Political Calculations
Unexpectedly Intriguing!
November 30, 2020

2020's Thanksgiving holiday-shortened trading week came and went, leaving the S&P 500 (Index: SPX) sitting atop a new record high for the index before disappearing into market history.

For those who checked out early for the holiday, we'll repeat how we closed the previous edition of the S&P 500 chaos series, since it helps explain this week's update to the alternative futures chart.

On a final note, sharp-eyed readers will note that over the projected future of next two weeks, the alternative futures chart is showing a relatively short duration "echo" of the volatility that struck the market about a month ago. This is an artifact from the model's use of historic stock prices in setting the base reference points from which it projects the future. For longer duration events, we will often add a redzone forecast range to account for the echo effect, but since this upcoming echo is comparatively short, we'll simply note that the trajectory of the S&P 500 will likely appear to "run hot" with respect to the model's projections over these weeks.

Here is this week's alternative futures chart, which shows what running hot looks like in the context of what we just described.

Alternative Futures - S&P 500 - 2020Q4 - Standard Model (m=+1.5 from 22 September 2020) - Snapshot on 27 Nov 2020

Although we're not adding a redzone forecast to the chart, all that exercise involves is connecting the dots of the projected forecast for a given future quarter investors are focusing upon from a point before the echo effect skews the projection to a more distant point in the future after the echoes of past stock price volatility have dissipated. If we were to add one, we would start by assuming investors would remain focused on 2021-Q3 and connect points for this alternative trajectory on opposite sides of the echo. We would then indicate a range of plus-or-minus three percent of the value of the index to account for typical day-to-day trading volatility.

The current echo, which traces back to the volatility of a month earlier, will run out before the end of this week. But since you now know how that particular magic works, we'll leave it as an exercise for you to either amaze or dismay your friends by making your own redzone forecast with one of our spaghetti forecast charts!

Monday, 23 November 2020
Tuesday, 24 November 2020
Wednesday, 25 November 2020
Friday, 27 November 2020

A succinct summary of the positives and negatives Barry Ritholtz found in the holiday-shortened trading week's economics and markets news is available over at The Big Picture.

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November 27, 2020

It's the day after Thanksgiving 2020, and like many Americans, we're now pondering what can we have to eat along with our turkey leftovers.

Longtime readers know we have a strong affinity for Campbell's Tomato Soup, since we've tracked the price of an iconic can of the condensed product since 1897.

That's why we were excited to discover the following 21 minute time capsule video from 1952. While it starts with an awful magic act that becomes an awfully long commercial for Campbell's Soups, it really says quite a lot about how Americans lived and ate nearly seven decades ago. Not to mention showing how Campbell's supply chain worked to get the finest ingredients to make its soups and get them to American consumers, as the company's home economist, Ann Marshall, was working to "create new ways in which soup can serve you even better".

We have to admit we were surprised by the very existence of the Chicken-Cranberry Salad featured in the film, which somehow hasn't survived into the 21st century. It seems whatever partnership existed between Campbell's and the Knox gelatin corporation at the time wasn't strong enough for this chilled concoction to endure.

But since we came for tomato soup, here's a quick overview of the suggestions Campbell's had for how to use its tomato soup in your recipes in 1953:

  • As a base for beef stew.
  • Use it just as it comes from the can as tomato sauce.
  • Pour half a can into your meat loaf as an ingredient, then heat and steam the rest of it to cover your meat loaf as a pour-on sauce.
  • Make a full-flavored spaghetti sauce from it. Or tomato cheese macaroni.
  • A "spicy, mellow-favored" cake!
  • A French salad dressing when shaken with oil, vinegar, and seasoning.
  • Combined with equal parts clam chowder and milk or water for a really hearty soup.
  • Combined with equal parts split pea soup and milk or water to create "Purée Mongole", which apparently "wins rave notices every time".

We didn't know what Purée Mongole was either, but it turns out "it was popular in the 1930s, being served in Manhattan restaurants in New York City. Mongole soup has since declined in popularity and is rarely (if ever) seen today." The New York City hotel chef who created it, Louis Diat, is better known for also creating the cold leek and potato soup known as vichyssoisse in 1917.

Speaking of which, there is a tomato-based version of vichyssoisse that looks pretty appealing. Is anyone else hungry for soup all of a sudden?

Previously on Political Calculations

Our coverage of America's most iconic soup, presented in reverse chronological order!

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November 26, 2020

We hope you have a Happy Thanksgiving. To help achieve that goal, Michael Wade has crafted 10 rules to follow to help ensure your Thanksgiving experience is a happy one.

  1. Thou shalt not discuss politics at the dinner. There is next to no chance that you'll convert anyone and any hard feelings that are generated may last long after the pumpkin pie is finished. Why spoil a good meal?
  2. Thou shalt limit discussion of The Big Game. This is mainly directed at the men who choose to argue plays, records, and coaches while their wives stare longingly at the silverware. The sharp silverware.
  3. Thou shalt say nice things about every dish. Including the bizarre one with Jello and marshmallows.
  4. Thou shalt be especially kind to anyone who may feel left out. Some Thanksgiving guests are tag-alongs or, as we say in the business world, "new to the organization." Make a point of drawing them in.
  5. Thou shalt be wary of gossip. After all, do you know what they say when you leave the room? Remember the old saying: All of the brothers are valiant and all of the sisters are virtuous.
  6. Thou shalt not hog the white or dark meat. We know you're on Atkins but that's no excuse.
  7. Thou shalt think mightily before going back for seconds. Especially if that means waddling back for seconds.
  8. Thou shalt not get drunk. Strong drink improves neither your wit nor your discretion. Give everyone else a gift by remaining sober.
  9. Thou shalt be cheerful. This is not a therapy session. This is not the moment to recount all of the mistakes in your life or to get back at Uncle Bo for the wisecrack he made at your high school graduation. This is a time for Rule #10.
  10. Thou shalt be thankful. You're above ground and functioning in an extraordinary place at an extraordinary time. Many people paid a very heavy price (and I'm not talking about groceries) to give you this day. Take some time to think of them and to express gratitude to your friends and relatives. Above all, give special thanks to the divine power who blesses you in innumerable ways.

Ignore any one rule at your own risk. And if it helps, they're not just rules, they're also basic tools you can use to discover happiness in your life after your family's Thanksgiving dinner is over.

Slicing pumpkin pie beside bread at end of Thanksgiving dinner - Source: Element5 Digital via Unsplash - https://unsplash.com/photos/RPjyNMHDrFY

Image Credit: Photo by Element5 Digital on Unsplash

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November 25, 2020

The United States is the largest producer of farm-raised turkeys in the world.

That's a statement that raises several questions: How many turkeys are raised on American farms? Where are these turkeys raised within the United States? If the U.S. is the world's largest producer, does it export turkeys to anywhere else in the world?

In 2019, the U.S. Department of Agriculture estimates the answer is 229 million turkeys! And as for where they are raised within America, we created an interactive map to show where farm-raised turkeys can be found within the U.S.

The answer to the third question is yes, the U.S. does export food products made from farm-raised turkeys elsewhere in the world. In the twelve months from October 2019 through September 2020, at least other 87 nations or their territories received turkey products from the U.S. The U.S. Census Bureau's estimates the value of these turkey products added up to more than $441 million.

As for where they specifically went, we created another interactive map, this time of the world, to visualize which countries imported turkey products from the U.S.

The data for the United Kingdom, France, and the Netherlands includes the value of turkey products exported to their overseas territories, many of which are in the Americas where turkeys are a native species, and which account for bulk of their indicated consumption.

Meanwhile, Mexico is the largest consumer of turkey products exported by the U.S., accounting for over $276 million (63%) of the total value of U.S. exports to the world. China was a distant second at $19.4 million (4%), as it significantly increased its imports of U.S.-produced turkey meat to help meet its 'Phase 1' trade agreement obligations and to partially compensate for its extreme shortage of pork resulting from its 2019 outbreak of African Swine Fever within its domestic hog farms.

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November 24, 2020

Thanksgiving is the quintessential American holiday, and for many American households, turkey is the centerpiece of their Thanksgiving dinner.

But how many farm-raised turkeys are there? How much turkey meat is produced each year? And how big is an average farm-raised turkey in the United States?

Political Calculations tracks all these Thanksgiving-related datapoints, tapping the U.S. Department of Agriculture's databases going back to 1970, so you can see how American farm-raised turkeys have changed over the past five decades.

Speaking of change, the population of farm-raised turkeys in the United States has generally fallen since 1996. In 2020, an estimated 222 million turkeys were raised on American farms, which is down some 27% from the peak of 302.7 million raised in 1996.

Number of Turkeys Raised on U.S. Farms, 1970-2019, with estimate for 2020

The figure for 2020 also represents a decline of 7 million from 2019's level, which itself was revised downward from an initial estimate of 240 million.

By contrast, the collective live weight of farm-raised turkeys has generally plateaued since 1996, falling within a range between 6.877 billion pounds (1999) and 7.922 billion pounds (2008). The initial estimate of the live weight of 2020's 222 million farm-raised turkeys is 7.175 billion pounds.

Total Live Weight of Turkeys Produced, 1970-2019, with estimate for 2020

The combination of a generally flat total live weight for all turkeys produced on American farms with a falling number of birds can only be explained by the growing size of individual turkeys. In 2020, we estimate the average weight of a live farm-raised turkey in the U.S. is 32.3 pounds, down slightly from 2019's revised figure of 32.5 pounds.

Total Live Weight of Turkeys Produced, 1970-2019, with estimate for 2020

Compared to the decade of the 1970s, when the average farm-raised turkey tipped the scale at 18.7 pounds, that represents a 73% increase in the typical size of turkeys produced in the U.S., where their average weight has steadily risen over the last four decades.

That trend may be changing however, because smaller turkeys are in high demand as Americans downsize for 2020's Thanksgiving. With celebrations limited to immediate family members with the ongoing coronavirus pandemic, American consumers have been bypassing larger birds in favor of smaller ones.

Data Sources

National Turkey Federation. Sourcebook. [PDF Document]. October 2013.

U.S. Department of Agriculture. National Agricultural Statistics Service. Poultry - Production and Value: 2019 Summary. [PDF Document]. April 2020.

U.S. Department of Agriculture. National Agricultural Statistics Service. Turkeys Raised. [Online Database]. Accessed 1 November 2020.

U.S. Department of Agriculture. Economic Research Service. Livestock, Dairy, and Poultry Outlook. (LDP-M-316). [PDF Document]. 16 October 2020.

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November 23, 2020

In the previous edition of our S&P 500 chaos series, we reported investors had shifted their forward looking focus from 2020-Q4 outward to 2021-Q3, after news of an effective vaccine to combat the SARS-CoV-2 coronavirus pandemic broke.

Since then, news of more vaccines developed to prevent COVID-19 filled the news stream, and investors have remained focused on 2021-Q3. The latest update to our alternature futures chart visualizes that state of affairs through the close of trading on Friday, 20 November 2020.

Alternative Futures - S&P 500 - 2020Q4 - Standard Model (m=+1.5 from 22 September 2020) - Snapshot on 20 Nov 2020

Why would investors focus on 2021-Q3 in response to positive vaccine development news? Or rather, why wouldn't they focus their attention on any other future point of time?

Investment manager Barry Ritholtz explains why investors would seeming pluck 2021-Q3 to focus upon out of thin air in his 20 November 2020 blog post "The Halfway Point". Go read the whole thing, but here's an excerpt that takes investors right up to the doorstep of 2021-Q3.

Here is a shocking observation:

The pandemic lockdown began in March of 2020. As of today, the two leading vaccine candidates from Pfizer and Moderna are requesting FDA approval for emergency use, then a fast track approval for distribution. These should become available in Q1, then be more widely distributed in Q2 and Q3. Best estimates for any form of herd immunity is later next year. Expectations are for life to begin to return to normal — meaning, going to back to work, mask-less social interactions, commuting, public events, etc. — are for sometime around June 2021.

From the March 2020 lockdown to a June 2021 re-opening is a 16-month span. The halfway mark? It’s today.

What we're seeing in the alternative futures chart suggests investors are being a bit more cautious in anticipating the post-pandemic "reopening" beginning after June 2021, but otherwise, what Barry is describing is exactly how investor expectations have come to focus on a specific point of time in the future, which is directly affecting today's stock prices.

That's exactly what the dividend futures-based model we use to project the potential future trajectories the S&P 500 might take is designed to do, provided you know how far forward in time investors are focusing their attention in planning their current day investment decisions. And now, even though nothing in the news itself has specifically pointed to that future quarter, we now have a coherent explanation for why investors would suddenly fix their forward-looking attention upon the distant future quarter of 2021-Q3.

At least, until they have reason to shift their focus to another point of time in the future, or the expectations for dividends at that point of time significantly changes. Both of which is subject to the random onset of new information.

Speaking of which, here are the samples we pulled out of the news stream for the week that was, based on their market-moving potential.

Monday, 16 November 2020
Tuesday, 17 November 2020
Wednesday, 18 November 2020
Thursday, 19 November 2020
Friday, 20 November 2020

The Big Picture's Barry Ritholtz also listed the positives and negatives he found in the past week's economics and markets news. Barry's weekly series is a good starting place for picking up additional context that percolates in the background beyond the headlines we feature for their market-moving potential.

On a final note, sharp-eyed readers will note that over the projected future of next two weeks, the alternative futures chart is showing a relatively short duration "echo" of the volatility that struck the market about a month ago. This is an artifact from the model's use of historic stock prices in setting the base reference points from which it projects the future. For longer duration events, we will often add a redzone forecast range to account for the echo effect, but since this upcoming echo is comparatively short, we'll simply note that the trajectory of the S&P 500 will likely appear to "run hot" with respect to the model's projections over these weeks.

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November 20, 2020

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500 (Index: SPX) at approximately the midpoint of the current quarter, shortly after most U.S. firms have announced their previous quarter's earnings.

The latest forecast for S&P 500 earnings through the end of 2020 suggests a less deep earnings recession than the forecast from the Summer 2020 snapshot, indicated a better-than-previously-expected bottom for the Coronavirus Recession. At the same time, S&P continues to project a robust recovery for earnings in 2021, although not as strong as it did three months ago.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, September 2014-December 2021, Snapshot on 12 November 2020

The chart shows two previous earnings recessions for the S&P 500, going back to 2014. As you can see from the historic earnings per share data shown in the chart, Standard & Poor has a history of making optimistic projections, which are often revised downward. Changes in S&P's projections for 2021 will be something to watch as we get into 2021, especially with the prospects for a global double-dip recession.

Data Source

Silverblatt, Howard. Standard & Poor. S&P 500 Earnings and Estimates. [Excel Spreadsheet]. 12 November 2020. Accessed 19 November 2020.

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November 19, 2020

One week ago, we projected the state of Arizona would soon arrive at a critical juncture in its experience with the coronavirus pandemic. With the rate of ICU bed usage in the state for COVID-19 patients now surpassing a key threshold, that time has now arrived.

That state of affairs may be seen in a chart tracking Daily COVID-19 ICU Bed Usage in Arizona, where the number of beds occupied by COVID-19 patients now exceeds the level would be considered easily sustainable.

Daily COVID-19 ICU Bed Usage in Arizona, 3 March 2020 - 18 November 2020

Arizona's hospitals still have available ICU bed capacity, so the situation in the state isn't as critical as other areas that are currently experiencing a significant surge in cases. What exceeding this threshold means is that Arizona hospitals need to begin more actively managing their ICU beds usage to accommodate the rising numbers of COVID-19 patients. Ideally, those measures will involve increasing their ICU bed capacity. Unlike many states, Arizona saw two new hospitals open this month in its major metropolitan areas, which will provide some additional breathing room.

Sharp eyed readers will note we've added a new event to this chart. Event I marks an increase in the trend for COVID-19 ICU bed usage that coincides with political events that took place in the state during the period from 23 October 2020 through 25 October 2020. Using the back calculation method to identify the period in which the incidence of coronavirus exposures points to this period as a significant event. The latest update to our chart tracking daily new COVID-19 hospital admissions in Arizona identifies each of the major events associated with a changes in the risk of coronavirus exposure among Arizona's population.

Daily COVID-19 New Hospital Admissions in Arizona, 3 March 2020 - 18 November 2020

The data for this latter chart is still incomplete, where the ICU bed usage chart has proven to be a good real time indicator of the progression of SARS-CoV-2 coronavirus infections within the state. We anticipate the rolling 7-day moving average will soon confirm the surge in COVID-19 hospitalizations.

Data for positive COVID-19 test results in Arizona already confirms a surge in new cases, pointing once again to the period of 23 October 2020 through 25 October 2020 as the period in which the incidence of new infections increased. The following chart of daily newly confirmed COVID-19 cases in Arizona shows the latest surge:

Daily COVID-19 Confirmed Cases by Sample Collection Date in Arizona, 3 March 2020 - 18 November 2020

Meanwhile, since it has the greatest lag between the incidence of exposure and observed change in trend, a chart of deaths attributed to COVID-19 in Arizona does not yet confirm a change in trend. We project the rolling 7-day moving average of coronavirus deaths will show a change in trend taking place in the period from 9 November through 13 November 2020 as these deaths are reported in the weeks ahead.

Daily COVID-19 Deaths in Arizona, 3 March 2020 - 18 November 2020

We track Arizona's COVID-19 data because the state provides high quality, relatively detailed data that makes it possible to use the back calculation method to identify when the rate of incidence of coronavirus infections has changed for the state's residents. To better show how that method works, we put together the following chart to track the incidence of COVID-19 infections among the various demographic age groups reported by Arizona's Department of Health Services. The chart focuses on the time from 9 August 2020 through 18 November 2020, which covers Arizona's 'back-to-school' period for its state universities.

In this chart, we're identifying trend-changing events by number instead of letter, so here's the basic summary:

  1. 20-22 August 2020: In-person classes begin at state universities.
  2. 4-6 September 2020: Social mixing during Labor Day weekend.
  3. 13-15 September 2020: University of Arizona imposes lockdown measures on its students (the outbreak of cases in the state during this time was concentrated at the UA campus). After this third significant event affecting the incidence of new coronavirus cases in Arizona, it's important to note the divergence that takes place among demographic age groups in the state. The Age 0-19 group sees a falling number of cases, as Arizona schools have measures that are largely effective in limiting the spread of new cases. But the Age 20-44 group sees an increasing number of cases as compared to all other age groups, where this group is the most likely to frequent high exposure risk venues, such as bars, gyms, and other businesses for which public health officials have established specific operating requirements.
  4. 23-25 October 2020: Political rallies centered around the occasion of the 24 October 2020 National Vote Early Day, less than two weeks ahead of the U.S. elections.

The current upward trend in cases and what we can identify as contributing factors to it using the back calculation method suggests the most effective approach state and local government officials can take to reverse its adverse trend would be to restrict the operation of high exposure risk businesses in local communities as the ICU beds usage within them nears 95% of capacity. Arizona has already demonstrated a decentralized approach can be highly effective in coping with a surge in cases, without unnecessarily imposing economic hardships on the state's residents in areas where the number of cases and burden on loal hospital resources is relatively low.

Local officials could also mandate wearing masks at public venues within their jurisdictions, though we think this option would provide little benefit. That is because most areas in the state already have relatively high rates of compliance with wearing masks inside local businesses, where there is little evidence to suggest a statewide mandate would significantly alter the trend. The current situation differs from the situation that applied during the summer when Arizona became a national hotspot for COVID-19 infections, when the rate of mask wearing was very low prior to the state governor's order allowing local officials to impose mask wearing requirements for their residents. Starting from an already higher level of mask wearing, any additional benefit that might be realized is much smaller.

With the elections now in the past, removing that contributor to the risk of virus exposure, Arizona's next challenge in its coronavirus pandemic experience will be to address the social mixing that will take place during the Thanksgiving holiday. We'll present our next follow up after the holidays to see how the state fared.

Previously on Political Calculations

Here's our previous Arizona coronavirus coverage, with a sampling of some of our other COVID analysis!

References

Arizona Department of Health Services. COVID-19 Data Dashboard. [Online Application/Database].

Maricopa County Coronavirus Disease (COVID-19). COVID-19 Data Archive. Maricopa County Daily Data Reports. [PDF Document Directory, Daily Dashboard].

Stephen A. Lauer, Kyra H. Grantz, Qifang Bi, Forrest K. Jones, Qulu Zheng, Hannah R. Meredith, Andrew S. Azman, Nicholas G. Reich, Justin Lessler. The Incubation Period of Coronavirus Disease 2019 (COVID-19) From Publicly Reported Confirmed Cases: Estimation and Application. Annals of Internal Medicine, 5 May 2020. https://doi.org/10.7326/M20-0504.

U.S. Centers for Disease Control and Prevention. COVID-19 Pandemic Planning Scenarios. [PDF Document]. Updated 10 September 2020.

COVID Tracking Project. Most Recent Data. [Online Database]. Accessed 10 November 2020.

More or Less: Behind the Stats. Ethnic minority deaths, climate change and lockdown. Interview with Kit Yates discussing back calculation. BBC Radio 4. [Podcast: 8:18 to 14:07]. 29 April 2020.

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November 18, 2020
Adam Nowakowski's Day Trading Investor via Unsplash: https://unsplash.com/photos/MFms-wkv3Ow

Three weeks ago, we began following Iron Mountain (NYSE: IRM), a Real Estate Investment Trust (REIT) whose core business is documents management. While the company is best known today for archiving the paper records of large corporations, it has been increasing its investments into electronic records management technology to expand its business in the digital age.

The reason we chose this particular company to follow is because it appeared to be on the cusp of pursuing one of two potential paths with respect to its dividend policy. IRM's stock price had been crushed with the coronavirus pandemic in 2020, where the company's market cap with respect to its aggregate dividends had fallen below its historic range.

So much so that, one week before its 2020-Q3 earnings call with investors, the level of its market capitalization suggested it had a strong chance of either cutting its dividends per share by a third or holding its dividend steady with a slim possibility of a small increase. The latter scenario assumes the firm had been successful in restructuring its debt during the previous three months, which would free up funds to sustain its generous dividend.

Iron Mountain's 2020-Q3 earnings call then came and went on 5 November 2020. The company's management chose the second path, which allows us to update the visual assessment of the relative value of the company's market cap with respect to its aggregate dividends against the historic backdrop of the relationship between these two financial measures during the past ten years.

Iron Mountain (NYSE: IRM): Market Capitalization vs Forward Year Aggregate Dividends per Share at Dividend Declaration Dates, 2010-2020, Snapshot on 5 November 2020

IRM has taken advantage of falling interest rates prompted by the pandemic to restructure much of its short term debt, which has taken the prospect of a significant dividend cut off the table at this time. Here's a relevant excerpt of CEO William Meaney's comments on the topic from the transcript of IRM's 2020-Q3 earnings call:

Turning to cash flow and the balance sheet, we are operating from a position of significant balance sheet strength. In the third quarter, our team did a nice job delivering further cash cycle improvement with solid performance in both payables days and days sales outstanding. On a sequential basis, cash cycle improved by a full day as a result of continued DSO improvement. In August, the team executed another successful bond refinancing, issuing $1.1 billion to redeem our most restrictive outstanding debt and pay down a portion of the outstanding balance under our revolving credit facility.

The continued strong support received from the fixed income community provided us the opportunity to upsize our transaction while printing the lowest coupon for 10-year notes in the company’s history. Taken together with our bond offerings in June, we issued $3.5 billion of new debt on a leverage-neutral basis, increased our weighted average maturity by over two years to nearly eight years, while only modestly increasing our weighted average cost of debt.

Additionally, these new bonds are more in line with our REIT peers as they include a fixed charge coverage ratio as opposed to a debt to EBITDA covenant. Also, I think it is worth noting that we have eliminated all of our 6.5 times leverage covenant bonds, meaning our most restrictive bond covenant is now 7 times debt to EBITDA.

At quarter end, we had $1.7 billion of liquidity. As a reminder, at the end of the second quarter, we had elevated levels of cash on our balance sheet due to the timing of the payoff of one of our notes from the June bond offering. We paid off the notes in early July, leaving us with a cash balance at September 30 of $152 million.

We ended the quarter with net lease adjusted leverage of 5.3 times, which takes into account adjustments as described in our credit facility. Looking ahead, we expect to end the year with leverage of approximately 5.5 times, which would represent an improvement year-on-year as we make progress towards our long term leverage range.

That's important because companies generally need at least one of two things to be positive to sustain their dividends over time: their earnings and their cash flow. IRM priortized restructuring its debt to reduce the pressure it presented on its cash flow, which allows it to preserve its dividend, which it left unchanged. Here are Meaney's comments on that subject, which immediately followed his comments on IRM's debt restructuring:

With our strong financial position, our board of directors declared our quarterly dividend of $0.62 per share to be paid in early January.

Turning to capital expenditures, our full year expectation is now approximately $450 million, or a decrease of $75 million, reflecting development capital for our Frankfurt data center that will now be a part of our venture with AGC.

Meaney continues describing how IRM's plan to sustain its dividend can be maintained while the company continues to expand its electronics records management business line:

Now let me share a few thoughts as to our capital allocation strategy. First, we are committed to our dividend at this sustainable level and over time, we expect to glide into our targeted AFFO payout ratio of mid-60%. Second, we are committed to our target long term leverage range of 4.5 to 5.5 times on a net lease adjusted basis. This year, the team has made good progress toward our target.

As investors know, we have been allocating significant capital to our data center business for several years, and as our pipeline continues to build with high return investment opportunities, our strategic intent is to increase the amount of capital we dedicate to the business. With that, we have considered options to generate incremental funds for investment.

We view capital recycling as a good means to monetize certain assets, particularly industrial real estate to increasingly invest in our development pipeline. Industrial cap rate are at historically low levels, and we have the opportunity to structure long term leases on favorable terms that effectively allow us to have control of the facilities, whether we lease or own. With that, in the third quarter our team accessed the market and monetized two facilities for proceeds of approximately $110 million. This brings our year-to-date proceeds to nearly $120 million, ahead of our full year target of $100 million.

With the highly favorable market backdrop together with our development pipeline, we are planning to recycle relatively more going forward, albeit what will amount to a small portion of our total industrial assets. Similarly, we view selling stabilized data center assets into a joint venture as analogous to monetizing industrial real estate assets - it represents another source of capital to redeploy into development projects. The joint venture we just announced in Frankfurt is a good example of this strategy. The JV provides us with an opportunity to boost returns on stabilized assets and provides incremental capital to allocate to projects in the development phase.

We think Iron Mountain's plan minimizes the risk of a dividend cut but doesn't eliminate its exposure to other factors that might ultimately lead to that outcome. While the company's stock saw a boost to $27.48 per share on the day of the earnings call, in the two weeks since, it has fallen by 5.7% to $25.90 per share.

That fall largely coincides with the introduction of new lockdown measures in Europe to try to bring the spread of new coronavirus infections down to levels where its national health systems are capable of managing it. It has also occurred despite the major announcements of two COVID-19 vaccines with greater than 90% effectiveness in their Phase 3 trials, which will start being distributed before the end of 2020 and have hundreds of millions of doses distributed worldwide in 2021.

That makes IRM's stock more interesting than what we realized when we first selected it to follow. Following its recent stock price history, we find it has risen and fallen with the waves of coronavirus infections in the regions Iron Mountain does business, which makes it something of an indicator of how investors anticipate the coronavirus pandemic will affect business activities upon the company's large, established customer base, and by extension, the firm's revenues.

In maintaining its current dividend level, Iron Mountain stands to gain substantially if its stock price and market cap recovers to levels consistent with how investors have historically valued the company's dividends. But unlike stocks whose prices have risen on speculation from recent vaccine development news, we think Iron Mountain's stock price is reflecting what they anticipate for its actual business conditions in the year ahead.

That makes investing in IRM a COVID-19 play, or rather, a bet on the future for the coronavirus pandemic's real world impact on business activities. Knowing where the company stands today, how would you place your bets on its future?

Previously on Political Calculations

Image Source: Photo by Adam Nowakowski on Unsplash

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November 17, 2020

Can you use Benford's Law to reliably detect election fraud?

Benford's Law Leading Digit Distribution

This question has been raised often since the U.S. elections on 3 November 2020. The earliest mention of it we can find where it was used to question results in this election dates to 6 November 2020, at this Twitter thread, which featured this infographic looking at the city of Milwaukee's election results in the U.S. presidential race. That was followed by tweets looking at vote tallies in Michigan, Chicago, Allegheny County (Pittsburgh), and other cities and states with long reputations for election irregularities.

Much of the analysis behind these posts appears to have originated with Rajat Gupta's DIY Election Fraud Analysis Using Benford's Law tutorial from September 2020, which provides a guide for how to apply Benford's Law to evaluate election results using spreadsheet applications like Microsoft Excel.

As such tutorials go, it is relatively well done, providing step by step instructions that anyone with basic spreadsheet programming experience can follow to conduct their own analysis to see if their dataset of interest follows Benford's Law and generate a chart showing the outcome. But the tutorial has a huge problem, in that it skips over a huge factor that determines whether Benford's Law can even be successfully applied to evaluate whether the data represents the results of a natural outcome or has potentially been artificially manipulated.

To be successfully applied to detect potential fraud, the dataset must contain values that span several orders of magnitude. In the case of election results from voting precincts, the number of voters in individual precincts would have to number from the 10s, to the 100s, to the 1,000s, to the 10,000s, and so on.

But when you look at the precinct voting data covering the geographies in question, it most often covers data that predominantly falls within a single order of magnitude. This limitation makes Benford's Law an unreliable indicator for detecting potential fraud in this application.

Matt Parker, avid student of math gone wrong and currently the #1 best selling author in Amazon's Mathematics History subcategory, has put together the following video to explain why Benford's Law doesn't work well under these limiting circumstances. It is well worth the 18 minute investment of time to understand where Benford's Law can be successfully applied to detect potential fraud and where it cannot.

Benford's Law has recently been more successfully applied to challenge the validity of the number of coronavirus infections being reported by several nations. The difference in determining its success comes down to the virus' exponential rate of spread, which quickly generates an escalating number of cases that satisfies the requirement that the range of values subjected to analysis using Benford's Law span several orders of magnitude.

With that condition unmet for the raised election examples, we find that using Benford's Law to detect potential voter fraud is unreliable. If the authors of the analyses identifying voter fraud were aware of the deficiency of data used to support their findings, we would categorize these results as the product of junk science. We don't however think that harsh assessment applies for these cases, as most seem to be following an otherwise useful guide that omits presenting the conditions that must be satisfied to properly apply Benford's Law. That makes this situation different from other examples of junk science where the offenders clearly knew their data's deficiencies and failed to disclose them, sometimes with catastrophic effect.

We'll close by providing a short guide to our work covering related aspects of the topics we've discussed and pointing to academic work that provides more background.

Previously on Political Calculations

References

Deckert, Joseph; Myagkov, Mikhail; and Ordeshook, Peter C. Benford's Law and the Detection of Election Fraud. Political Analysis, Volume 19, Issue 3, Summer 2011, pp. 245-268. DOI: 10.1093/pan/mpr014.

Mebane, Walter R. New Research on Election Fraud and Benford's Law. Election Updates. [Online Article]. 23 August 2011.

Mebane, Walter R. Inappropriate Applications of Benford's Law Regularities to Some Data from the Presidential Election in the United States. [Online Article (PDF Document)]. 10 November 2020.

Brown, Michelle. Does the Application of Benford's Law Reliably Identify Fraud on Election Day? Georgetown University Graduate Theses and Dissertations - Public Policy. [PDF Document]. 2012.

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