Political Calculations
Unexpectedly Intriguing!
July 28, 2015

Today, we're going to do some quick, back-of-the-envelope style economics to answer the question of whether the supply or the demand for new homes is what is behind the recent falling trend for their prices. First, let's visually establish that yes, both average and median U.S. new home sale prices have been falling since October 2014:

Median and Average Monthly U.S. New Home Sale Prices, January 2000 through June 2015

Next, lets tap the Federal Reserve's Economic Data to see how the monthly supply of new homes has been changing, as measured by the number of months it would take for all new homes to be sold at their current rate of sales:

Here, we find that the supply of new homes has been rising since February 2015. We now have the information we need to use our tool for telling whether supply or demand factors are behind the change in the prices for new homes in the U.S.

Price and Available Quantity Data
Input Data Values
How has the price of the item changed over a given period of time?
How has the available quantity of the item changed over that same time period?

What's Behind the Change in Price?

What we find is that the prices of new homes have been falling because of an increase in their relative supply. As for the current state of the U.S. home builders, we find that the industry's market capitalization has been increasing, although the most recent data suggests its growth may be starting to decelerate.

Trailing Twelve Month Average New Home Sales Market Capitalization, Constant June 2015 USD, December 1963 through June 2015

After adjusting for inflation, as measured by the Consumer Price Index for all urban consumers in all U.S. cities, it would appear that the U.S. new home market has recovered approximately to the level it was in 1994 and 1995, when it last rose to surpass a market capitalization of $14 billion in terms of June 2015's U.S. dollars.

Data Sources

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 24 July 2015.

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 24 July 2015.

U.S. Department of Labor Bureau of Labor Statistics. Consumer Price Index, All Urban Consumers - (CPI-U), U.S. City Average, All Items, 1982-84=100. [Online Application]. Accessed 24 July 2015.

Federal Reserve Economic Data. Monthly Supply of New Homes. [Online Database]. Accessed 24 July 2015.

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July 27, 2015

How different would the value of the S&P 500 be if not for the amount of stock buybacks that have taken place in the U.S. stock market since the end of 2008?

We're asking that question today because of the recent suggestion that "Wall Street's new drug is the stock buyback":

In the first quarter of 2015, companies in the S&P 500 index returned more money to shareholders than they earned. The last time that happened was in the fourth quarter of 2008, when the entire S&P 500 reported a slight loss for the quarter but still spent $110 billion on dividends and buybacks.

“This is not a normal trend,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “This is a large amount of money being returned with the majority of it in buybacks.”

In the first quarter, S&P 500 companies spent $237.69 billion on dividends and buybacks, while reporting operating earnings of $228.36 billion, according to data compiled by Silverblatt.

[...]

According to recent data from S&P, total buybacks and dividends (assuming those dividends were reinvested) have accounted for 35% of the buildup in market cap for the S&P 500 since it bottomed out in 2009. Without dividends, buybacks alone have accounted for 21% of the market cap’s rise.

To approximate what that change means in terms of the value of the S&P 500 index, we're going to treat the S&P 500 index as if it were a single company, which means that we will not be accounting for the market cap-based weighting of the buybacks that a number of the index' component firms have executed since the end of 2008.

We then calculated the S&P 500's equivalent number of shares by dividing its market capitalization at the end of each quarter since 2008 for which S&P has provided data (Excel Spreadsheet) by the index's value at the end of each quarter (Excel Spreadsheet). We then applied the same math to determine the equivalent number of shares that would have been bought back during each quarter.

Then, starting with the equivalent number of shares we calculated for the S&P 500 at the end of the fourth quarter of 2008, we progressively added the net change in the number of equivalent shares between each subsequent quarter and its preceding quarter to that base figure, while also adding back the equivalent number of shares that were consumed by buybacks for each quarter.

Our last step was to take each quarter's reported market capitalization and to divide it by the number of equivalent shares from our hypothetical "no stock buyback" parallel universe to calculate what the value of the S&P 500 index would be in that alternate reality. Our results are visualized in the following chart.

Quarter-Ending Value of S&P 500 Index, 2008-Q4 through 2015-Q1, With and Without Stock Buybacks

What we see from our highly simplified, back-of-the-envelope math is that through the end of the first quarter of 2015, the most recent for which S&P has reported data at this writing, the value of the S&P 500 would be about 324 points, or nearly 16%, lower if not for the progressive impact of share buybacks over the last seven years.

The actual impact of share buybacks over this period of time though would be less than that amount, because what we would really want to calculate is the impact of "surplus" share buybacks, which would be the difference between the number of share buybacks that have occurred with the number that would otherwise have occurred under "normal" economic and market conditions. And over the last several years, those conditions have been anything but normal, especially given what has been described as an "interesting coincidence" in how many companies came to have the cash needed to execute their share buyback plans in recent years.

Part of the reason for that cash hoard has been QE and near-zero interest rates, which have made it more attractive to take on debt to help fund share repurchases.

While there is no direct relationship between the two, the price tags on QE and buybacks offer an interesting coincidence: S&P 500 companies have spent about $2.41 trillion on buybacks over the course of the current bull market, according to S&P data, compared with a $2.37 trillion rise in the Fed’s balance sheet since the start of QE.

What does that mean for the market going forward? We'll let a JPMorgan analyst's comments from May 2013 (via ZeroHedge) explain:

"The other side effect of elevated dividends and share buybacks is that these distributions to shareholders may reduce the long term potential of the company to grow relative to the alternative of capital spending."

Two years later, that dynamic would be a major reason why the upward growth of the S&P 500 has largely stalled out through the first seven months of 2015, which through Friday, 24 July 2015, is less than 1% higher than it was at the end of 2014. It likely took longer than they expected, but scenario described by JPMorgan's analyst arrived all the same.

Data Sources

Standard and Poor. S&P 500 Buybacks Report. [Excel Spreadsheet]. Accessed 24 July 2015.

Standard and Poor. S&P 500 Earnings and Estimates. [Excel Spreadsheet]. Accessed 24 July 2015.


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July 24, 2015

We always thought that the early 21st century was kind of steampunk cool, what with all the advancements in lasers, artificial intelligence, computer hacking and the automation of stupidity, but perhaps nothing stands out more to us than how a previously unknown cloning technology changed the nature of warfare, opening the door to the world we live in today. (HT: Neat-o-Rama (via Core77)!)

After viewing the video above, it seems strange now to think that Andy Samberg and Bill Hader were ever underappreciated as visionary geniuses. It's a shame that the people of the early 21st century only thought they were some kind of comedic actors and not the originators of what would ultimately become the 21st century's most sophisticated and deadly military doctrine.

Then again, that was exactly what they wanted them to think, until....

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July 23, 2015

Via Barry Ritholtz, we were impressed by the following chart from Bloomberg indicating at "when your city became unaffordable", as measured by percentage of the income earned by a typical 22-to-34 year old American worker within a given major U.S. city would have go to pay the typical rent in that city:

When Your City Became Unaffordable - Source: Bloomberg - http://www.bloomberg.com/news/articles/2015-07-15/the-exact-moment-big-cities-got-too-expensive-for-millennials

So we tweaked one of our favorite charts to go along the data shown in the chart above so that it covers the same period of time.

U.S. Trailing Twelve Month Average of Median New Home Sale Price vs Trailing Twelve Month Average of Median Household Income, Annual Data Spanning 1980 through 2014, with Monthly Data from December 2000 through May 2015

Draw your own insights!

Data Sources

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 8 July 2015.

U.S. Census Bureau. Income, Poverty, and Health Insurance in the United States: 2011. Current Population Survey. Annual Social and Economic Supplement (ASEC). Table H-5. Race and Hispanic Origin of Householder -- Households by Median and Mean Income. [Excel Spreadsheet]. 19 September 2014. Accessed 19 September 2014.

Sentier Research. Household Income Trends: May 2015. [PDF Document]. Accessed 8 July 2015. [Note: We've converted all data to be in terms of current (nominal) U.S. dollars.]

References

Clark, Patrick. The Exact Moment Big Cities Got Too Expensive for Millennials. Bloomberg. [Online Article]. 15 July 2015. Accessed 22 July 2015.

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July 22, 2015

How much did it cost the producer of the goods you see for sale at a retailer to actually make those goods?

The answer is "it depends," and what the real answer depends upon is how much of a markup has been put on the goods at each step of their journey as they have gone from the producer to the store where you can buy it.

Let's start with the producer. Here, the starting point for determining what will be the retail price of the good is their cost to produce it. They will then add a markup to that basic cost, which not only includes their profit margin, but also includes a safety margin beyond their profit target, which helps cover their costs of keeping their business going if their sales have some degree of volatility to them or if they are cyclical, where sales swing from good to not good and back again with the passage of time.

As a general rule of thumb, a producer will double the cost of producing the good in their markup to trade buyer or retailer, where the result of this math represents the wholesale price of the good. Goods that have high production costs though will often have a multiple between 1.5 and 2 as their markup, given the higher values involved.

Retail Prices - Source: USDA - http://www.choosemyplate.gov/budget/pricetag.html

The retailer will then apply another markup to the goods they buy from producers based on the wholesale price, which in addition to their profit and safety margin, covers their other costs of doing business, such as rent, insurance, taxes, utilities, staff, and so on.

The size of that markup will often fall between 2-1/2 to 3 times the wholesale price of the good, and the result of that math is called the retail price.

Now, here's where it gets interesting. In order for a product to be successful, that markup math has to work both forwards and backwards.

By backwards, we're referring to the situation where the good is being sold in a competitive marketplace, where the actual price that the good will sell at is set not by the producers, wholesalers and retailers, but by the market, where the price that customers are willing to pay for it may not leave enough of a profit and safety margin for the producers and retailers to justify continuing their efforts to produce and sell it.

Our latest tool is designed to estimate what the production cost that works with these typical markups where, if that turns out to be less than a producer's actual cost to make a good, would be an indication that they shouldn't make it. Our default numbers are those for Campbell's Condensed Tomato Soup, circa 1897-1898....

And if you're reading this article on a site that republishes our RSS news feed, click here to access a working version of this tool!

Market Retail Price and Markup Data
Input Data Values
Retail (Market) Price of Good
Markup Multiple from Wholesale to Retail
Markup Multiple from Production Cost to Wholesale

Estimated Prices and Costs
Calculated Results Values
Wholesale Price
Production Cost

Although we've set the default results to only display the results to two decimal places, for our default example using the original prices of Campbell's Condensed Tomato Soup, we find that the wholesale price rounds down from 3.3 cents per can, which in turn, means that the cost to produce a single can would have had to be about 1.7 cents per can.

Coincidentally, that figure would also very likely be the company's maximum profit per can back in 1897 and 1898, which is a result that we'll revisit in the near future as we continue our series into the history of the price for Campbell's Condensed Tomato Soup.

But the reason we create tools like this is so that you can use them to do the math that applies for you. Try it with the retail prices and markups of the products that you want to estimate how much it really cost to produce!


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Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

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