Political Calculations
Unexpectedly Intriguing!
May 5, 2016

If you were paying attention to the news yesterday, you probably heard that the United States' trade deficit with the rest of the world hit was the smallest it has been in several years. Which is being presented as a positive for the U.S. economy. Here is an excerpt of some key numbers from the news:

The U.S. trade deficit fell more than expected in March as imports of goods tumbled to their lowest level since 2010, a potential boost to first-quarter economic growth estimates that also hints at sluggish domestic demand.

[...]

In March, imports were held down by industrial supplies and materials imports which hit their lowest level since April 2004. Petroleum imports were the lowest since September 2002, even as oil prices rose to an average $27.68 per barrel.

Imports from China fell to their lowest level in three years. With exports rising, the politically sensitive U.S.-China trade deficit declined 25.7 percent to $20.9 billion in March.

But there is more to that story, and actually where the relative health of the U.S. economy is concerned, some, well, cause for concern. The following chart shows what we find when we calculate the year-over-year change in the growth rate of the exchange rate adjusted value of goods between the U.S. and China, which is important because it gives an indication of the relative health of the two largest economies in the world.

Year over Year Growth Rate of Exchange Rate Adjusted Value of Trade in Goods and Services Between the U.S. and China, January 1986 through March 2016

We see that for March 2016, the year over year growth rate for the goods that China imports from the U.S. and also the goods that the U.S. imports from China are in negative territory, which is an indication that things are not well with both economies.

While China's economy has been in this territory for some time, which coincides with that economy's struggles. What's more remarkable however is the deep plunge that the U.S. economy would appear to have taken from the values recorded a year ago.

That's somewhat misleading, because a year ago, the amount of goods coming into the U.S. from China was elevated due to the end of a work slowdown by organized labor at the U.S.' west coast ports, which had created a significant backlog that took time to clear after it ended in February 2015. Last month, that work slowdown meant an elevated year over year growth rate, but in March 2016, that means a dramatic plunge in the year over year growth rate.

So how can we get a sense of the relative health of the U.S. economy from the most recently reported trade data when that dynamic is at work?

It occurred to us that we can take advantage of the cyclical nature of China's exports to the United States, which typically peak in either September or October of each year, and bottom in either February or March. We've shown that for the value of goods that the U.S. imports from China in the chart below for the period from January 2000 through March 2016, where we're showing the value of the goods in terms of both U.S. dollars (which is how Americans see the value of what it imports from China) and Chinese yuan (which is how the Chinese see the value of what it exports to the U.S.)

Value of Trade in Goods and Services Imported to the U.S. from China, January 2000 through March 2016

What if we calculated the percentage change from one year's bottom in the value of the goods that the U.S. imports from China to the next? Doing that should give us a pretty good idea of whether the value of trade is up, indicating positive economic growth since a growing economy will draw in more goods from elsewhere in the world to meet its growing demand, or if its down, indicating recessionary conditions are present in the U.S. economy. The following chart reveals what we found:

Percent Change in Annual Low Value of Trade in Goods and Services Imported to the U.S. from China from Previous Year's Low Value, January 2000 through March 2016

We see that negative values are consistent with recessionary conditions being present in the U.S. economy, coinciding with the 2001 recession, the 2008-2009 recession, and the 2012-2013 microrecession.

We also see that 2016 shows a negative value. Which is really remarkable because that's in comparison to the lowest month for U.S. imports from China in 2015, which was made lower in part because of the labor union orchestrated work slowdown at west coast ports that year.

Which then confirms that the relative health of the U.S. economy in March 2016 has deteriorated from what it was a year ago, and is also worse than what was observed during the 2012-2013 microrecession.

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May 4, 2016

Just a visual reminder for anyone who has any confusion about what the fundamental driver of stock prices really is. The animation below shows the S&P 500's average monthly earnings per share, dividends per share and price per share in logarithmic scale since January 1950 in five second intervals before recycling....

Animation: Average Monthly S&P 500 Earnings per Share, Dividends per Share, and Price per Share, January 1950 through April 2016

There has been one notable exception to this fundamental relationship during all these years, which held between 7 May 1997 and 23 May 2003. That period of time is best known as the "Dot-Com Stock Market Bubble", which was caused by one change in the nation's tax laws, and repaired by another.

Oh, and the title of this post is the answer to CNN's Matt Egan's question from 22 April 2016: "What's propelling the stock market rebound?"

Data Source

Political Calculations. The S&P 500 At Your Fingertips. [Online application]. 6 December 2006. Last updated: 17 April 2016 (through March 2016).

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May 3, 2016

We have some good news! For the first time since October 2015, the number of U.S. firms that announced dividend cuts during a calendar month dropped below the level where we can be reasonably certain that at least part of the U.S. economy is experiencing significant contraction.

But the bad news is that at 24 firms, the still elevated number of dividend cutting firms who communicated that they are experiencing economic distress during April 2016 indicates that the U.S. economy is pretty far from being out of the woods.

Monthly Number of Public U.S. Companies Announcing Dividend Cuts, January 2004 through April 2016

To be considered to be fully out of the woods, the number of firms announcing dividend cuts each month would need to fall below a level of 10. The U.S. stock market hasn't seen a number below that mark since October 2013.

Meanwhile, for the fourth year in a row, the number of firms announcing that they are cutting their dividends spiked during the first quarter of the calendar year. Back in 2013, that was a direct consequence of expected and actual changes in U.S. tax laws.

But in the first quarters of 2014, 2015 and now 2016, it is the result of an increasingly dour outlook for the business prospects of an increasing number of U.S. firms, and in particular, firms with relatively small market caps, who have been forced to take this action.

Data Source

Standard & Poor. Monthly Dividend Action Report. [Excel Spreadsheet]. Accessed 2 May 2016.


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May 2, 2016

"As expected", is the answer to the question "How did the S&P 500 behave during Week 4 of April 2016?"

But for that to be expected, you would have to have known the following:

  1. Investors entered the week mainly focused on the distant future quarter of 2016-Q4.
  2. The Fed, who had a two-day meeting that would end in the middle of the week, was unmotivated to surprise markets by changing the expectation for when it might next hike short term U.S. interest rates.
  3. The expectations for the dividends of large market cap stocks announcing earnings during the week were highly unlikely to change.

Based on those three factors, the most likely outcome for the week would be that it would end as it began, with investors setting today's stock prices in accordance with their expectations for the future quarter where they've fixed their attention: 2016-Q4.

And so it did:

Alternative Futures - S&P 500 - 2016Q2 - Standard Model - Snapshot on 29 April 2016

For historical reference, here is what we identified as the week's market moving headlines, or as was the case, the market's non-moving headlines, along with our comments.

On the whole, U.S. stock prices, as measured by the daily closing value of the S&P 500, behaved as expected during the fourth week of April 2016. With no compelling reason to shift their forward-looking focus away from 2016-Q4, nor any significant change in the expectations for future dividends, and absent any significant speculative noise that might cause stock prices to temporarily deviate away from the trajectory they are on, the week ended as it began. The S&P 500 is continuing to generally pace the trajectory associated with what we should expect if investors are focused on 2016-Q4.

And until one of those things changes, we can continue to expect very little volatility in the market through the end of the quarter, which would be mostly flat until June, after which we would seem to be set to see some fairly mild erosion in stock prices.

But then, that part of the future hasn't locked in quite yet, so it will be subject to change!...

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April 29, 2016

Think for a moment about the inside of your refrigerator. Have you optimally organized it for maximum cool food storage efficiency?

Don't be silly - of course you haven't! That's why Karl, the Bosch engineer, has created a YouTube video explaining what you need to do to impose order on the chaos that resides within your chillbox!

HT: Core77.

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