Political Calculations
Unexpectedly Intriguing!
November 17, 2017

Back in June 2014, we were among the first to observe in near real time that China's economy had cooling to the point where it could be considered to be in recession, which we based on a unique combination of trade and environmental data. The recessionary conditions that we observed persisted from 2014 through mid-2016, when they finally began to reverse. We noted at the time that both trade data and the measurements of carbon dioxide emitted into the atmosphere indicated that the Earth's economy was cooling during that period.

In January 2017, the outgoing Obama administration claimed that the global economy was growing while carbon emissions were flat, an apparent decoupling between the two that directly contradicted our observations.

On 13 November 2017, we got a stunning vindication of our observations from the Global Carbon Project, which released its latest updates and measurements for worldwide carbon emissions, via the Financial Times, which reported the following (emphasis ours):

Stronger Chinese economic growth will push global greenhouse gas emissions to a record high in 2017 after remaining flat for three years, dashing tentative hopes of a turning point in the world’s efforts to curb climate change.

A new report by the Global Carbon Project, an international research consortium, predicts that carbon dioxide emissions from fossil fuels and industry will rise 2 per cent this year. The report was released at the UN climate change meeting in Bonn on Monday....

This year’s rise is especially disappointing as it follows three years of almost no growth in emissions despite a world economy expanding at a steady clip. In 2016, emissions were flat even though the world economy grew 3.2 per cent. One explanation for the uptick is that China’s economic slowdown in the middle part of this decade was more pronounced than official figures suggested.

Earlier this year, the government of China's Liaoning province acknowledged that they had outright fabricated fiscal and economic growth data over a period of several years, coinciding with the tenure of the province's Communist party chief Wang Min, who ran Liaoning from 2009 to 2015. The FT speculates that Liaoning was far from the only province that engaged in that practice, where they identified four other provinces in northern and eastern China that also appear to have been reporting inflated economic figures.

Which brings us to a remarkable bit of evidence that we came across on NASA's Black Marble web site, which recently updated its nighttime map of Earth, providing us with the ability to compare images captured in 2016 with ones captured four years earlier in 2012. We've animated the nighttime map of Southeast Asia, which flips between 2012 and 2016 below.

Animation: NASA Black Marble - Southeast Asia, 2012 vs 2016

If you look closely at the map, you'll see the nighttime lights brighten in areas that experienced economic growth between 2012 and 2016, such as along the coast of Viet Nam, and dim in the areas that experienced recessionary conditions between those two years. Pay very close attention to what happened between 2012 and 2016 in northern and eastern China....

The correlation between Night Time Lights (NTL) and economic activity has been found to be a "good proxy" for assessing economic development, particularly in countries that lack high quality economic data reporting.

The evidence is accumulating that the period from 2014 through mid-2016 was not as good as China's official statistics have previously indicated. Given the importance and sheer size of China's economy, it's remarkable that its relative economic health can be both seen from space and measured in the Earth's atmosphere thousands of miles away from its territory.

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November 16, 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, where the S&P 500's earnings per share now exceed their previous 2014-Q3 peak. Even by the most conservative measure, the long earnings recession for U.S. firms is finally over!

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2014-2019, Snapshot on 8 November 2017

Looking into the future, the outlook for earnings per share in the near term has dipped slightly since August 2017, but has brightened in the more distant future of the second half of 2018.

Data Source

Silverblatt, Howard. Standard & Poor. S&P 500 Earnings and Estimates. [Excel Spreadsheet]. Updated: 8 November 2017. Accessed: 15 November 2017.

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November 15, 2017

On 20 December 2016, shares of General Electric (NYSE: GE) peaked at a closing value of $32.25 per share. Since then, through the close of trading on Tuesday, 14 November 2017, GE's share price has fallen by nearly 44% to $17.90 per share.

We think that GE's stock price has further to fall before it bottoms.

Here's why. Based on a simple relationship between the company's share price and its forward year dividends per share, we find that GE's share price is elevated above the level that investors have valued the company's shares for its given level of dividends payouts since 2009, when GE last announced a dividend cut.

GE Stock Price per Share vs Expected Forward Year Dividends per Share on Dividend Change Announcement Dates, 2009-2017

The relationship in the chart above was developed using the company's share price on the dates it announced changes in its dividend payouts to the public with and the company actually paid out in dividends during the following 12 month period. The exception is the announcement for 13 November 2017, where we've projected that the company will sustain its newly lowered dividend payment of $0.12 per share over the next year.

What we find is that the company's share price when it announced its latest dividend cut on 13 November 2017 was elevated well above the trend line established by the relationship between the company's share price and forward year dividends per share for all its previous dividend change announcements since February 2009.

What that result suggests is that the company's share price has further to fall. Based on this first cut analysis, we would anticipate GE's share price continuing to fall to the $14-$16 per share range in the near future.

To build the case that is likely to happen, what we really want is more data points. We'll revisit this analysis soon where we'll incorporate data from GE's dividend declaration dates to build up the sample for our simple linear regression analysis.

GE's Dividend Change Announcements from 2009 through 2017

Extracted from contemporary news sources. These announcements frequently preceded the company's official dividend declarations.

Data Sources

Dividend.com. General Electric. [Online Database]. Accessed 14 November 2017.

Previously on Political Calculations

We began developing this form of analysis earlier this year! Here are the previous posts in the series....

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November 14, 2017

On Monday, 13 November 2017, before the opening bell, General Electric (NYSE: GE) finally faced up to the reality that it wasn't going to escape having to cut its dividend for the second time since the Great Depression. That made the company's stock price action for the day very different from what the company experienced just a few weeks ago, on Friday, 20 October 2017, when investors thought they were going to see a dividend cut, but were surprised when the company didn't follow through at that time.

Google Finance: GE Stock Price from 20 October 2017 through 13 November 2017

This is a cool chart because it reveals not just how investors reacted to the news of no dividend cut on 20 October 2017 and also to the news of GE's 50% dividend cut on 13 November 2017, but also how investors anticipated the move during the days in between, as GE's stock price declined by 12.17% before dropping by another 7.17% on the day of the dividend cut announcement. GE's stock price fell by 19.34% during just those 16 trading days.

That final decline came after a 25.11% decline in GE's stock price in the preceding 10 months since 23 December 2017. GE's total decline since that date now exceeds 40%, which puts the company's stock price decline on par with its just announced 50% dividend cut from $0.24 per share to $0.12 per share.

Meanwhile, all that occurred as the S&P 500 has risen by 14.33%.

For GE, the slashing of its dividend comes with the news that the company itself will become much smaller. And yet, analysts don't believe that the restructuring that GE's CEO John Flannery also announced on 13 November 2017 goes far enough.

GE kicked off the morning by announcing a 50 percent cut to its quarterly dividend, a major, if necessary, step for a company that prides itself on the payout and caters to a large number of individual investors. Looking at GE's projected 2018 numbers released just a few hours later, however, it's not clear the company cut deep enough.

The reduced dividend still costs about $4 billion annually. And while GE's targeting $6 billion to $7 billion in industrial free cash flow next year, that's based on a "cherry-picked definition", says Cowen & Co.'s Gautam Khanna. The real number appears to be close to zero if you account for pension and capital expenditures as other industrial companies would, he says.

To be able to sustain their dividend payments to their shareholders, companies need to have one of two things going for them: positive earnings (profits) that grow over time and/or sufficient cash flow. Without either, future dividend cuts become inevitable, where the expectation of those cuts will lead investors to pull down stock prices until they arrive or until the company's management can turn their earnings and cash flow situation around.

At this writing, it doesn't look like GE has quite found its bottom yet, which is why a good number of GE's more dividend-minded stock owners are selling their shares and are buying the stocks of other dividend-paying companies whose business outlooks are brighter.

“People who were in GE for their dividend may be looking for a better place to put their money,” said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

Utilities .SPLRCU and consumer staples .SPLRCS rank among the sectors with the highest dividend yield on the S&P 500. They were also the largest percentage winning sectors on Monday.

We call that the conveyance effect, which occurs when investors act to sell their shares of a particular stock that is a component of a market capitalization-weighted stock market index and use the proceeds to buy shares of other companies within the index, with the result that the value of the index itself rises.

It happens all the time with the continual changes in the market cap weightings of individual stocks within an index, but usually not quite so visibly, where we have to thank the reaction of investors to a significant market event involving one of the more heavily weighted stocks of an index like the S&P 500 for making it obvious enough to be captured in a regular financial news report.

Previously on Political Calculations

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November 13, 2017

On Wednesday, 8 November 2017, the S&P 500 (Index: INX) closed at an all time new record high closing value of 2594.38, before going on to fall back a bit to end the week at 2582.30.

Along the way, the index set an all new intraday high on Tuesday, 7 November 2017 of 2597.02. The new highs marked a now one-year long rally for stock prices in the United States, coinciding with the positive market reaction to the surprise defeat of Hillary Clinton in the 2016 presidential elections and the end of expectations that failing Obama-era economic and fiscal policies would continue.

But for us, that wasn't the most interesting thing that happened during a fairly uneventful week. Just over two months ago, we identified a specific range in which we expected that the S&P 500 would fall during each day of the last two months, provided that investors would largely remain focused on the distant future quarter of 2018-Q2 in making their investment decisions. And then it happened, where we've opted to mark the occasion by showing the trajectory of the S&P 500 over the span of 2017-Q3 and 2017-Q4 through the close of trading on 10 November 2017 in the following chart.

Alternative Futures - S&P 500 - 2017Q3 and 2017Q4 - Standard Model with Connected Dots for 2018Q2's Alternative Future Trajectory Between 8 September 2017 and 8 November 2017 - Snapshot on 10 November 2017

The thing that prompted us to make the unique forecast was the need to have to cope with echo effect of the past volatility of stock prices on our dividend futures-based model for an extended period of time, which arises from our use of historic stock prices from 13 months, 12 months and 1 month earlier as the base reference points from which we project future stock prices. There was, of course, no guarantee that investors would maintain their focus on 2018-Q2 during all that time, nor was their any guarantee that the U.S. stock market wouldn't be affected by a major noise event either in a new outburst of current-day volatility, but our assumptions remained valid and our forecasting results speak for themselves.

Let's next take a closer look at where we are in the current quarter of 2017-Q4.

Alternative Futures - S&P 500 - 2017Q3 - Standard Model with Connected Dots for 2018Q2 Alternative Future Trajectory Between 8 September 2017 and 8 November 2017 - Snapshot on 10 November 2017

The key to understanding what our model is communicating is to know how far ahead in time investors are focusing their forward-looking attention. In these spaghetti charts, once you've identified which point of time in the future investors are looking, our model can put you within 3% of the indicated trajectory associated with that future quarter, where currently, investors continue to appear to be focused on 2018-Q2, which currently coincides with what will likely be the timing of the Fed's first rate hike in 2018, following an almost certain lock for a rate hike to be announced in December 2017.

We said earlier that Week 2 of November 2017 was largely uneventful for the S&P 500, and as you can see from the following short list of headlines that caught our attention during the week that was, that may be an understatement....

Monday, 6 November 2017
Tuesday, 7 November 2017
Wednesday, 8 November 2017
Thursday, 9 November 2017
Friday, 10 November 2017

Elsewhere, Barry Ritholtz summarized the week's positives and negatives for the U.S. economy and markets!

Update 13 November 2017, 8:12 AM EST: General Electric (NYSE: GE) pulled the trigger before the opening bell and cut its dividend in half, to 12 cents per share. This is a stock to watch today, although it looks like that investors somewhat anticipated the action since our last comments on the topic. Here's a short list of our recent coverage:

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