Political Calculations
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February 27, 2017

The Presidents Day holiday may have shortened the trading week that was the fourth week of February 2017, but unfortunately, squeezing the entire trading week into just four days didn't make the market's action any more interesting, despite the setting of new record highs. Our alternative futures chart, where we track actual stock prices against where our standard dividend futures-based model of where stock prices would project them to be based upon how far forward in time investors are collectively looking shows how unimpressive the market's movements have been over the past week.

Alternative Futures - S&P 500 - 2017Q1 - Standard Model - Snapshot 2017-02-24

Based on what we observe, the actual trajectory of the S&P 500 is running along the lower half of the range that our standard forecasting model would predict for investors being focused on either the very near term future of 2017-Q1 or the slightly more distant future of 2017-Q2. Which future quarter they're focused upon doesn't make much difference because their projected trajectories are nearly identical, which has been the case since 19 January 2017.

Now, the most likely reason for why investors would be so closely focused on either of these two quarters comes down to the expected timing of its next planned hikes in short term interest rates, which is why we've focused on the news headlines related to the expectations that Fed officials are seeking to set in our summary of the week's market-moving headlines. Which for Week 4 of February 2017, really represents the reasons for why the daily closing value of the market didn't move much at all during the week (considering that they were already focused on either 2017-Q1 or 2017-Q2 coming into the week)!

Tuesday, 21 February 2017
Wednesday, 22 February 2017
Thursday, 23 February 2017
Friday, 24 February 2017

On a side note, with the Fed ending its Zero Interest Rate Policy (ZIRP), we've noticed an increase in interest in our "Reckoning the Odds of Recession" tool, which we haven't had much need to pay attention to over the last eight years with the Fed essentially holding its thumb on the scale for short term interest rates. For what it's worth, we think that the scale is still showing the signs of the Fed's heavy thumbprint upon it, so we think that it will still be some time before it might begin delivering useful information on recession probabilities for the U.S. economy.

Going back to the week that was, Barry Ritholtz has outlined the pluses and minuses for the U.S. economy for the trading week that ended on Friday, 24 February 2017.

Going forward to the week that will be, the next edition of this series will be for Week 1 of March 2017, keeping with our practice of assigning those weeks with a split in days between months to the month that supplies the most trading days!

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February 24, 2017

Dominic Walliman's brief overview of the major fields and divisions within mathematics and how they generally relate to one another:

Our favorite sections of the map are the portions dedicated to dynamical systems and to applied mathematics. But then, that should be of no surprise to any of our regular readers!

HT: Barry Ritholtz.


February 23, 2017

Dividend cuts in the first quarter of 2017 are being announced at a rate that is roughly 45% slower than what was recorded at the same point of time back in the first quarter of 2016.

We're basing that observation on the sampling of dividend declarations that our two real-time sources for those announcements have cumulatively indicated for 2017-Q1 through 22 February 2017, where the total number of dividend cuts they have reported has reached 28. Through the same point of time in 2016-Q1, those same sources had reported a cumulative total of 51. The following chart visualizes the cumulative trajectories of both 2016-Q1 and 2017-Q1.

Cumulative Number of Dividend Cuts Announced by Day of Quarter, 2016-Q1 versus 2017-Q1

The difference a year makes is being seen in the kinds of firms announcing dividend cuts. Back in 2016-Q1, the ranks of dividend reducing firms were swelled by an abundance of firms in the U.S. oil and gas industry, where through 22 February 2016, they had accounted for 33 of the 51 firms that had announced dividend cuts. In 2017-Q1, only 14 firms in the U.S. oil and gas industry from our sampling have declared that they are reducing their dividends as of 22 February 2017.

That's the difference between a sector of the U.S. economy that was in full contraction a year ago, whereas today, it can best be described as experiencing the lingering effects of recessionary conditions, which compared to that previous situation, is a clear improvement.

In 2017-Q1 however, we are seeing in increase in distress in the U.S. financial industry compared to what was recorded in 2016-Q1, with an uptick in firms that are negatively exposed to the effects of increasing interest rates, such as Real Estate Investment Trusts (REITS).

Data Sources

Seeking Alpha Market Currents Dividend News. [Online Database]. Accessed 22 February 2017.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 22 February 2017.

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February 22, 2017

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500 at approximately the midpoint of the current quarter, shortly after most U.S. firms have announced their previous quarter's earnings. Today's snapshot of the trailing year earnings per share for the S&P 500 reveals that the stock market's earnings have continued rebounding off their 2016-Q3 bottom, but that they are growing at a slower pace than Standard and Poor had projected just three months ago.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2014-2019, Snapshot on 16 February 2017

At present, the earnings recession that began taking hold in the U.S. stock market in 2014-Q3, as falling oil prices impacted the earnings of U.S. firms in the energy production sector of the economy, appears to be set to be over sometime in the next few months as the S&P 500's trailing twelve month earnings per share recovers to their pre-earnings recession levels.

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. Accessed 17 February 2017.

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February 21, 2017
Sugary Drinks - Source: National Institute of Health - https://directorsblog.nih.gov/2012/11/13/weighing-in-on-sugary-drinks/

On 1 January 2017, the city of Philadelphia's new tax on the sale of sweetened beverages went into effect. Imposed on bottled and canned soft drinks made with either natural or artificial sweeteners, including those that add virtually no calories to the beverages being sweetened, the tax is aimed at reducing the incidence of obesity among Philadelphia's population, which the city claims to be a public health crisis.

Official revenue figures and updated obesity statistics from the city for the tax's first weeks in force are still pending, but Bloomberg has gotten a sense of how effective the tax has been at curbing sweetened soft drink purchases within Philadelphia's city limits from the retailers and distributors who fulfill the demand of the city's residents for the products.

Philadelphia’s six-week-old tax on sweetened beverages is already taking a toll on drink distributors and grocers, with some reporting sales drops of as much as 50 percent.

Canada Dry Delaware Valley -- a local distributor of Canada Dry Ginger Ale, Sunkist, A&W Root Beer, Arizona Iced Tea and Vita Coco -- said business fell 45 percent in Philadelphia in the first five weeks of 2017, compared with the same period last year. Total revenue at Brown's Super Stores, which operates 12 ShopRite and Fresh Grocer supermarkets, fell 15 percent at its six retailers in the city.

"In 30 years of business, there's never been a circumstance in which we've ever had a sales decline of any significant amount," said Jeff Brown, chief executive officer of Brown's Super Stores. "I would describe the impact as nothing less than devastating."

With sales having declined by that magnitude in its month and a half in effect, it's a safe bet that the city of Philadelphia will not be seeing the $91 million in revenue from having imposed the tax on the city's soft drink consumers that it was counting upon to fund the city's expanded prekindergarten programs, park improvements and to pay for the very generous raise that the city granted to municipal union employees shortly after the city council passed the soda tax.

The city's tax amounts to a 1.5 cents-per-ounce surcharge on top of what was the regular retail price for the bottled and canned regular or diet beverages sweetened with sugar or with a number of sugar substitutes, regardless of their relative effects on the health of consumers. A 12-ounce can would have its cost increased by 18 cents, while a 2-liter container would see its cost to retailers increase by over $1.00, which is as much as the retailers might have charged consumers for a 2-liter container of soda pop before the new tax was imposed.

Although directly levied on distributors, a significant share of Philadelphia's soda tax is passed through to consumers, just as the economics of tax incidence would suggest.

The higher taxes are drying up the distributors' business, with negative impacts on their ability to keep employees on their payrolls:

Canada Dry Delaware Valley Chief Operating Officer Bob Brockway said he expects his business will decline by at least a third over the course of the year. He distributes more than 20 percent of all soft drinks in Philadelphia market. Even though retailers just outside the city limits have gotten a sales bump, that increase isn't enough to offset the drop in Philadelphia. Brockway said he'll have to lay off 30 of his 165 employees in the area in March. Depending on summer sales, the layoffs will probably continue, he said....

At Brown's stores, many of which were established in places previously designated as food deserts, beverage sales are down 50 percent. Jeff Brown said he’s had to cut 5,000 to 6,000 hours of employment per week, the equivalent of about 280 jobs. Beverages are the biggest category in a grocery store, he said, with 4,000 products. When consumers drive outside the city to find cheaper prices, Brown said he's losing the non-beverage portion of their carts as well.

The city of Philadelphia could have avoided this situation if its leaders had been more honest in their rationale for imposing the tax, where if the city's leaders were truthful about their desire to address the public health crisis of obesity that they claim justifies the tax, they would have levied it across a wide range of products that share similar sweetened calorie content as the sweetened soft drinks they chose to tax, minimizing the effective tax rate to consumers.

They would then have dedicated the proceeds from that tax to funding to the city's public health programs to specifically address obesity related health concerns.

Ideally, they would also have acted to proportionately reduce other city sales taxes so that the total tax burden on people in the community where they apply remains unchanged. Otherwise, the impact of the new tax would be highly regressive in disproportionately impacting low income earners.

If the city government was then successful in reducing consumption of these products through the tax, the costs of the public health problems related to their consumption will also go down and they would be able to easily get by without the tax revenue from that source, without any impact to their ability to provide other city government services.

On the other hand, if they're not successful in reducing people's consumption of these products, then they'll have the source of revenue they need to address the public health problem they claim to be the justification for the tax.

But if the politicians advancing the tax use any part of the money they collect through the tax for some other reason, which is exactly what they've done in Philadelphia, they should stop claiming that the tax was for the purpose of addressing a legitimate public health concern and admit that it was all really a ruse to cram through the greater spending they desired.

Previously on Political Calculations


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