Political Calculations
Unexpectedly Intriguing!
28 February 2018

Watching the movement of the stock prices of individual companies change with respect to one another can be a lot like watching the flight of a flock of starlings.

Imagine, if you will, a flock made of the stock prices of the individual companies that compose a stock market index like the S&P 500 (Index: INX). A lot of the time, most of the individual stocks will move in the same direction as the overall index itself, which makes sense - a market capitalization-weighted index like the S&P 500 is going to tend to go in the direction that most of its component stocks are going.

But sometimes, a bird breaks away from the flock and flies its own course - almost independently of all the other birds. Which brings us to what the stock price of General Electric (NYSE: GE) has been doing since the middle of February 2018.

As it happens, the last time we talked about GE was back on 24 January 2018, right before the S&P 500 peaked on Friday, 26 January 2018 and embarked on a 10.5% correction, so we've been following its trajectory with respect to the index with some interest. The following chart shows GE flying a very different path than all the other birds of a feather flocking together in the S&P 500.

GE vs the S&P 500: Percentage Change of Stock Prices Since 26 January 2018, Ending on 27 February 2018

We're fascinated whenever we see the stock prices of companies striking out in different directions than the market indices in which they're grouped, where the divergence of GE, which has continued in correction while the S&P 500 has itself rallied and recovered a good portion of what it lost during the recent correction calls for some explanation.

To get that context, we mined news sources to identify stories that would have influenced investor perceptions of GE on the days where rather than tracking along with the S&P 500, it diverged from it, where we're looking at the period where the divergence between the two opened up to more than 2%. Here's a quick sampling of the bad news headlines that coincide with GE's flight path going onto such a different trajectory than the index as a whole:

For the first four gap-widening days, it makes sense that the news would negatively affect investor expectations for GE's prospects as an investment as the company is working to shrink in size, while still facing large and, as yet, undefined liabilities, where the reduction in revenues from selling its assets could negatively impact its business outlook.

The only real exception is 26 February 2018, although for the first hour after the market opened, it looked like GE might break to new lows below $14 per share. Instead, the stock went on to rally and reached $14.65 per share to close the day.

Why did GE rally on that day after such bad news about its earnigns had come out? Your guess is as good as ours, but if we have to come up with some coherent explanation for it, here it is. The bad news about the company's plans to restate its 2016 and 2017 earnings that came out over the preceding weekend was really news about the past - not the future. When making investment decisions, investors always focus on the future, where what the company announced didn't much alter the expectations for GE's future prospects. So GE's stock price recovered to the level that it might reasonably have been projected to go if the news of the restated earnings hadn't happened at all.

All we know for sure is that like watching a flock of starlings execute a synchronized turn, how stock prices in an index change with respect to one another or to the index as a whole can be equally fascinating.

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27 February 2018

The last month has been an exciting time for the U.S. stock market, where if you wanted to describe it in one word, volatile would probably be the word that best describes it!

But to understand how exciting it has been for investors and traders, we need to put the last month of stock price volatility into some historical context. Which we've done in the following chart showing the daily volatility as the percentage change in the closing price of the S&P 500 since 3 January 1950, which updates one we first featured two-and-a-half years ago.

S&P 500 Daily Volatility (Percent Change Between Closing Value and Previous Day's Closing Value), 3 January 1950 - 26 February 2018

By and large, the pattern daily volatility in the S&P 500 and its predecessor indices over the last sixty-eight years and almost two months follows something that looks a lot like a normal distribution, although with considerably more datapoints (~79%) falling within one standard deviation of the flat, near-zero mean trend line than would be expected if that pattern of variation really applied (~68%).

Conveniently, one standard deviation is roughly equivalent to a percentage change of 1%.

Otherwise, about 95% of all the day-to-day datapoints fall within two standard deviations (or 2%) of the mean, and 99% of all the datapoints fall within three.

Datapoints that fall outside one standard deviation of the mean would therefore be evidence of a heightened level volatility for stock prices, while falling more than three standard deviations (or 3%) away from the mean would be evidence of an "extraordinary" amount of volatility.

Our second chart zooms in on the last month for the S&P 500, from Friday, 26 January 2018 through Monday, 26 February 2018.

S&P 500 Daily Volatility (Percent Change Between Closing Value and Previous Day's Closing Value), 26 January 2018 - 26 February 2018

In this chart, we can see that over the past calendar month covering some 21 trading days, 9 of the datapoints fall within the most "typical" range that we would expect based on the historical data, which is between 7 and 8 fewer than would be expected for that period of time.

The remaining 12 days are consistent with at least a heightened level of volatility in the S&P 500, where we would expect to see just 4 or 5 such days during the course of a month's time. Of those days, two fall more than three standard deviations from the mean, indicating just how extraordinary volatile the month has been for the index.

On one of those days, Monday, 5 February 2018, the S&P 500 dropped more than 4% (or four standard deviations) below the historical mean. Going over all the 17,148 trading days since 3 January 1950, we find that a 4% or larger percentage change from the previous day's close has only been recorded on 86 occasions, where the historic odds of that happening work out to be 1 in 199.

Coincidentally, the total point decline of 113.19 points from the previous day's closing value on 5 February 2018 is the largest single-day point decline on record for the S&P 500, but that's not a terribly impressive figure when you consider that the previous day's closing value for the index was 2,762.13.

The S&P 500's largest ever single day percentage decline was 20.47%, which occurred back on 19 October 1987, a day that became forever known to investors as Black Monday. In terms of actual points however, the index fell by 57.87 points, which is a little over half the value in points that the S&P 500 fell nearly 31 years later on 5 February 2018, when it fell by 4.1%.

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26 February 2018

The third full week of February 2018 marked the quietest week for the S&P 500 (Index: INX) over the past month, although the market closed on Friday, 23 February 2018 with an unexpectedly strong rally.

Alternative Futures - S&P 500 - 2018Q1 - Standard Model with Connected Dots for 2018Q1 and 2018Q2 Trajectories Between 7 February 2018 and 6 March 2018 - Snapshot on 23 February 2018

That strong response on Friday appears to have been largely motivated by the news that the Federal Reserve would be less aggressive than had been speculated in its plans to hike short term interest rates in the U.S. during 2018. The following table shows what investors expect for the future for the Federal Funds Rate in 2018, where quarter point rate hikes are expected to be announced at the Fed's Open Market Committee meetings scheduled for the end of March (2018-Q1), June (2018-Q2) and December (2018-Q4).

Probabilities for Target Federal Funds Rate at Selected Upcoming Fed Meeting Dates (CME FedWatch on 23 February 2018)
FOMC Meeting Date Current
125-150 bps 150-175 bps 175-200 bps 200-225 bps 225-250 bps 250-275 bps 275-300 bps
12-Mar-2018 (2018-Q1) 16.9% 83.1% 0.0% 0.0% 0.0% 0.0% 0.0%
13-Jun-2018 (2018-Q2) 3.9% 31.0% 60.0% 5.2% 0.0% 0.0% 0.0%
26-Sep-2018 (2018-Q3) 1.5% 14.0% 39.9% 36.3% 7.9% 0.4% 0.0%
19-Dec-2018 (2018-Q4) 0.8% 8.0% 26.9% 36.4% 21.5% 5.7% 0.7%

In the table above, we're trying something new to help better visualize what the probabilities indicated by the CME Group's FedWatch tool for the likely timing of changes in U.S. interest rates are communicating. Here, the cells that have been highlighted in yellow in each row represent when the odds that the Fed will hike the Federal Funds Rate at the selected date are greater than 50%, where the cell whose probability is shown in boldface font indicates the minimum target range to which they will likely be set. [If you're reading this article on a site that republishes our RSS news feed, you may need to click through to our site to see the color-coded formatting.]

Outside of Friday's market moving headline, the rest of the news of the week was mostly consistent with generating what we would describe as "typical" levels of noise for the S&P 500 in what was a holiday-shortened week of trading.

Tuesday, 20 February 2018
Wednesday, 21 February 2018
Thursday, 22 February 2018
Friday, 23 February 2018

Elsewhere, Barry Ritholtz identified the positives and negatives for the U.S. economy and markets in Week 3 of February 2018, where good news was found in the stock market and the economy at large, and the bad news of the week could mostly be tied to the impact of rising interest rates.

Coming soon, we'll take a look at the volatility in the S&P 500 over the past month to provide some proper historical context to consider it!

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23 February 2018

How are U.S. companies responding to having less of their revenues taxed by Washington D.C. after the passage and implementation of the Tax Cuts and Jobs Act of 2017?

As we've seen throughout this past week, reduced taxes have significantly increased projected corporate earnings per share by a sizable margin, where many firms have used their recently unburdened funds to repurchase their own shares in what looks set to be record numbers.

Other U.S. companies however are providing a more direct benefit to their shareholders in boosting their cash dividends, where since we've already covered the number of dividend increases and increases for the entire U.S. stock market in January 2018, the first month under the new tax law, we thought we'd go the extra mile to see how much dividends are changing.

To do that, we'll be sampling Seeking Alpha's Dividend News database to identify the U.S. companies that declared that they would either increase or decrease their dividends in January 2018, which we'll compare with a similar sample extracted from the same source in January 2017. The following chart summarizes the number of dividend increases and decreases that were declared by U.S. firms whose stocks trade on the NYSE and NASDAQ exchanges in those periods that are included in our sampling.

Sample of Declared Dividend Changes in January 2017 versus 2018

The quick text summary of the data in the chart is as follows:

  • 2017: 162 total, 151 increases, 11 decreases.
  • 2018: 177 total, 168 increases, 9 decreases.

So we see that in terms of pure numbers, 2018 is ahead of 2017. But what about the size of the dividend changes being declared?

Our next chart shows the median and mean (or average) dividend change declared by the companies sampled in January 2017 and in January 2018.

Median and Mean (Average) Change in Dividends per Share for U.S. Companies Declaring Changes in Their Dividend Payouts in January 2017 versus 2018

Focusing on the changes from 2017 to 2018, here's the text summary of the dividend data in this chart:

  • Median: January 2018's median increase of $0.020 per share across 177 companies is double the size of January 2017's median increase of $0.010 per share across 162 companies.
  • Average: January 2018's $0.031 per share is 51% larger than January 2017's average increase of $0.020 per share.

Multiply those changes by millions of shares, and suddenly, we're talking about some serious money! It's not as large as what we're projecting will go toward share buybacks in the immediate aftermath of the implementation of the new tax laws, but both are venues by which the 54% of American households that own stocks in some form can benefit from what U.S. companies are doing with the newly unburdened earnings in their financial accounts.


22 February 2018

Following the sudden improvement in their after-tax earnings following the implementation of the Tax Cuts and Jobs Act of 2017, many publicly-traded U.S. companies are taking advantage of the permanent corporate income tax reform by buying up shares in their own companies.

That strategy is in addition to doing things like increasing compensation and paying out bonuses to employees, increasing dividend payouts to investors, reducing debt and other balance sheet repairs and also investing in new business growth opportunities, all of which have been made possible by the reduction of the corporate tax burden.

Of these strategies, things like dividend hikes and share buybacks matter to investors, where as of 2017, count approximately 54% of U.S. households among their number, either through direct ownership of shares or through indirect vehicles like mutual funds and retirement and pension plans. Where share buybacks are concerned, Investopedia has put together the following video to explain how they can affect the value of shares of stock for a company that chooses that strategy.

So what does that mean for investors in 2018? A boom in buybacks if Birinyi Associates' observations of the year to date for share buybacks through mid-February 2018 is any indication:

Since President Donald Trump signed the tax bill, companies have announced about $170.8 billion in stock buybacks, the most ever for this early in the year.

"There's a whole stock pile of cash that just came back. Take Cisco. We know they had $68 billion trapped overseas, and they're going to take $25 billion of that and buy back stock," said Art Hogan, chief market strategist at B. Riley FBR.

Birinyi Associates, which has tracked buybacks since the 1980s, said this year's level, from Jan. 1 through Feb. 15, is the most ever, topping $147.2 billion in the period of 2016, which had been the busiest at this point of the year.

Given that data point for the previous record amount of share buybacks in 2016, we've projected what the total for share buybacks in 2018 may be, assuming that the full year's total matches the same proportion that was ultimately recorded back in that earlier year for the S&P 500.

S&P 500 Buybacks (Share Repurchases), 2000-2016, 
with estimates for 2017 and 2018

The historic data in the chart above comes from Yardeni Research and Standard & Poor, where we've estimated the full year's buybacks for the S&P 500 in 2017 from the data for its first three quarters, and then used the Birinyi Associates' figure for the first month and a half of 2018 to project the total share buybacks for S&P 500 companies in 2018.

What we find is that 2018's projected total of $628 billion in buybacks will break the previous record of roughly $589 billion worth of stock repurchases that was set by U.S. corporations in 2007, which would work out to be about a 7% increase over that previous record.

Time will tell if share repurchases were the right thing for the companies that are choosing this action to have done with the benefits they received from U.S. corporate income tax reform.

Update 24 February 2018: Lance Roberts takes a different tack in considering what the new boom in share buybacks means at RealInvestmentAdvice!

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21 February 2018

Starting back in 2012, we have taken a snapshot of the Standard & Poor's forecast for future earnings in the S&P 500 every three months, approximately at the midpoint of the current quarter. Today's snapshot of the trailing year earnings per share for the S&P 500 reveals something that we have not seen in all the time that we've visualized S&P's earnings forecasts: a dramatic increase in the amount of earnings per share that the companies of the S&P 500 are forecast to record before the end of the calendar year.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2014-2019, Snapshot on 2 February 2018

From mid-November 2017 to early-February 2018, the forecast for the S&P 500's trailing twelve month earnings per share has risen from $133.68 to $145.67.

This change may be directly attributed to the passage of the Tax Cuts and Jobs Act of 2017, which was signed into law on 22 December 2017. The law provides for a permanent reduction in U.S. corporate income tax rates, the statutory rates for which had previously been ranked among the highest in the world.

Since the amount of corporate earnings is determined after a company's revenues have been subjected to taxes, a rather large portion of this change reflects the positive impact of the reduction in U.S. corporate income tax rates. At the same time, there also has been an organic improvement in corporate earnings in recent months, which has been driven by improving business conditions. This latter effect can be seen to some extent in the chart above as the smaller improvement in projected earnings per share recorded for the S&P 500 in the period from mid-August 2017 to mid-November 2018.

Those improvements buck the "usual" pattern that we've seen consistently over the past six years, where projected earnings per share start off strong, but then go on to progressively weaken over time as the actual future for earnings failed to live up to initially forecast expectations.

Update 24 February 2018: Lance Roberts adds his perspective on the change in expected future earnings at RealInvestmentAdvice, while Ed Yardeni considers how that might affect stock prices going forward at his site.

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 16 February 2017. Last updated: 2 February 2018. Accessed 17 February 2018.

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20 February 2018

After the wild ride it went on in the first full week of February 2018, the S&P 500 (Index: INX rallied in a subdued fashion during the second week of February 2018.

Alternative Futures - S&P 500 - 2018Q1 - Standard Model - Snapshot on 16 February 2018

The subdued rebound for the S&P 500 was all the more remarkable because it occurred in an news environment where a resurgence in consumer inflation became more of a concern for markets, to the point where speculation began to rise that the Fed might hike short term interest rates in the U.S. four times in 2018.

Checking in with the CME Group's Fedwatch tool, we find that investors are still only betting on three rate hikes occurring during 2018, near the end of the current quarter of 2018-Q1, and the more distant future quarters of 2018-Q2 and 2018-Q4, where the probabilities reported by the tool indicate a greater-than-50% chance that the Federal Funds Rate will be increased by a quarter point (or more) at these specific points of time in the future.

Probabilities for Target Federal Funds Rate at Selected Upcoming Fed Meeting Dates (CME FedWatch on 16 February 2018)
FOMC Meeting Date Current
125-150 bps 150-175 bps 175-200 bps 200-225 bps 225-250 bps 250-275 bps 275-300 bps
12-Mar-2018 (2018-Q1) 16.9% 83.1% 0.0% 0.0% 0.0% 0.0% 0.0%
13-Jun-2018 (2018-Q2) 3.9% 31.3% 60.3% 4.5% 0.0% 0.0% 0.0%
26-Sep-2018 (2018-Q3) 1.7% 15.3% 41.9% 34.7% 6.0% 0.3% 0.0%
19-Dec-2018 (2018-Q4) 0.9% 9.1% 29.2% 36.6% 19.4% 4.4% 0.4%

The headline of the week was the drastic reduction in the kind of volatility that characterized the previous two weeks for the S&P 500. So much so that if we were to redraw our "connect-the-dots" manual forecasts of the potential trajectory of stock prices in our alternative trajectories chart above, we would choose a projected point for the alternative trajectories of 2018-Q1 and 2018-Q2 in the second week of March 2018, which would fall outside of the short term volatility echo in our model's projections, where they would extend slightly longer and instead of being flat-to-slowly rising, they would indicate slowing declining-to-flat.

Still, all the other assumptions behind our red-zone forecast appear to be holding at this time, so we're going to let the original forecast ride. We're also noticing something potentially interesting in the level of stock prices with respect to the alternate future trajectories our dividend futures-based model projects, where they would appear to be consistent with the levels that our model had projected earlier this year, before the year's volatility events really took off, adding considerable noise to its projections. We'll take a closer look at what that might mean for our red-zone forecasting approach in March, after all the data for the S&P 500 through the period of the short term volatility echo has come in.

While Week 2 of February 2018 was relatively subdued compared to the previous two weeks, there was no absence of potential market moving news during it. Here's the roundup of headlines and stories that caught our attention during the week that was.

Monday, 12 February 2018
Tuesday, 13 February 2018
Wednesday, 14 February 2018
Thursday, 15 February 2018
Friday, 16 February 2018

Meanwhile, The Big Picture's Barry Ritholtz outlined the positives and negatives for the U.S. economy and markets for the second week of February 2018.

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16 February 2018

Did you ever want to get into quantum physics, but didn't know where to start?

A good place to begin understanding a complex, complicated thing like quantum mechanics is at the beginning, where believe it or not, it all started with, dare we say, a light bulb moment! Check out the following video from MinutePhysics on the origin of quantum mechanics, which is really all about how physics works on the tiniest scales possible.

If you're ready to move on to the next level, you might enjoy Dominic Walliman's explanation of Quantum Physics for 7 Year Olds. After that, before you get cocky, remember that "nobody understands quantum mechanics!"


15 February 2018

In 2017, U.S. soybean producers sent an estimated 1.32 billion bushels of their crop to China, the second-most on record. The record for U.S-to-China soybean exports came a year earlier, when U.S. soybean producers exported an estimated 1.53 billion bushels of their crop that year to China, which was a dramatic increase over the 1.15 billion bushels they sent to China in the year before.

Estimated Bushels of Soybeans Exported by U.S. to China, 2012-2017

2016 would appear to be have been the most successful year to date for U.S. soybean exporters, but there's a lot more to that story.

Although the year saw optimal growing conditions for soybeans in the U.S., which resulted in a bumper crop, one of the main contributors to the success of U.S. soybean producers that year came about as a result of a severe drought in Brazil, the world's top soybean exporting nation.

Brazil's drought created a unique opportunity for U.S. soybean producers seeking to claim a larger share of the world market in 2016. Since Brazil's annual harvest peaks in the second quarter of each year, thanks to its Southern hemisphere geography that puts its growing seasons six months ahead of the U.S., the news that Brazil's 2016 soybean crop and exports would be reduced because of drought conditions provided U.S. growers with the advance warning they would need to respond to what, for them, would be an opportunity.

So they took it. U.S. soybean producers planted seed varieties that would optimize the yield for their crops, which helped contribute to 2016's bumper crop in the United States. They then aggressively harvested the crop to satisfy China's domestic demand for soybeans, where China was buying up as many bushels of soybeans from the U.S. as they could that year.

But there was a dark side to that success, which is now becoming increasing apparent. In choosing seeds that would maximize crop yields, U.S. soybean producers sacrificed the protein content of their crop, effectively reducing the quality of their product. In 2017, that meant having to compete with higher quality soybeans grown in Brazil as that nation's crops have rebounded from 2016's drought conditions.

U.S. soybean growers are losing market share in the all-important China market because the race to grow higher-yielding crops has robbed their most prized nutrient: protein.

Declining protein levels make soybeans less valuable to the $400 billion industry that produces feed for cattle, pigs, chickens and fish. And the problem is a key factor driving soybean buyers from the U.S. to Brazil, where warmer weather helps offset the impact of higher crop yields on protein levels....

Soybeans are by far the most valuable U.S. agricultural export, with $22.8 billion in shipments in 2016. Declining protein levels and market share pose another vexing problem for soy farmers already reeling from a global grains glut and years of depressed prices.

The quality problems of U.S. soybean producers go beyond that however. In their race to export as many soybeans as they could to China in 2016, they also got sloppy in their harvesting and processing practices, where an excessive amount of foreign material was being included within the industry's soybean shipments.

China's response to that problem was to impose stricter import specifications on U.S. soybean exports at the end of 2017, which is expected to negatively impact up to 50% of the nation's soybean exports in 2018. That impact will come in the form of higher costs for U.S. soybean producers, who will have to take steps to reduce the amount of non-soybean material that will be shipped to China.

Half of U.S. soybeans exported to China this year would not meet Chinese rules for routine delivery in 2018, according to shipping data reviewed by Reuters, signaling new hurdles in the $14-billion-a-year business.

More stringent quality rules, which take effect on Jan. 1, could require additional processing of the U.S. oilseeds at Chinese ports to remove impurities. This could raise costs and reduce sales to the world’s largest soybean importer, according to U.S. farmers and traders.

Half of the 473 vessel shipments in 2017 and half the total 27.5 million tonnes of U.S. soybeans exported to China this year contained more than 1 percent of foreign material, exceeding a new standard for speedy delivery, according to U.S. Department of Agriculture (USDA) data compiled by grain broker McDonald Pelz Global Commodities LLC.

In the short run, the choice to sacrifice quality to pursue additional revenue and higher profits made a lot of sense to U.S. soybean producers. In the long run, that choice could very well leave them worse off than if they hadn't taken that path. What choice would you have made in 2016 if you were playing the soybean export game?

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14 February 2018

If you went by the media's reports on the U.S. trade deficit, you might think that the U.S. economy was in a bad position because it imported a record amount more than it exported in December 2017.

The U.S. trade deficit widened more than expected in December to its highest level since 2008, as robust domestic demand pushed imports to a record high, adding to the stiff headwinds faced by the Trump administration’s “America First” trade policies.

The import-driven surge in the trade gap reported by the Commerce Department on Tuesday also suggests 3 percent annual economic growth may be hard to achieve. Imports, which subtract from gross domestic product, could get a further boost from a $1.5 trillion tax cut package that became effective in January.

But surprisingly, China didn't appears to be a major culprit in the last month of 2017, even though the U.S.-China trade deficit "jumped to a record $375.2 billion" overall in 2017.

Imports from China fell 7.6 percent in December....

Exports to China surged 7.5 percent to a record high in December. As a result, the U.S.-China trade deficit declined 13 percent in December.

What does that look like in terms of the year over year growth rate of the value of trade between the U.S. and China? The following chart shows the answer (along with 383 additional months of historic U.S.-China trade data!):

We find that the year over year growth rate of U.S. exports to China jumped upward in December 2017 after having dipped in the previous two months to near-zero growth levels. That dip is somewhat misleading, because it is largely attributable to a year-over-year decline in America's soybean exports to China that typically peak in the months of October through December each year, where these months in 2016 had seen all-time record levels of U.S. soybeans go to China.

Estimated Bushels of Soybeans Exported from the U.S. to China Each Month from January 2012 - December 2017

Looking back at the year over year growth rates, we see that the magnitude of the rebound in the growth rate of U.S. exports to China in December 2017 nearly matches the year-over-year increase in the U.S.' imports of goods from China, which confirms a strong close to 2017 for both China and the U.S. At the same time, we see that 2017 was good for both nations.

But don't take our word for the U.S. side of the trade ledger. AEI's Mark Perry read the same trade data, and even more dismal media reports, before arriving at a similar conclusion:

But all we hear about is how rising imports and trade deficits are a drag on economic growth, and how the goal should be to stimulate exports to increase output and jobs. And yet rising imports can be a sign of economic strength for US firms, with a positive effect on US jobs. As a hypothetical example, suppose that US imports of foreign-made auto parts (or steel) are increasing. Why would that be? It’s only because US automakers or the foreign transplants that now manufacture 21 different vehicles in the US are expanding production in the US. And to expand domestic production requires more US autoworkers. Therefore, the fact that imports rose to an all-time high in December is consistent with a US economy that is expanding, both for output and employment. And that’s exactly what we see from the data – jobless claims adjusted for the population are at an all-time historical low, the 4.1% jobless rate is the lowest since 2000 (and likely headed lower), retail sales are up 9.0% annualized over the past six months through December, and January’s ISM Manufacturing and Non-Manufacturing indexes just hit the highest readings for a January in seven and 14 years respectively. In January, hourly earnings were up 2.9% from a year ago, the best reading since 2009. Private payrolls were up 196,000 in January for the past twelve months, and full-time employment has grown by 2.39 million jobs while part-time employment is down 92,000! The are now 5.8 million unfilled jobs and quit rates are at the highest levels of the recovery. Lots of evidence of both strong economic growth and job growth!

Perry suggests a solution for better seeing the importance of both imports and exports in indicating the relative health of a nation's economy:

The continual focus by politicians and the media month-after-month on the “trade deficit” is misplaced, and the ubiquitous media reports that describe “trade deficits” disparagingly miss the bigger picture of international trade. Rising exports and rising imports are both signs of an expanding, healthy economy, and tracking the total monthly volume of international transactions (exports + imports) is, therefore, a better measure of the importance of international trade to our economy than tracking net exports (exports – imports).

We have the monthly data going back to January 1985 - let's try it with the U.S-China trade figures through December 2017:

Combined Value of U.S. Exports to China and Imports from China, January 1985 - December 2017

In the chart above, we see that for both nations, the total volume of imports and exports between the U.S. and China rebounded strongly in 2017, as both nations' trade volumes showed robust growth as they recovered from a depressing 2016. This is definitely not the dismal economic picture being portrayed in the media.

We'll close by noting that Perry features a chart showing the combined total of the value of all of the U.S.' imports and exports in his post on the topic, so if you're looking for a chart with that data, here's where you'll find it with data from 2004 through 2017.


13 February 2018

In just two years, the United States has become one of the world's major oil exporting nations, going from virtually $0 to nearly $22 billion worth of oil shipments being sent out of U.S. ports in the last year after the U.S. Congress lifted a 40 year old ban on the export of crude oil from the nation.

The following chart shows the value of the amount of crude oil exported in each month to the world and also just to China since the ban was lifted in December 2015.

Value of U.S. Crude Oil Exports to the World and to China, January 2016 through December 2017

Believe it or not, China is just the second biggest importer of crude oil from the United States. The biggest importer is Canada, which you can confirm for yourself in the following chart showing the largest importers of U.S. crude oil in 2017.

Percentage Share of U.S. Crude Oil Exports by Nation, January 2017 through December 2017

From 2015 to 2016 to 2017, U.S. exports of crude oil to the world increased from $0 to $9.4 billion to $21.8 billion. But perhaps the more remarkable story is the growth of U.S. oil exports to China during that time, and particularly from 2016 to 2017.

Those exports have grown in value from $0 in 2015, to $360 million in 2016, to $4.4 billion in 2017 - one-fifth of all U.S. oil exports to the world - a torrid pace of growth that's finally drawing media attention.

Bit by bit, the U.S. petroleum industry is turning world oil markets inside out.

First, sharp drops in U.S. imports of crude oil eroded the biggest market that producers like OPEC had relied on for many years. Now, surging U.S. exports – largely banned by Washington until just two years ago - challenge the last region OPEC dominates: Asia.

U.S. oil shipments to China have surged, creating trade between the world's two biggest powers that until 2016 just did not exist, and helping Washington in its effort to reduce the nation's huge trade deficit with China.

The transformation is reflected in figures released in recent days that shows the U.S. now produces more oil than top exporter Saudi Arabia and means the Americans are likely to take over the No.1 producer spot from Russia by the end of the year.

2018 could be very good for the U.S. oil production and export industry. It's hard to believe that just seven months ago, we were lucky to stumble into what was then a hidden story for U.S.-China trade that has since become one of the biggest economic stories of 2017.

Data Source

U.S. Census Bureau. U.S. Trade Online. [Online Database]. Accessed 11 February 2018.


12 February 2018

Extreme choppiness was the name of the game for the S&P 500 (Index: INX) in the first full week of February 2018, as the Lévy flight crash that started last week continued to wreak havoc on stock prices.

The following chart updates the one we featured in our "chaotic carnage" post last week, which confirms the extent to which the market's previous period of calm and relative order has broken down.

S&P 500 Index Value vs Trailing Year Dividends per Share, 30 September 2015 through 9 February 2018

From its peak closing value of 2,872.87 on 26 January 2018 to the lowest-close-to-date since of 2,581.00 on 8 February 2018, the S&P 500 has swung through the equivalent of 8.5 standard deviations of the typical level of volatility that it saw in the preceding 21 months.

As for what prompted the sudden Lévy flight crash, there are quite a few candidates for consideration. For a solid overview, we'll point you toward some of the more insightful analysis that we've seen in the past week, where we'll encourage you to follow the links provided by the authors of each article for more information:

From the perspective of our dividend futures-based model of how stock prices work, we see the sudden decline of stock prices as simply a change in how far forward in time investors are looking, where the different expectations for the rate of change of dividend growth at different points of time in the future would appear to explain most of the change in stock prices, where we've seen investors myopically shift their focus from the distant future quarter of 2018-Q4 all the way back to the current quarter of 2018-Q1. For our model, when the gap between these different expectations are wide and investors shift their attention from one point of tiem in the future to another, the result will either be a Lévy flight rally or crash depending on the direction of the change in how far into the future investors are focusing their attention.

That explains most of what we've observed to date, but not all. For us, this event is the first real opportunity that we've had to identify the potential limitations of our model in a real-world test that we really haven't had since we first began developing it nearly 10 years ago when the market was already undergoing a fundamentally-driven crash event. Following George Box' wisdom that "all models are wrong, but some are useful", we also took a stab last week at identifying where stock prices might be likely to go next if the S&P 500 was near the end of its Lévy flight crash event.

Alternative Futures - S&P 500 - 2018Q1 - Standard Model - Snapshot on 09 February 2018

As events went on to prove later during the week, we attempted our "red-zone forecast" too soon, where for our connect-the-dots approach to work, we would need to connect the distant future end of our forecast range to a point outside of the period affected by the echo of the recent surge of volatility in stock prices in our model's projections. Given the market's recent volatility, it may be some time before we know where that point of time in the future is.

Still, even though we know it's wrong, we're going to leave the red-zone forecast as shown, because it marks a useful threshold for us in testing the limitations of our model. If stock prices break significantly below the forecast range, without a corresponding decline in the expectations for future dividends, that will confirm for us that factors outside of the scope of the model are driving stock prices.

That's one reason why we pointed to a potential investment opportunity related to the dividend futures that we use in our model last week, which haven't budged since mid-to-late December 2017. The willingness of investors to pick up what seems at this point to be money on the sidewalk can help provide us with the updated information that we need about the state of expectations for dividends that will let us get a clearer picture of the future.

As long as we're on the topic, our model is also limited in that, outside of changes in the expectations for future dividends, it only tells us when and in what direction investors shift their forward-looking attention during these kind of Lévy flight events. It doesn't tell us why they have changed how far into the future they're looking, which is why we make a point of paying attention to news headlines that might have some market-moving potential. Week 1 of February 2018 had no shortage of news....

Monday, 5 February 2018
Tuesday, 6 February 2018
Wednesday, 7 February 2018
Thursday, 8 February 2018
Friday, 9 February 2018

Barry Ritholtz listed the positives and negatives for the U.S. economy and markets for the first full week of February 2018 - surprisingly, the movements in stock prices made both sides of the list.

It's definitely an exciting time in the market!

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