Political Calculations
Unexpectedly Intriguing!
October 13, 2015

We're seeing more signs of a reversal in China's recent economic fortunes. First, taking advantage of what may be the most unique alternative economic indicator we've developed to date, we observe that the trailing twelve month average of the year-over-year change in Earth's atmospheric carbon dioxide levels have rebounded off their June 2015 trough.

Trailing Twelve Month Average of Year-Over-Year Change in Parts per Million of Atmospheric Carbon Dioxide, Jan 1960-September 2015

That change is significant because the nation of China is, by a considerable margin, the world largest producer of atmospheric carbon dioxide. The recent cyclical decline in the rate at which global CO2 levels are increasing had coincided with a change in the communist nation's economic strategy, where the nation's leaders had sought to put the nation onto a much slower growth trajectory.

China's leaders were too successful however, as the nation's economic growth stalled out far more rapidly than they had desired, prompting them to initiate new stimulus efforts in an attempt to reignite growth during the second quarter of 2015.

The global CO2 data suggests that those efforts to stimulate the Chinese economy have had some positive effect, as its economy is burning more fuel - an indication of increased activity. [We suppose that some might claim the increase might be purely due to recent explosions and other incidents that have taken place in China recently, however the increase in atmospheric CO2 levels precedes those events, indicating that other factors are responsible for the reversal in direction.]

Meanwhile, our alternative economic indicator of the exchange rate-adjusted, year-over-year growth rate of the value of goods and services traded between the U.S. and China also suggests that China's economy has rebounded off the lows that were recorded in the first quarter of 2015.

Year Over Year Growth Rate of Exchange Rate Adjusted U.S.-China Trade in Goods and Services, January 1986 - September 2015

Here we observe that China's exports to the U.S. surged in August 2015, while at the same time, the year-over-year growth rate of China's imports from the U.S. was elevated above its 2015-Q1 lows, which suggests an improving economic situation in China.

The August 2015 data is the first following China's surprise devaluation of its currency on 11 August 2015. Given its timing, the data for August is affected by the change, but the goods and services recorded during the month would already have been in transit between the two nations.

What that means is that while our calculation of the exchange rate adjusted year over year growth rates for August would have been affected, the volume of goods and services would really not have been much impacted. Consequently, the impact of China's currency devaluation won't be fully realized in the U.S. Census Bureau's trade data until the upcoming reports for September and October 2015.

Perhaps the more interesting thing however is that the apparent improvement in the trade numbers between the U.S. and China rather directly contradict the numbers that would have to exist between China and all other nations, if the direction indicated by the official trade data that China has reported for September 2015 is any indication. One possible interpretation of that outcome is that China is loading up on U.S. agricultural products, but is otherwise forgoing importing resources from other nations.

By no means is China's economy out of the woods as yet.

Data Sources

Board of Governors of the Federal Reserve System. China / U.S. Foreign Exchange Rate. G.5 Foreign Exchange Rates. Accessed 9 September 2015.

U.S. Census Bureau. Trade in Goods with China. Accessed 9 September 2015.

National Oceanographic and Atmospheric Administration. Earth System Research Laboratory. Mauna Loa Observatory CO2 Data. [File Transfer Protocol Text File]. Accessed 8 September 2015.


October 12, 2015

According the S&P's Monthly Dividend Report (Excel spreadsheet), the U.S. economy is once again experiencing contractionary economic forces.

Monthly Number of Public U.S. Companies Announcing Dividend Cuts, 
January 2004 through September 2015

At 43, September 2015's total reported by Standard and Poor is over double what was recorded by our two primary sources for real time dividend cut announcements, Seeking Alpha's Market Currents (filtered for dividends) and the WSJ's Dividend Declarations, which we use to generate our near-real time cumulative dividend cuts by day of quarter chart, which confirms that the U.S. economy took a turn for the worse in September 2015, but for the third quarter of 2015 overall, only indicates that the U.S. economy experienced recessionary, rather than contractionary, conditions.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter, Snapshot on 9 October 2015

Although our near real time sources for announced dividend cuts would appear to have missed half of the firms cutting dividends in September 2015, it does provide a large enough sample to give an indication of the kinds of firms that came under the most distress during September.

  • Oil industry-related firms
  • Interest rate sensitive firms (such as mortgage REITs)
  • Education industry-related firms

The first two stock market sectors are pretty self-explanatory. First, with oil prices falling significantly during the quarter, a number of U.S. oil producers are seeing declining revenues, which are negatively impacting their bottom lines.

Second, interest rate sensitive firms had come under similar negative pressure in the first two and half months of 2015-Q3, as investors expected that the U.S. Federal Reserve would make good on their threat to finally begin increasing short term interest rates in the U.S., which had the effect of contributing to modestly boost longer term interest rates over much of the quarter. Although that boost ended when the Fed failed to follow though on the expectations it had set after its September 2015 meeting, the increase that did occur was enough to cut into the profit margins of a number of REITs, who were compelled to reduce cash dividend payments to their owners.

What's new however is the appearance of education-industry related firms among those announcing dividend cuts. While there was only one such firm that took that action, Universal Technical Institute (NYSE: UTI), which slashed its dividend by 80% from $0.10 per share to $0.02 per share, the cut comes as the entire education industry sector is coming under increased strain.

Speaking of which, since we've been following the story of the academic and financial degradation in the business situation of the Apollo Education Group (NASDAQ: APOL), we would be remiss if we didn't note two very recent developments.

First, on 3 October 2015, reports came out that indicated that enrollment in the Apollo Group's University of Phoenix division is now projected to continue falling for another year, to where it will fall some 70% below its 2010 peak of 476,500. That would put its enrollment at the end of its 2016 fiscal year at roughly 142,500, below the 150,000 level that CEO Greg Cappelli indicated that he expected it would bottom nearly three months earlier.

Second, on 9 October 2015, the U.S. Department of Defense barred the University of Phoenix from recruiting students at U.S. military installations in response to the company's unauthorized recruitment practices. Recruiting military service members had become a priority for the University of Phoenix and also a significant source of revenue for the Apollo Education Group as the University of Phoenix' overall enrollment has fallen.

It will be interesting to see to what extent other firms in the education sector of the U.S. economy will come under similar levels of distress as the U.S. higher education bubble continues to burst.

Data Sources

Silverblatt, Howard. Standard and Poor's Monthly Dividend Action Report. [Excel Spreadsheet]. Accessed 11 October 2015.

Seeking Alpha Market Currents. Filtered for Dividends. [Online Database]. Accessed 11 October 2015.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 11 October 2015.

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October 9, 2015

People have had a very hard time waking up in the morning for a very long time, which is why alarm clocks were among the first devices ever invented. In fact, there's a pretty good argument to be made that one of the first alarm clocks ever was invented by the Greek philosopher Plato, who rigged up the most advanced, non-sun-based time keeping device of the ancient world, the water clock, with a whistle that would awaken a sleeper after a set period of time, even in darkness.

But soon after that innovation, and for centuries afterward, really sound sleepers developed a natural resistance to the sound of their alarm clocks going off: they grew used to the sound of the alarm, and instead of being alarmed into wakefulness, they continued their slumber.

And that's the problem that U.S. Patent Number 256,265, issued on 11 April 1882, was devised to solve! Invented by Samuel S. Applegate of Camden, New Jersey, the "Device for Waking Persons from Sleep" forever solved the problem of people sleeping in for too long by rigging a frame containing a number of weighted objects above a sleeper, which would be triggered to drop on their head when their alarm clock went off.

Really! Here are the illustrations from the patent that show Applegate's Alarm Clock of Damocles:

Figures 1-4, U.S. Patent Number 265,256

And here is the description of the invention from the patent, in the inventor's own words (emphasis ours):

The object of my invention is to construct a simple and effective device for waking persons from sleep at any time which may have previously been determined upon, the device being also adapted for use in connection with an electric or other burglar-alarm apparatus, in place of the usual gong-alarms....

Ordinary bell or rattle alarms are not at all times effective for their intended purpose, as a person in time becomes so accustomed to the noise that sleep is not disturbed when the alarm is sounded.

The main aim of my invention is to provide a device which will not be liable to this objection.

In carrying out my invention I suspend a light frame in such a position that it will hang directly over the head of the sleeper, the suspending-cord being combined with automatic releasing devices, whereby the frame is at the proper time permitted to fall into the sleeper's face.

In the drawings, A represents the frame, which consists of a central bar, a, having on each side a number of projecting arms, b, the whole being made as light as is consistent with proper strenth. From each of the arms b hand a number of cords, d, and to the lower end of each of these cords is secured a small block, e, of light wood, preferably cork. These cork blocks, however, are not essential, as tassels, or balls of zephyr may be attached to the cords, or the latter alone may be used, or a rectangular frame having having a network of cords may take the place of the frame wiht its pendent cords, the only necessity to be observed in constructing the frame being that when it falls it will strike a light blow, sufficient to awaken the sleeper, but not heavy enough to cause pain....

I prefer to limit the extent of fall of the frame A so that the bars a and b of the same will not come into contact with the sleeper's face....

We're sure that heavy sleepers everywhere thank goodness for Applegate's preferences. On the other hand though, how heavy of a sleep can one have when the objects that will drop hard enough to wake them up, even without pain, are visibly suspended above their faces?

Other Stuff We Can't Believe Really Exists


October 8, 2015

On 21 September 2015, we wrote:

From a volatility standpoint, given the amount of vertical space between the likely trajectory of stock prices for investors focusing on either of these two future quarters, we can now reasonably expect that there will be quite a bit of volatility in the near term, which is due to the quantum-like characteristics of how stock prices behave.

That volatility will be highly dependent upon new information entering the market, as stock prices move rapidly from one expectation level to another as investors shifting their forward-looking focus from 2015-Q4 to the more distant future and less positive future of 2016-Q1 and back again in response to news events.

Keep in mind that this is not something new. We have already tracked one such Levy flight this year, and the Fed has created an environment where we may well see others in upcoming weeks until investors might have sufficient reason to stabilize their focus on one particular point of time in the future.

That is assuming that there will be no changes in the fundamental driver of stock prices: rational expectations of the amount of dividends that will be paid out in future quarters, which have been remarkably steady through most of the year to date. If and when that might change, the likely trajectory for stock prices will change dramatically, as we've previously observed back in late 2008 and 2009, and more recently in December 2012 and 2013.

And as for what to expect this week, in the aftermath of these events, and not considering any new information that what we have at the close of trading on 18 September 2015, here you go:

Alternative Futures - S&P 500 - 2015Q3 - Rebaselined Model - Snapshot on 2015-09-18

[Update 9 October 2015: Changed "hand" to "have" in paragraph preceding chart. Damn you autocorrect!]

Here is what the updated version of that chart looks like now that we're past the end of the third quarter of 2015:

Alternative Futures - S&P 500 - 2015Q3 - Rebaselined Model - Snapshot on 2015-10-01

And here is what the succeeding chart for the fourth quarter of 2015 now looks like, as of the close of trading on 7 October 2015:

Alternative Futures - S&P 500 - 2015Q4 - Rebaselined Model - Snapshot on 2015-10-07

The large and pronounced changes we have been observing in the level of stock prices is the result of what we'll call our quantum random walk hypothesis, which largely resolves and reconciles the fundamental and apparently incompatible differences in the theories advanced by such economists as Eugene Fama and Robert Shiller for how stock prices behave, for which they were jointly awarded the Nobel prize in economics (or whatever it's really called) in 2013.

And since today is the official beginning of the previous quarter's earnings reporting season, where we have the very real potential to see a major shakeup in the future expectations for the S&P 500's dividends per share, we might soon see how changes in the fundamental driver of stock prices that defines the "quantum levels" of future stock prices affects their likely projected trajectories.

Welcome back to the cutting edge!

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October 7, 2015

By now, we all know the stories of how the billionaires who own professional sports teams hold the cities of their teams hostage when they want to build new stadiums at public expense, threatening to move the team to another city if they don't get their way, and where all too often, state and local elected officials cave in to their demands.

The issue of public financing of sports stadiums comes up because of a bizarre and unintended consequence of the 1986 Tax Reform Act, where the U.S. Congress had sought to limit how much public financing could be used to build a stadium. Instead, they created a huge loophole for team owners, which created an extremely powerful incentive for them to exploit their connections with local politicians and their communities.

Here's how the loophole works. The U.S. Congress specified that no more than 10% of the revenue generated by a project built with public tax dollars could be repaid with revenues generated by the project, which for stadiums, would be money provided from the sales of tickets, concessions and parking. Because that was how the tax-exempt public financing that had previously been provided by taxpayers to build stadiums had been paid back, they thought that limit would cap the public's exposure to the growing costs of building more luxurious sports facilities.

Instead, it opened the floodgates because now, billionaire team owners could legally stick the public with up to 90% of the cost of their stadium building projects, because they're not allowed to provide more of a payback themselves under the law.

Combine that with the established role of sports teams in a community, which can extend to shaping its identity, and that's a recipe for exploitation, where instead of the cost of a sports stadium being paid by those who attend games is transferred to the general public, while the benefits go to the team.

The general public comes out on the short end of that deal, because that often means higher taxes and diverting funding away from other projects that the community would rather pursue and services they would rather have provided.

So what would happen if a city told the billionaire sports team owner playing that game to go ahead and leave town?

We know the answer to that question because there are two cities in Arizona that took very different paths with respects to the interests of major league sports teams that illustrate that alternative choice. The two cities are Chandler and Glendale, which are located on opposite sides of the Phoenix metropolitan area, where a number of major league baseball teams hold their annual spring training.

City of Phoenix: Maryvale Baseball Park - https://www.phoenix.gov/parks/sports/professional-sports/maryvale-baseball-park

The two cities have close to the same population and also have had very similar economic development paths, but the leaders of one, Chandler, had a choice back in the late 1990s to either give in to demands by the owners of the Milwaukee Brewers to either support building a new spring training facility in the city with public financing or deal with the situation of having the team pull up stakes and leave for other cities willing to pay for them to play in them. The city's leaders chose to let the Brewers leave.

In leaving, the Brewers obtained financial assistance to move to the city of Phoenix, where the city is reported to lose some $1.8 million annually in operating its Maryvale Baseball Park, where team's owner has continued to play the same hostage game - threatening to leave unless the city invests more taxpayer money in the facility.

Meanwhile, the leaders of the other city, Glendale, have pursued professional sports teams with a "borrow now and pay someday later" strategy, doing everything they can to bring as many professional sports teams and their facilities to the city as they can, which they've used as anchors for retail and other entertainment-related development projects aimed at drawing tourism dollars. Glendale has been very successful in achieving its leaders' major league professional sports dreams, attracting professional football, hockey and its own major league baseball teams for their spring training.

The difference between the two cities is that Chandler, freed of the blackmail strategies of the billionaire owners of professional sports teams, has boosted its public finances without the teams, focusing on expanding the diversity of its economic base with strong businesses rather than continually chasing sports-related tourism dollars. In the years since it told the owners of the Milwaukee Brewers "no", the city has improved its bond rating from AA- to AAA and has succeeded in doing other things to boost the community with the resources that had been tied up in the Brewers' old spring training facility, which has since been converted into a city park and is also where the old stadium has recently been razed to become the grounds for a new large residential development.

Glendale, on the other hand, has racked up so much public debt that the city's new leaders are being forced to make hard choices about what city services it will continue maintaining and how to fund them, as its bond rating has fallen from AA to BBB+ over time, which means it costs them more to borrow money as lenders and investors are increasingly skeptical of the city's ability to make good on its liabilities.

As a result, the city's leaders now live with the ongoing fear of having the teams they worked so hard to attract will walk out, thereby losing the sports and entertainment-related revenues they have become dependent upon to pay back the city's bondholders, as the city seeks to avoid bankruptcy court. The city, as some describe, ruined by sports, where outright hostility between the professional sports team owners and the city's officials has replaced the warm feelings that once defined their relationships.

The alternatives really don't get much clearer than that, do they?

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