Political Calculations
Unexpectedly Intriguing!
December 19, 2014

Suppose, for a moment, that you could look up and see the Moon from anywhere in the Northern Hemisphere on every night of 2015.

Thanks to images collected by the Lunar Reconnaissance Orbiter and the talented staff at NASA's Scientific Visualizations Studio, here's what you would see as the lunar terminator sweeps across the Moon's surface as the Moon passes through all of its phases in 2015.

Identifying the major features on the lunar surface at their sunrises and sunsets is a nice touch, as is capturing the Moon's apparent libration motion in the sky.

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December 18, 2014

Barry Ritholtz has a fine rant:

Those of you who continue to insist you can even remotely forecast what might happen next continue to reveal incredibly foolish, thoroughly disproved beliefs, despite an overwhelming avalanche of evidence that you haven’t the slightest idea what the fuck is going on now, much less what is going to happen next.

Once again, the markets prove that nobody knows ‘nuthin.

Carry on.

Okay. Here is the chart we posted before the market opened on Tuesday, 16 December 2014:

Alternative Futures for S&P 500 - Standard Model - 2014Q4 - Snapshot on 15 December 2014

Here is what the updated version of that chart looks like as of the market close on 17 December 2014:

Alternative Futures for S&P 500 - Standard Model - 2014Q4 - Snapshot on 17 December 2014

We do this sort of thing routinely. So much so that we don't even bother calling attention to it any more unless it is to point out an obvious gap in someone's understanding of what is possible.

Then again, it's not like we're going to be doing much of that beyond next week, as we'll no longer be routinely posting such things after that time!

Until then, welcome back to the cutting edge of what is possible today!

Update 18 December 2014: How about another go, seeing as Barry was really going on about the impossibility of predicting what the stock price futures were indicating would be happening with stock prices this morning? Here's what our stock price forecast chart looks like after the close of trading on 18 December 2014:

Alternative Futures for S&P 500 - Standard Model - 2014Q4 - Snapshot on 18 December 2014

Here's the text from the chart:

Converging Back to 2015-Q2 Following the Fed

Following the Fed's announcement and Janet Yellen's press conference on Wednesday, 17 December 2014, it would appear that the Federal Reserve has succeeded in directing the collective attention of investors to 2015-Q2, which is when it will most likely begin to hike short term interest rates. Consequently, stock prices have rocketed up during the last two days as they converge with the trajectory defined by an investor focus on that future quarter in setting today's stock prices, which is exactly how our model of how stock prices behave says they would behave under those circumstances. Very forecastable, Barry Ritholtz!

After a certain point, doing this sort of thing is a lot like shooting fish in a barrel, because what we're doing is much more science than art - it works because it's simply applied physics with direct parallels to the laws of motion. Which is why we're moving on to other challenges that might also benefit from that kind of approach.

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December 17, 2014

It has often been remarked that falling oil prices are unambiguously good for Americans. But as we'll show you today, who they might be good for depends greatly upon where you live and the kind of government policies that are enforced there.

Let's start by reviewing how the price of crude oil has changed since the beginning of 2014. Our first chart below tracks the price per barrel of Brent crude oil since its price has the greatest impact upon gasoline prices at U.S. fuel pumps.

We see that the price per barrel of Brent crude hovered around $110 per barrel up until 4 July 2014, after which, its price has fallen at a steady pace to reach an average price nearly $44 per barrel lower as of this writing.

As you might imagine, the falling price of Brent crude oil has paced falling fuel prices across the entire U.S., which benefits Americans because it frees up the money they had been spending just on fuel, where that same amount of money can now be used to buy both the same amount of fuel they had been buying and additional things too.

One of the first industries to benefit from the savings that Americans were realizing from falling oil and gasoline prices was the restaurant industry, where business really began to improve just as fuel prices began to fall.

Cheaper gas, a rosier jobs picture and charbroiled burgers: this is the recipe for strong sales at CKE Restaurants, the privately held parent company of fast food chains Carl's Jr. and Hardee's.

"I won't give you exact numbers, but our sales have been very good since about the middle of June," CEO Andy Puzder told CNBC in a phone interview.

By October 2014, an increasing number of Americans seeking to dine out led to an unexpected improvement in the U.S. job market. Here, after having seen absolutely no sustained improvement in their employment numbers since October 2009, the number of employed teens between the ages of 16 and 19 in the U.S. suddenly increased by 266,000. Employers, predominantly in food and drinking service-related businesses, had finally responded to the increased demand they were seeing by adding U.S. teens in large numbers to their payrolls for the first time in years.

That improvement was not a one-time statistical outlier. The job gains of teens were sustained in November 2014.

Change in Number of Employed by Age Group Since Total Employment Peak in November 2007, through November 2014

So it would appear that falling oil prices have indeed been unambiguously good for around 266,000 U.S. teens who began collecting their first real paychecks in October 2014.

But as we noted at the very beginning of this post, where people live and the government policies that are enforced there matters quite a lot in determining who gets to benefit from something as apparently ambiguously good for Americans as falling oil prices.

That brings us to California.

According to the U.S. Census Bureau's population estimates, in 2013 there were 17,011,519 Americans between Age 16 and Age 19 in the entire United States. Of these, 2,143,455 live in California. Californians between the ages of 16 and 19 then represent 12.6% of the entire population of working age teens in the United States, or just over 1 out of every 8.

What percentage of the 266,000 American teens who benefited from becoming employed do you suppose are working in California?

If we go by simple statistics, we would expect that number would be equal to one-eighth of the entire increase in the number of working teenagers in the U.S., or 33,250.

According to the California's Employment Development Department, the actual number rounds to 3,000.

It's like the proverbial dog that didn't bark.

California Lottery - Source: http://www.calottery.ca.gov/play/second-chance/slp-second-chance

What are the odds of that?

Because the numbers exceed the capability of our own tool for doing the math, to answer that question, we turned to VassarStats' binomial probabilities calculator and entered the following values for n (266,000, the number of newly employed teens), k (3,000, the number of newly employed teens in California) and p (.126, the decimal equivalent of the percentage of the U.S. teen population represented by California's working age teens.)

The probability of counting 3,000 newly employed teens (or less) in California with respect to the actual population distribution of U.S. working age teenagers is less than 0.0001% (or <0.000001 as reported by the calculator). Or if you prefer, the odds of that outcome happening by chance are less than one in a million.

That result tells us that something has gone specifically and unambiguously wrong in California's job market for teens.

It occurs to us that we have an interesting natural experiment to consider in determining what exactly has gone specifically and unambiguously wrong for California's job-seeking teens.

Here, we know exactly when the environment that led to the large improvement in teen employment across the rest of the United States changed, and that the thing that caused the improvement has continued to act to the unambiguous benefit of all Americans across the country.

But not for teens in California. Something had to change just in California during the same period of time that teens in every other state in the nation were benefitting that would put teens in California at a relative disadvantage compared to their fellow American peers in their own state's job market.

And as it happens, we know exactly what changed to lead employers in California, and nowhere else, to bypass teens for consideration for the kind of low-wage jobs that the direct peers of these least educated, least skilled and least experienced members of the U.S. labor force were suddenly finding at the largest numbers seen in years elsewhere in the nation.

Labor Market for Teenage Californians, January 2005 through October 2014

Unlike every other state in the United States, California increased its minimum wage on 1 July 2014, just as the employment situation was about to improve across the entire country thanks to falling oil and fuel prices. No other state has likewise implemented an increase in their minimum wages during this period.

By arbitrarily increasing their minimum wage from $8.00 to $9.00 per hour in July 2014, California's politicians effectively jerked away the prospect of finding employment from its job-seeking teen population at a time when it would have its best chance at doing so in years, while also damaging their prospects for increased future earnings. All by making it too costly for the state's employers to employ them profitably.

How many of California's teens missed out on the opportunity of getting their first job during this time? After dividing 263,000 (October 2014's increase in teen employment minus the number attributed to California's teens) by .874 (87.4% is the percentage of U.S. teens who live outside of California), we find that if California had punched its own age demographic weight as did the rest of the country, teen employment in the U.S. would have increased by 300,915, as California would have added approximately 37,915 teen jobs to its employment totals.

Instead, the state came up some 34,915 jobs short. Just for its own teens.

It's not an accident that the New York Times is proclaiming that the economic recovery has finally spread to the middle class after having been historically terrible for so long. In finally providing enough "oomph" to create jobs for the least educated, least skilled and least experienced members of the U.S. civilian labor force, falling oil prices has indeed been unambiguously good for nearly all Americans, but especially the middle class families to which the vast majority of these newly working teens belong.

But not for middle class families in California, where the kind of government policies that are enforced there are keeping the very real economic recovery now occurring in every other part of the U.S. beyond their reach.

Just like jobs for California's teens. Just by keeping jobs away from California's teens.

Sad Teen Boy Is Seated with a Backpack - Source: http://www.stopbullying.gov/blog/2013/12/30/bullying-and-suicide-whats-the-connection

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December 16, 2014

In discussing the rise of volatility in the U.S. stock market at this time yesterday, we omitted our chart showing each of the trajectories that stock prices are likely to follow depending upon which particular quarter in the future they might be focusing their attention. If you haven't read that post yet, that is the explanation for why stock prices ran the gamut from one extreme to the other yesterday.

Alternative Futures for S&P 500 - Standard Model - 2014Q4 - Snapshot on 15 December 2014

Here's the text from the chart:

Over the last week, the rapid decline in oil prices to critical levels has led investors to consider the situation where oil industry-related companies, which includes the financial institutions that back them with development loans, would act to preserve their solvency by cutting their dividends in 2015-Q1. Meanwhile, investors are also factoring in the timing of when the Federal Reserve will begin to hike short term interest rates, which is expected in 2015-Q2. The result? Stock prices falling about halfway in between the alternative future projections for both quarters (if investors were simply focused on one or the other)!

Update 9:10 AM EST: The CBOE's dividend futures for 2014-Q4 (which extend through the end of this week) showed a boost yesterday as the dividend futures for 2015-Q1 showed a nearly equal decrease. What that most likely means is that investors have made the determination that dividends they had expected to be paid after this upcoming Friday will instead be paid out on or before that date - there really hasn't been a major change in the future expectations as of the market open on 15 December 2014! What that does change however is the relative position of stock prices between the alternative trajectories associated with the future quarters of 2015-Q2 and 2015-Q1, with investors appearing to be more heavily weighting their collective focus on 2015-Q2 in setting today's stock prices.

Update 10:30 AM EST: It does occur to us that there may be another possibility - with the apparent distress in the revenues of oil companies, investors could be weighing the possibility that the Fed might delay its hiking of interest rates into 2015-Q3. If so, we might get a confirmation of that on Wednesday, 17 December 2014 when the Federal Reserve's Open Market Committee issues a statement and Janet Yellen holds a press conference.

As a reminder, our regular analysis of the U.S. stock market will only continue through 23 December 2014. Since we've finished our development work in that area, we're moving on to other projects.

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December 15, 2014

For all the noise related to falling oil prices and their impact upon stock prices during the past week, there is something that we have not yet seen that would fully confirm the fears of U.S. investors: large numbers of companies in the oil sector acting to cut their dividends.

That is not to say that action will not be eventually be forthcoming, but as yet, we have only seen a very limited number of oil industry related companies take that action since we noticed an uptick in their number in November 2014, so we would describe the current action with stock prices in the market as being primarily the result of speculative noise.

As a noise event then, what matters most in driving stock prices today is the timing of when investors are betting that these companies with increasingly distressed revenue prospects will act to cut their dividends. Here, rather than being solidly focused on a single point of time in the future, stock prices are becoming volatile because investors are shifting their attention between two different points of time in the future, which have different expectations for the growth rate of the dividends that investors can reasonably expect to earn from owning stocks associated with them.

We think that dynamic may explain an unusual pattern that we've previously observed in the months and weeks ahead of major market crashes, where large drops in stock prices that occurred as order broke down in the stock market were preceded by similarly-driven volatility.

With that in mind, our first chart below illustrates the current state of order in the U.S. stock market, as measured by the S&P 500 against its trailing year dividends per share, which has held since 4 August 2011.

S&P 500 Index Value vs Trailing Year Dividends per Share, 30 June 2011 Through 14 December 2011

So we're clear, the stock market can be said to be experiencing a period of relative order whenever stock prices are following an established power law trend with respect to their trailing year dividends per share, where the residual variation of stock prices about that trend can be described by a normal (or Gaussian) distribution. Or more accurately, when a statistical hypothesis test cannot reject the possibility that stock prices are behaving "normally".

In looking for signs of significant volatility that might precede the breaking down of an existing state of order in the stock market are changes in the 20-day (one-month) moving average of stock prices that exceed two standard deviations in magnitude.

You'll see several as you review this chart. The first appears when the S&P 500's trailing year dividends were below $25 per share, which occurred in the period from 30 June 2011 to 4 August 2011. This particular drop marks the beginning of the current period of order in the stock market, which coincided with the end of the Federal Reserve's second Quantitative Easing (QE 2.0) monetary stimulus program in June 2011.

After the present state of order became established, the next time that stock prices showed significant downward volatility were when trailing year dividends reached about $27.50 per share in June 2012 and again when they reached just over $30 per share in October 2012.

Under typical circumstances, this episodes of volatility would have signaled that order was breaking down in the U.S. stock market. And it was, as the U.S. economy was on the verge of entering into a new phase of contraction. The only thing that saved the U.S. economy and preserved order in the U.S. stock market was the Federal Reserve's launching of its third quantitative easing program (QE 3.0) in September 2012, which it subsequently expanded in December 2012 (QE 4.0).

So it's not that the signal of order breaking down in the U.S. wasn't sent or didn't work, but rather that it was heeded by the Federal Reserve, which acted to prevent it from breaking down in the stock market while also keeping the U.S. economy out of a full-fledged recession. They were successful in their effort.

The next time we see a two standard deviation shift in the value of U.S. stock prices occurred shortly after trailing year dividends per share neared $38.50 per share in mid-September 2014, shortly after the Fed confirmed that it would terminate its QE 3.0/4.0 programs at the end of 2014.

That brings us up to now, where we find that instead of being fully focused on 2015-Q2, as they seemed to be just a week ago, investors would also now appear to be paying increasingly close attention to 2015-Q1 in setting today's stock prices. Our chart showing the expectations that investors have for the future, as measured by the change in the growth rate of trailing year dividends per share for each of the future quarters for which we have data, places stock prices in between these two particular future quarters.

Change in Growth Rates of Expected Future Trailing Year Dividends per Share with Daily and 20-Day Moving Average of S&P 500 Stock Prices, Snapshot on 12 December 2014

In this chart, we observe that 2015-Q1 has recently drawn the attention of investors, which is significant because this is the quarter in which that those increasingly revenue-distressed oil companies would most likely act to cut their dividends. That action would be really similar to the dynamic that took hold in the stock market after the U.S. economy peaked in December 2007 ahead of the so-called Great Recession, which then set up falling dividends as the primary driver of stock prices throughout 2008.

Meanwhile, we believe that investors remain mostly focused on 2015-Q2, since that coincides with the period of time in which the Fed is most likely to begin hiking short term interest rates in the U.S.

It is the interplay between these two factors set to occur at two different points of time in the future that is what will make for the potential for a really rocky ride for investors.

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