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December 2, 2016

In November 2016, 29 U.S. firms announced they would be cutting their dividend payments to investors. The month marks the 37th consecutive month in which the number of dividend cuts has exceeded a threshold that is consistent with recessionary conditions being present in the U.S. economy, and the 16th of 23 times since January 2015 where the number has exceeded a level that indicates some degree of contraction occurring within the U.S. economy.

Number of Public U.S. Companies Posting Decreasing Dividends, 
January 2004 through November 2016

From what we can tell from our near-real time sampling of announced dividend cuts, most of the distress leading firms to announce dividend cuts is increasingly becoming concentrated in the financial sector of the U.S. economy, although the oil production sector remains elevated as well.

But there is good news to report as well. The number of dividend increases announced during the month of November 2016 showed a year over year increase over November 2015, which is only the second time since August 2015 where that has happened, breaking a downtrend for this measure of relative economic health.

Number of Public U.S. Companies Increasing or Decreasing Their Dividends, 
January 2004 through November 2016

It will be interesting to see what develops during December 2016, as the Federal Reserve has all but 100% committed to hiking short term interest rates that month, even though their previous actions to do so has coincided with increased dividend cuts announced by interest-rate sensitive U.S. firms, such as mortgage-related Real Estate Investment Trusts (mREIT).

Data Sources

Standard & Poor. Monthly Dividend Action Report. [Excel Spreadsheet]. Accessed 1 December 2016.


December 1, 2016

Today's example of junk science is special in that we're focusing on the story of an individual who contributed to the exposure of the false science that is bringing down one of the most successful business startups of the last decade: Theranos.

If you follow the story, you'll find that there are a lot of boxes that can be ticked off on our checklist for how to detect junk science, but we'll be focusing on the following two categories in today's example.

How to Distinguish "Good" Science from "Junk" or "Pseudo" Science
Aspect Science Pseudoscience Comments
Challenges Scientists in legitimate fields of study commonly seek out counterexamples or findings that appear to be inconsistent with accepted theories. A challenge to accepted dogma in the pseudosciences is often considered a hostile act, if not heresy, which leads to bitter disputes or even schisms. Science advances by accommodating change as new information is obtained. Frequently, the person who shows that a generally accepted belief is incorrect or incomplete is more likely to be considered a hero than a heretic.
Merit Scientific ideas and concepts must stand or fall on their own merits, based on existing knowledge and evidence. These ideas and concepts may be created or challenged by anyone with a basic understanding of general scientific principles, without regard to their standing within a particular field. Pseudoscientific concepts tend to be shaped by individual egos and personalities, almost always by individuals who are not in contact with mainstream science. They often invoke authority (a famous name for example, or perhaps an impressive sounding organization) for support. Pseudoscience practicioners place an excessive amount of emphasis on credentials, associations and recognition they may have received (even for unrelated matters) to support their pronouncements. They may also may seek to dismiss or disqualify legitimate challenges to their findings because the challengers lack a certain rare pedigree, often uniquely shared by the pseudoscientists.

Let's get to the story of one of Theranos' whistleblowers, picking it up from when they reported their findings of falsified research and cover-ups to the CEO of Theranos, Elizabeth Holmes to see how these categories came into play.

After working at Theranos Inc. for eight months, Tyler Shultz decided he had seen enough. On April 11, 2014, he emailed company founder Elizabeth Holmes to complain that Theranos had doctored research and ignored failed quality-control checks.

In essence, Shultz was complaining that the company was engaged in pseudoscience, a form of fraud that seeks to use the veneer of respectable science to advance false premises to support ideological, cultural or commercial goals. In this case of Theranos, the allegations are that the company's management falsified its research results in order to advance their commercial goals, where their sales depended upon the acceptance of their product's capabilities in the medical community. Capabilities that, by many accounts, have proven both greatly overstated and severely lacking.

The alleged doctoring of research, thus ensuring they would obtain their desired results, and the tossing out of failed quality control checks that might contradict the perception they sought to create that their Edison test devices were genuinely capable of performing as they claimed.

But perhaps the most telling evidence that individuals at the firm were engaged in highly unethical conduct was to be found in their response to being called out for their bad actions. The story continues with how Theranos' executives responded to the whistleblower's e-mail.

After emailing Ms. Holmes in April 2014 about the allegedly doctored research and quality-control failures, Mr. Shultz heard nothing for several days.

Then Mr. Balwani’s response arrived. It began: “We saw your email to Elizabeth. Before I get into specifics, let me share with you that had this email come from anyone else in the company, I would have already held them accountable for the arrogant and patronizing tone and reckless comments.”

Note the immediate attempt to put down the real challenge to the doctored research and ignored quality checks by immediately changing the subject to attempt to make it all about the whistleblower, which in addition to representing an abuse of whatever authority they may have, also checks off the boxes on our checklist for how to detect junk science for both challenges and merit.

This kind of personal attack is surprising common among those who have knowingly engaged in junk science and have had their scientific misconduct exposed. Insults and smear attacks aimed at those who have identified misconduct are simply part of their toolbox for getting away with their unethical behavior, where they hope to discourage additional scrutiny by attempting to make it personally painful for those seeking to expose it.

In the case of Theranos' executive's response, that appears to also have meant going after the whistleblower's family.

The reply was withering. Ms. Holmes forwarded the email to Theranos President Sunny Balwani, who belittled Mr. Shultz’s grasp of basic mathematics and his knowledge of laboratory science, and then took a swipe at his relationship with George Shultz, the former secretary of state and a Theranos director.

As it happens, Tyler Shultz' grandfather, where the conflict between Theranos' executives and the younger Shultz has led to a rift within the family.

But that's not the creepiest part of Theranos' response, which included some serious escalations after the WSJ began publishing a series of exposés about the company.

Theranos accused him of leaking trade secrets and violating an agreement to not disclose confidential information. Mr. Shultz says lawyers from the law firm founded by David Boies, one of the country’s best-known litigators and who later became a Theranos director, surprised him during a visit to his grandfather’s house.

They unsuccessfully pressured the younger Mr. Shultz to say he had talked to the reporter and to reveal who the Journal’s other sources might be. He says he also was followed by private investigators hired by Theranos.

The purpose of this kind of activity on the part of those engaged in pseudoscience is to intimidate the whistleblower into either silence or into compliance. The Theranos case is unique in that the company has the resources to apply pressure through these costly means, but other forms of intimidation, such as cyberstalking, are a preferred choice of intimidation tactic for those more economically minded.

Meanwhile, the Theranos story is still playing out in the headlines and in the courts, where in the latest news, it appears that all the right people are being targeted with the consequences for their actions. There's hope for justice yet for the pseudoscience whistleblowers of the world!


Carreyrou, John. Theranos Whistleblower Shook the Company - and His Family. Wall Street Journal. [Online Article]. 18 November 2016.

Elizabeth Holmes, Theranos CEO - Source: White House


November 30, 2016

We're well into what might be described as the third phase of the second U.S. housing bubble.

That might seem like a bold statement, but it's something that really becomes evident when you track the trailing twelve month averages of median new home sale prices against median household income in the U.S. on a monthly basis.

Trailing Year Average of U.S. Median New Home Sale Prices vs Trailing Year Average of U.S. Median Household Income, 2000-12 through 2016-10

The primary factor fueling the decoupling of median new home sale prices and median household income in the United States away from its long term relationship is a shortage condition for homes in the U.S., particularly in regions that have adopted policies that have largely closed access to meaningful real estate development within them.

[Note: If you follow the links in the above paragraph, you'll find they point to posts at Kevin Erdmann's Idiosyncratic Whisk blog - he will have a book capturing much of his analysis on the topic coming out sometime in 2017!]

As for being in the third phase of that second housing bubble, you can see where we're at in the following chart that illustrates the three main trends for the trailing year average of reported median new home sale prices in the U.S. since July 2012.

Trends in Trailing Twelve Month Average of U.S. Median New Home Sale Prices, 2012-07 thru 2016-10

The initial inflation phase was kicked off by major investors who snapped up properties as fast as they could in the period from July 2012 through July 2013, which saw median new home prices rise at an average rate of $2,476 per month. The second phase came as a number of the investors behind the first phase began seeing less opportunity to realize easy gains, which resulted in their slowing their activities - that phase ran from August 2013 through September 2015, where median new home sale prices in the U.S. rose at an average rate of $1,511 per month.

The third phase began in October 2015 and has continued to the present, which has more closely resembled the kind of transactions that defined the established trends for new home sales in the U.S. before the onset of the first U.S. housing bubble in November 2001. During the third phase, median new home sale prices have been rising at an average rate of $1,034 per month.

With home prices rising by $5.32 for every $1 increase in median household income, this third phase may qualify as a post-bubble trend, although we recognize that this rate of increase is somewhat faster than the $3.60-$4.07 rate that median new home sale prices went up for every $1 increase in median household income in the 32 years from 1967 through 1999.

Finally, we should note that to really be a "bubble", median new home sale prices would have to fall significantly at some point in the future, since a bubble itself has two main phases by definition - an inflation phase where prices escalate and a deflation phase where they collapse. Since July 2012, we've only seen median new home sale prices escalate in what we're calling the second U.S. housing bubble, so whether it is a true bubble has yet to be determined.


Sentier Research. Household Income Trends: October 2016. [PDF Document]. 29 November 2016. [Note: We have converted all the older inflation-adjusted values presented in this source to be in terms of their original, nominal values (a.k.a. "current U.S. dollars") for use in our charts, which means that we have a true apples-to-apples basis for pairing this data with the median new home sale price data reported by the U.S. Census Bureau.]

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 29 November 2016.


November 29, 2016

We're going to ask a question today that has many answers. But before we ask it, consider the following chart, which shows the sales (or revenues) per share of the firms that make up the S&P 500 index for each quarter from 2000-Q1 through a preliminary estimate for 2016-Q3.

S&P 500 Sales per Share, 2000-Q1 through 2016-Q3

Here are some things to consider about the information shown in the chart:

  • The post-recession revenue (sales) per share trends shown are both linear and parallel to each other.
  • Share buybacks by S&P 500 firms since 2009 have reduced the number of outstanding shares over time, which would tend to boost the sales per share figure indicated in the chart above so that it is progressively higher than it would otherwise be if the number of shares for the S&P 500 were held constant.

Now for the question: What changed after 2012 to cause the outcome of stalled-out growth for the sales per share of the firms of the S&P 500?


Standard & Poor. S&P 500 Index Earnings. [Excel Spreadsheet]. Accessed 28 November 2016.

National Bureau of Economic Research. U.S. Business Cycle Expansions and Contractions. [Online Document]. Accessed 28 November 2016.

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November 28, 2016

We're catching up with two weeks worth of action in the S&P 500, so let's start with what stood out during Week 3 of November 2016.

First and foremost, our prediction from five weeks ago appears to have held throughout nearly every trading day of the last five weeks, with the S&P 500 actual values consistently falling within 3% of the red-dotted line that we sketched on top of our standard forecasting model to anticipate its future trajectory at that time, as almost indicated by the hand-drawn red-shaded region (since we drew it slightly narrower than intended).

Alternative Futures - S&P 500 - 2016Q4 - Standard Model with Connected Dots Overlay - Snapshot 2016-11-18

In the chart above, our hand drawn forecast applies only to the period where our standard model would be affected by the echo effect from past volatility (indicated as the brown-shaded region), which is an artifact of our model's use of historic stock prices from 1 month, 12 months and 13 months earlier in its projections of future stock prices. To work around the echo effect, we literally connected the dots corresponding to the trajectory associated with 2016-Q4 on both sides of the period we identified over five weeks ago where we anticipated that our model's projections would be less accurate than usual.

Back then, we assumed that investors would keep their forward-looking focus fixed on the very near term future defined by the expectations associated with the current quarter of 2016-Q4, which we predicted would be the case as investors would be greatly influenced by their concerns over the Fed's plans to hike short term interest rates, where that concern would largely trump (pun intended) any noise introduced by the U.S. national elections.

Speaking of which, the outcome of the elections contributed quite a lot of noise, where the actual trajectory of the S&P 500 swung from the low end of our forecast range to the high end. That said, coming out of Week 3 of November 2016, it would appear that investors remained focused on 2016-Q4 in setting current day stock prices.

Here are the headlines that we identified as being relevant to the stock market in Week 3 of November 2016:

Monday, 14 November 2016
Tuesday, 15 November 2016
Wednesday, 16 November 2016
Thursday, 17 November 2016
Friday, 18 November 2016

Now, let's move into Week 4 of November 2016, where something more interesting happened in a Thanksgiving holiday-shortened week.

For investors focusing on the future, the big news of the week was the shift in how far forward investors were looking, which changed from 2016-Q4 to 2017-Q2 during the course of the week.

Alternative Futures - S&P 500 - 2016Q4 - Standard Model - Snapshot 2016-11-25

As for what caused that shift, here are the news items for which we took special note of during Week 4 of November 2016.

Monday, 21 November 2016
Tuesday, 22 November 2016
Wednesday, 23 November 2016
Friday, 25 November 2016

Elsewhere, Barry Ritholtz divided the economic and market news into its positives and negatives for both Week 3 and Week 4 of November 2016.

Looking forward over the next couple of weeks, in the absence of more fundamental events to change expectations or new noise events, we think that the S&P 500 will continue running to the high side of our forecast range for 2017-Q2, which shows the effects of a small echo from late 2015. That said, pay attention to the difference in where stock prices can be expected to go if investors focus on either 2017-Q2 or 2017-Q3. Unless the expectations for the change in the growth rate of future dividends for 2017-Q3 improves significantly, any news that would reasonably delay the expected timing of the Fed's next rate hike out of 2017-Q2 would likely coincide with a significant downward change in U.S. stock prices.

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