-Cola (NYSE: KO) to boost their dividends, which offset earlier moves in February by Diamond Offshore Drilling (NYSE: DO), Cliffs Natural Resources (NYSE: CLF), Exelon (NYSE: EXC), and CenturyLink (NYSE: CTL) to cut their dividends. The net increase in dividends expected for 2013-Q2, where investors are currently focusing their attention, provides a little more room for the rally to run, as the change in the growth rate of stock prices will continue to move upward to converge with the change in the growth rate of dividends per share expected in 2012-Q3.

By the way, it's really unusual to have more than three S&P 500 companies act to cut their dividends in a single month outside a period of recession.

What Does "After That" Mean?

Hypothetically, what would it mean if investors were to suddenly change their focus from 2013-Q2 to 2013-Q3? Or to some other more distant quarter in the future?

Well, in terms of today's stock market, that would mean shaving about 30% from today's stock prices. But then, there is no guarantee that investors will focus on 2013-Q3. They could choose to focus on 2013-Q4 which is considerably worse. Or they could opt to focus on 2014-Q1, which initially looks to be similar to 2013-Q2, but about which we'll know more in a about a month.

That, by the way, would be the best case scenario for stock prices in 2013 provided that wild card factors like a really amped up quantitative easing program by the Federal Reserve don't inject a lot of noise into the market.

The latest that investors might shift their forward-looking focus away from 2013-Q2 will be 21 June 2013, but they will become increasingly likely to shift their focus to a more distant future quarter after 15 March 2013, when the futures contracts for the S&P 500's dividends in the first quarter of 2013 expires.

Update 25 February 2013: See if you can tell what time the U.S. stock market got the news that the polls had closed in Italy without a clear outcome today, along with all that means for uncertainty in Europe's markets:

Now, that's what we would describe as a classic noise event! It's up to you to decide if that's a calamity or an opportunity!

Update 28 February 2013: And then, as quickly as the Italian election noise event began, it ended:

All noise-driven events end. It's only ever a question of when.

It's not often that we can measure something like pro or anti-American political bias in American movies, but we can today because of a unique experiment conducted by Hollywood!

The reason why is because of the uneven level of quality of most movies, which can make it extremely difficult to make direct comparisons of a characteristic like political bias between them using the measure of how well they do at the box office. For example, one movie in a given genre might have good acting, but suffers from bad writing or poor direction. Another movie might have only okay acting and direction, but features really good writing.

That's often because different movies get made by different people, which introduces a lot of random elements into their production that can affect their quality, which in turn, affects their money-making potential. And then there's the matter of what audience the movie is aimed at - a movie targeted for teens will have a different box office performance than a movie targeted toward a older segment of the movie-going public.

But what happens when you put the same creative team to work behind movies that target the same basic audience demographic in the U.S., but are very different in their pro or anti-American political sentiment?

What happens is that you take out a lot of the randomness that might otherwise make a comparison between the movies produced by the same team invalid. You get a consistency of quality in all the other elements that can affect box office performance that makes it possible to measure just how much having a pro or anti-American political bias can have at the U.S. box office.

And that's exactly what we have today, thanks to the former Academy Award for Best-Picture winning The Hurt Locker and the current Academy Award Best-Picture nominee Zero Dark Thirty!

Both movies were made by same production team, including the director and screenwriter. Although they feature different actors, the overall quality of acting in The Hurt Locker and Zero Dark Thirty is also consistent, as measured by Academy Award nominations for the lead characters in each film.

Where they differ is in their political bias in how they present their stories, in which the post 9/11 U.S. war against terror is the backdrop. The Hurt Locker suggests that U.S. military servicemen conducting operations against terrorists are psychologically-impaired, irresponsible rogue elements who are dangers to themselves and others. Zero Dark Thirty portrays American spies and secret military operatives as devoted avengers of a horrific act of terror against the United States.

Same quality-level movie, made by the most of the same people, different political bias. Our chart below shows the cumulative U.S. box office receipts as reported by Box Office Mojo for both The Hurt Locker and Zero Dark Thirty against the number of days since release in their original theater runs. We also show the inflation-adjusted box office for The Hurt Locker in terms of constant 2012 U.S. dollars:

Through their first 65 days of release, Zero Dark Thirty has made over seven times as much in U.S. box office receipts as did The Hurt Locker, with nearly $90 million in receipts just in the United States. That figure then represents the real difference between being pro and anti-American at the U.S. box office.

As for why Hollywood keeps making anti-American movies even though it would appear to cost them so much at the U.S. box office, well, when it comes to America, it seems they have other values....

Today, we're revisiting the topic of the ages of those who served in the U.S. armed forces during World War 2, because we have new information to add to it!

Before we go any further, the reason we're doing this is because this information plays a key part in one of the projects we're developing behind the scenes here at Political Calculations, which we'll be presenting in bits and seemingly unrelated pieces throughout this year.

So what information are we adding today? Well, it's about the end of volunteerism and the institutionalization of mandatory conscription for filling the ranks of the U.S. Army, Army Air Corps, Navy and Marines during the Second World War.

Air Force Magazine's John T. Correll explains more about how the American tradition of volunteering for military service came to be rejected by the executive order of President Franklin D. Roosevelt:

In 1936, an obscure Army major, Lewis B. Hershey, was appointed the executive officer of the Joint Army-Navy Selective Service Committee, set up to prepare for possible mobilization. The panel consisted of two officers and two clerks. Hershey was a former schoolteacher who joined the National Guard in 1911 and transferred to the regular Army after World War I. Nobody, least of all Hershey, dreamed the job would last for decades....

When Germany in 1940 invaded the Low Countries and France, Congress authorized the first peacetime draft in American history. Inductions began in November 1940. The following year, Hershey was promoted to brigadier general and named director of the Selective Service.

A total of 10.1 million men were drafted during World War II. At the beginning of the war, men rushed to enlist, but, from Hershey’s perspective, that ruined orderly conscription. He persuaded President Roosevelt in December 1942 to end voluntary enlistments except for men under 18 and over 38.

Prior to President Roosevelt issuing Executive Order 9279 on 5 December 1942, American men between the ages of 21 and 36 were subject to the military draft. In his executive order, in addition to eliminating volunteerism and fixed-term enlistments, President Roosevelt also took advantage of legislation passed by the U.S. Congress on 11 November 1942 to expand the eligible age range to be subject to the draft to include all men from the ages of 18 through 37. Volunteering for service was only permitted for those under the age of 18 and up to the age of 45 who claimed they could satisfy the military's enlistment requirements.

The birth years that coincide with these age ranges are shown in our updated chart below:

The end of volunteerism with the draft explains why the average age of those who served in World War 2 is 26 - it is the middle of the range from which the pool of those conscripted were drawn into service in the years from 5 December 1942 through the end of the war in 1945.

But more importantly, with how the draft worked during World War 2, by lottery, the age distribution of those conscripted into military service in a given year would be fairly even, rather than being heavily concentrated around a given age. The size of any bell-curve that might normally have formed was therefore minimized as a result of the policy.

That evenness of age distribution among those who served in the armed forces during World War II, in turn, explains a lot of things that turn up repeatedly in various datasets after the war. And that is something we'll be revisiting throughout the year....

Not long ago, we denied an unusual request to remove a link from one of the articles that appeared on our blog. We now have a better understanding of why we received that strange request, thanks to another oddball request we received to remove a different link from another one of our blog posts.

Hi,

My name is Jonathan and I’m getting in touch on behalf of Medical Billing and Coding. I noticed that you’ve linked to my website on your page politicalcalculations.blogspot.com/2011_10_01_archive.html with the text "sitting is killing you" and am requesting that you remove the link.

I’m asking this because it’s come to our attention that some of the links to our website have been acquired against Google’s Webmaster Guidelines, so it’s important for us to remove links that are harming traffic to our website. Furthermore, by linking to our site, it could be detrimental to your site’s overall traffic, so it will be important for you to remove the link.

Please let me know if you have any questions. If you could email me once you have removed the link that would be great.

Best,

Jonathan Weiner

Ah, yes. Google's Webmater Guidelines, or as so many so-called Search Engine Optimization (SEO) "experts" who claim they can successfully drive traffic to a web site would describe it, their "Bible".

It turns out that the folks at Google just tweaked their search engine's algorithm and revised the guidelines because too many these scummy SEO experts were gaming the system by encouraging other web sites to link back to theirs, offering other web sites and blogs free content like infographics to encourage them to link back to them, regardless of the relevance of the content they gave away freely to the business of their web site.

But now the game is up. Google really wants to provide its users with highly relevant links to encourage them to continue using their Internet search engine, so they worked out how to demote the web sites that engaged in these kind of link schemes to boost their site traffic by boosting their site's Google search engine ranking.

How big a deal is this? Apparently, not getting the same search engine traffic that they used to is driving some of these link schemers to desperation. We've heard back from "Jonathan Weiner" twice since then! The first followup to the original e-mail came one week later:

Hi,

I recently emailed you regarding a link removal request in regards to your website and have not heard back. I’m getting in touch to make sure you received the email and are in the process of removing said links. Please let me know if you haven’t received my first email and I’d be happy to send it again.

And we received a second follow-up one week after that one....

Hi,

Just checking in again about the status of the link removal request I sent you last week. I noticed that your link to medicalbillingandcoding.org is still on your website. My first email was requesting that you take the link down. Please let me know if you’ve done so.

We're afraid that poor "Jonathan Weiner" is just going to have to get used to disappointment in his desperate drive to attract search engine traffic back to his site. And since he's been so persistent, we're opting to respond to his requests publicly, so that others might learn from his mistakes.

Dear Jonathan,

We're afraid that we must deny your request to remove all links to your site from our blog, as we are not responsible for your web site's dual declines in its Google search engine ranking and corresponding website traffic. While we're touched that you seem to care about our own search engine traffic, in truth, while we find it fun to see who's reading our blog, we're happy to grow our traffic organically. Whatever search engine traffic we get, we get the hard way - we produce original content and analysis that we hope our readers find interesting and share with others they believe might have a similar interest in our content, rather than engaging in the kinds of linking schemes that Google frowns upon in its guidelines for webmasters.

Second, we would have been able to respond to your request more quickly if you had properly identified the link of the actual article to where we made fair use of the the infographic your site freely entered into the public domain, rather than a link to our archive of posts from October 2011. As it happens, the "Sitting Is Killing You" infographic appeared as an integral part of the content of our blog post Happy Halloween! Now Have a Seat...., which is one of the more fun posts we wrote back in October 2011.

Third, your request to remove links to your site from our article would violate our editorial policy, where we always seek to identify and attribute the source of any non-original content that may appear on Political Calculations as part of our fair use of the material.

In this case, it appears that we owe you an apology, as we identified noted chart porn addict Barry Ritholtz as our source for the infographic in the text of our article, with the link to your site only clear to readers who might either mouseover the image or click through to your site by clicking the infographic image itself, which represents an error on our part, which we regret.

We will therefore be happy to correct our error and add an additional link to your site instead to better clarify that it is the original source of the infographic, which your site's staff writers had actively encouraged bloggers to post on their own sites back when they entered it into the public domain on 9 May 2011.

We are always happy to correct errors like these that appear on Political Calculations. Thank you for bringing it to our attention!

Best regards,

Ironman @ Political Calculations

Let's start today's post about where stock prices are headed by retelling an old Indian fable:

Three wise men were blindfolded and led one at a time into a room where an elephant stood. Each was asked to discern what was in the room without removing his blindfold. The first, upon touching the elephant's trunk, concluded a "snake" was in the room. The second, upon contacting a leg, concluded a "tree" was in the room. The third, upon grasping the tail, concluded a "rope" was in the room. All were surprised to discover the elephant once their blindfolds were removed.

We thought it might be fun to illustrate just what the modern equivalent of those three wise men "see" as they attempt to describe what's going on in the stock market with the charts that we've developed over the last several years to analyze stock prices, as described in a recent article from the Reuters news agency.

Odds of a pullback are increasing, with the market in slightly overbought territory, said Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston.

"I do suspect the closing of the earnings season will lead to at least a pause and possibly a pullback," Zaro said. The S&P 500 could shave 3 to 5 percent between now and early April, he said.

Here, having the most recent data be below the mean trend would suggest a rising market as stocks would be "underbought", while being above the mean trend would suggest that stock prices are "overbought" and are increasingly likely to either stall out or fall in the future.

In this chart, which picks up the major trend that has existed in the U.S. stock market since the QE 2.0 bubble popped in late July 2011, we see that stock prices are in what Bruce Zaro describes as "slightly overbought territory". The 3-5% "shave" he predicts by the end of March would represent a little over a one-standard deviation decline in stock prices, which would be a move from the central black trend line to the light-gray dashed line immediately below it.

Next, let's see what another blindfolded wise man discerns as he examines the stock market:

At the same time, other analysts say, the market has not shown significant signs of slowing, including a break below 15- and 30-day moving averages.

Such moves would be needed to show that momentum is slowing or that the market is at risk of a correction, said Todd Salamone, director of research for Schaeffer's Investment Research in Cincinnati, Ohio. The S&P 500's 14-day moving average is at 1,511 while the 30-day is at 1,494. The index closed Friday at 1,519.

Todd Salamone is what we would describe as a "momentum" guy. Unlike a practitioner of momentum trading, which is really a kind of crowd-following/crowd-anticipating investment strategy, Salamone believes in the physical force of inertia, which is a way of saying that once stock prices get onto a particular trajectory, they'll stay on it!

All you have to do to see that prediction on our chart above is to draw an imaginary line from a point at the bottom of the most recent short-term trend up through the most recent data point for stock prices. And then on out as far as you dare dream. Kind of like Chuck Prince's dance party investment strategy, because what can possibly go wrong so long as you don't see stock prices suddenly dip below the moving line average shown on the chart?...

Let's get one last take on the current state of the stock market from the Reuters article:

The S&P 500 has been trading near five-year highs, and it notched its highest level since November 2007 this week. But the gains have pushed the benchmark index almost as far as it is likely to go in the near term, with strong resistance hovering around 1,525 and 1,540, one analyst said.

As a result, the index is set to move sideways, said Dave Chojnacki, market technician at Street One Financial in Huntington Valley, Pennsylvania. "We just don't have the volume or the catalyst right now" to go above those levels, he said.

Dave Chojnacki is described as a market technician, which means he is a practitioner of technical analysis. Here's how Investopedia explains that black art:

Technical analysts believe that the historical performance of stocks and markets are indications of future performance.

In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, the technical analyst's decision would be based on the patterns or activity of people going into each store.

In essence, what he is saying as he senses the stock market today is that because investors have never gone shopping for stocks much above the 1,525 and 1,540 level for the S&P 500 before, they're resistant to go shop for them above that level now.

But then, he goes on to say something actually interesting - he loosely perceives that some sort of physics might be involved, as he doesn't find any forces that might drive stock prices higher as he surveys the market's current environment.

The two comments together would seem to describe how stock prices might behave given the lack of upward room to move that is indicated by the current changes in the growth rates of stock prices and dividends per share driving them as the gap between them narrows in our chart below, if only the analyst knew of the relationship between the two!:

The only perspective that's missing from the Reuters article is the consideration of a steep decline for stock prices once we get past the near term. We guess they couldn't find a fourth wise man to blindfold before going to press....

Starting last year, we began taking snapshots of Standard & Poor's forecasts for where the S&P 500's trailing twelve month earnings per share would be in the future at approximately three-month intervals. Our chart below illustrates how the expected future has changed over time:

Since our last snapshot in November 2012, we find that the earnings for the S&P 500 in the last two quarters of 2012 and the first two quarters of 2013 are now expected to be recorded at levels below where they had been expected three months ago.

But not all is gloomy, as S&P is now projecting a slight increase over previous expectations for earnings in the third and fourth quarters of 2013.

Still, perhaps the most important take-away from our chart though is how different the earnings expected for 2012 (shown as our snapshot of expected future earnings on 17 January 2012) are from where the level at which they are being finalized (shown as our 15 February 2013 snapshot). Going by the S&P 500's estimated total market capitalization of $9.8 trillion in March 2012, the fall in expected earnings for 2012 from January of that year to the present means that over $80 billion worth of earnings expected in 2012 failed to materialize during the year.

We just wonder if today's snapshot of the expectations for earnings in 2013 is as off-target!

Previously on Political Calculations

The previous snapshots we've taken of the way the future looked to investors for the S&P 500 at different points of time are presented in reverse chronological order below:

• Winter 2013 Snapshot of Expected Future S&P 500 Earnings
• Fall 2012 Snapshot of Expected Future S&P 500 Earnings
• Summer 2012 Snapshot of Expected Future S&P 500 Earnings
• The Spring 2012 Snapshot of Expected S&P 500 Earnings
• The Changing Futures for S&P 500 Earnings
• How Good Are Earnings Forecasts?

References

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 14 February 2013. Accessed 15 February 2013.

Did you know that there isn't anywhere on the web where you can go and get quarterly data for the S&P 500 before 1988? It's true, or at least it was true, until today!

Prior to today, the only place you could obtain data like the amount of dividends per share (DPS) or earnings per share (EPS) for S&P 500 companies was Standard & Poor, who only makes available the data since 1988 [Excel spreadsheet].

Meanwhile, you can obtain trailing year DPS and EPS data for the S&P 500 and its predecessor indices and component stocks from Yale's Robert Shiller [Excel spreadsheet], or perhaps more easily from our S&P 500 at Your Fingertips tool, which go all the way back to January 1871. Unlike Professor Shiller's spreadsheet, our tool also calculates the rate of return between any two calendar months you select, both with and without the reinvestment of dividends and with and without the effects of inflation.

It's a strange omission, if you think about it, because earnings and dividends are both reported and paid by the quarter!

So we're fixing that situation today. We've used S&P's available quarterly data since 1988 and our trailing year data to work out what the S&P 500's quarterly data would have to be for each quarter going all the way back to 1871-Q1.

You can access our data in the tool below, or if you prefer your data in graphical format, in the charts that appear below our tool:

Now for the charts covering the quarterly data for the S&P 500 and its predecessor indices and component stocks since the first quarter of 1871. Our first chart shows the S&P 500's average price per share in the month ending the quarter in question:

Next, let's look at the dividends per share that were paid out in each quarter from 1871-Q1 through 2012-Q4:

Our third chart reveals the earnings per share that would be reported for each quarter from 1871-Q1 through 2012-Q4:

If you're ever bored and looking for something to do, overlay the data for the price per share chart and the dividends per share chart - you might make a pretty unique discovery!

Image Source: Northern California Grantmakers