Political Calculations
Unexpectedly Intriguing!
May 27, 2016

Not long ago, we had the opportunity to buy Manchester United.

That's right. The soccer team. The one that Forbes estimates to be worth over 3.3 billion dollars, or if you prefer, the football team that Forbes estimates is worth over 2.2 billion pounds.

And we saw that we could buy it because it was on sale.

Manchester United Stock Price, 2015-05-22 through 2016-05-20

Specifically, we were looking to buy it in the first several months of this year, after we recognized that we could acquire the world's most successful and valuable sports franchise for a significant discount.

Manchester United Logo from Prospectus filed with U.S. Securities and Exchange Commission - Source: http://www.sec.gov/Archives/edgar/data/1549107/000104746912007026/a2210109zf-1.htm

So we put a bid in to buy Manchester United (NYSE: MANU) for $13.25 per share, which we projected would be pretty close to the bottom that the stock price would hit before beginning to recover.

As you can see in the chart above, we were almost right on target. MANU dropped to a low value of $13.30 during trading on 22 March 2016, and that was as close as we got to buying the world's most popular sports team. As of the close of trading two months later, on Friday, 20 May 2016, it had bounced back to $16.80 per share - an increase of $3.50 per share, or a raw percentage gain of 26.3%.

But truth be told, we weren't being fully rational in making our investment decisions. Our main motivating factor in even considering the purchase was irrationally psychological in nature.

Specifically, we were looking to buy the Red Devils as a psychological hedge for the disappointment that we realized we would be likely facing by the end of the 2015-2016 season as our preferred team in the English Premier League struggled to find its footing.

And though Manchester United was struggling too at the time we began considering buying it, which is why its stock was on sale in the first place, we recognized that the team's deeper organizational strengths would likely carry it through. And that meant that we could offset at least a portion of the amount of any psychological loss we might have by the end of the season with real financial gains.

In the end, that strategy didn't work because we were a nickel below where Manchester United would find its bottom before turning around. It was however fun to think about, which we now describe as that time we almost bought Manchester United. As for our psychological accounts, we are happy to say that we have since been handsomely rewarded by developments in the battle for Lord Stanley's Cup.

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May 26, 2016

Following up our discussion of the priorities of the TSA (a.k.a. the Transportation Security Administration), we thought it might be worth looking at the priorities of the U.S. Department of Homeland Security (DHS) as measured by how it directed the money it was authorized to spend over the past 10 years.

The chart below visualizes what we found in the DHS' own Budget in Brief documents for each year from the U.S. government's 2007 fiscal year (beginning on 1 October 2007) through the projected end of the current 2016 fiscal year (ending 30 September 2016). We've ranked the spending by major organization within the DHS from lowest to highest as of FY2016. The values in the chart are given in thousands of U.S. dollars.

U.S. Department of Homeland Security, Total Budget Authority by Organization, FY2007 to FY2016

Since Fiscal Year 2007, the annual budgets of two organizations within the U.S. Department of Homeland Security have more than tripled: the Federal Emergency Management Agency (FEMA) and the National Protection and Programs Directorate (also called the Office of Infrastructure Protection).

Meanwhile, five have budgets that are over 148% larger in FY2016 than they were in FY2007: Management and Operations (177%), Customs and Border Protection (171%), Office of Inspector General (164%), Citizenship and Immigration Services (163%) and the Secret Service (148%).

Meanwhile, the remaining seven major organizations have budgets in FY2016 that are all within 31% of what they were in FY2007 - some higher and some lower: Immigration and Customs Enforcement (131%), Coast Guard (128%), Transportation Security Administration (118%), Federal Law Enforcement Training Center (97%), Analysis and Operations (88%), Science and Technology Directorate (81%) and the Chemical, Biological, Nuclear and Explosives Office (72%).

This analysis omits the DHS' Office of Health Analysis, for which the Obama administration appears to have not requested funding in FY2017, and also the FEMA grants to U.S. states and local governments that are managed through the DHS, but which really represent spending by state and local governments that is funded by the federal government.

The TSA's budget peaked at $7.84 billion in FY2012, but was cut by 8.3% in FY2013. Since then, it has slowly risen back to be 94.9% of its peak budget value, which at $7.44 billion in FY2016, is also 118% of what the TSA spent to perform its mission in FY2007.

In FY2007, the TSA spent $6.33 billion. Adjusted for inflation, that $6.33 billion in 2007 U.S. dollars is the equivalent of $7.33 billion in 2016 U.S. dollars. Since the TSA will spend $7.44 billion in 2016, its spending has kept ahead of inflation.

What that means is that the TSA has all the money it would take to provide a similar level of service in 2016 as it did in 2007, if only it spent money the same way. Because it is spending its money differently, the problems the TSA is now having in causing significant delays for travelers at U.S. airports may be entirely attributed to the decisions of the DHS and its own management for how its available funds have actually been spent.

That's why the TSA's security chief, Kelley Hoggan, has been put on administrative leave, pending a new assignment (no, he hasn't has his federal government employment terminated as erroneously reported by several mainstream news outlets - that would take a system of real accountability for managerial job performance that the civilian branches of the U.S. federal government haven't had since 2008 - Hoggan is still receiving his full paycheck.)

Where does the buck stop again?

Data Sources

U.S. Department of Homeland Security. Budget in Brief: Fiscal Year 2017. [PDF Document].
Accessed 25 May 2016.

U.S. Department of Homeland Security. Budget in Brief: Fiscal Year 2008 through Fiscal Year 2014. [Links to PDF Documents]. Accessed 25 May 2016.

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May 25, 2016

Not long ago, we came across a data source that provided over 150 years worth of nominal price data for wheat crops grown in the U.S., which we recently visualized.

But more than that, it also provided some very remarkable data on the production of wheat over the 15 decades from 1866 through 2015. Data that captures the story of great advances that have been made in U.S. agriculture over the last 60 years, which is what we'll explore and visualize today!

First up, let's consider the amount of wheat that is harvested annually. The following chart counts up the thousands of bushels of wheat that were harvested from 1866 through 2015 in just one state, which has gone from nearly 1,292,000 bushels in 1866 to figures that have consistently ranged between 200 and 388 times that figure over the last 40 years.

Wheat Production [Thousands of Bushels], 1866-2015

At the same time, over the period since 1909 when data for the number of acres planted is available, we see that the gap between potential and actual wheat production has narrowed. The next chart shows what we'll call the harvest efficiency of the acreage of wheat planted each year, which we calculate as the percentage of acres harvested to acres planted.

Efficiency of Wheat Crop [Acres Harvested per Acre Planted], 1909-2015

In this chart, we see that U.S. farmers have become better over time in avoiding major crop losses, often as a consequence of severe droughts, where the trend is clearly one of great improvement. At the same time, the most recent years show that the amount of volatility in annual harvest efficiency has become greatly reduced during just the past 20 years, which is especially remarkable given that 2012 saw the most severe drought conditions across much of the wheat producing section of the United States since the 1950s.

But here's the real story that's hidden in this data: the rapid rise of the yield of wheat per acre. From 1866 through the mid-1950s, the typical yield for harvested wheat ranged between 9 and 20 bushels per acre. After 1955 however, it has risen to where it now ranges between 24 and 48 bushels per acre.

Yield of Wheat Crop [Bushels per Acre Harvested], 1866-2015

There is one big factor behind this change, and a lot of other factors that have combined to produce this result. The big factor is the development of infrastructure for irrigating crops, which are estimated to have increased the yield of wheat by 18 bushels per acre in the years since 1955. By minimizing losses to periodic drought conditions, the expansion of irrigation technology to improve wheat crop yields largely accounts for the reduction of volatility in annual harvest efficiency.

At the same time, an ongoing series of incremental improvements in other agricultural technologies, including seed genetics, seed treatments, fertilization methods and improving harvesting methods, have all combined to incrementally increase the yields of wheat harvested over time.

Those rising yields have also produced another benefit. Increasing yields and efficiencies has made it possible for wheat farmers to reduce the amount of acreage they plant.

Wheat Production [Thousands of Acres Planted], 1909-2015

In 2015, farmers planted 9,200,000 acres of wheat, just slightly more than the 9,112,000 acres of wheat that were planted over a century earlier in 1914. In 1914, wheat farmers harvested 172,750,000 bushels of wheat, which for that year, represented a record bumper crop. In 2015 however, wheat farmers harvested 321,900,000 bushels of wheat - over 1.8 times as much - in a year where the amount of wheat harvested was well below the average of the last 40 years.

That increase in productivity has allowed land that had been tied up in farming wheat to be used to grow other crops or to be used for entirely different purposes.

And it's not just wheat. Many other crops have seen even greater improvements in their yields and harvest efficiency.

These changes have also all happened as dramatically fewer Americans are employed in agriculture. In 1900, an estimated 41% of the entire American workforce were employed on farms. A century later, that figure had fallen below 2%. As of December 2015, some 1.5% of all working Americans are employed in agriculture.

Data Source

U.S. Department of Agriculture. National Agricultural Statistics Service. Northern Plains Regional Field Office. Kansas Wheat History. [PDF Document]. Last Updated: October 2015. Accessed 7 May 2016.

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May 24, 2016

On Monday, 16 May 2016, the U.S. Treasury updated its accounting of the national origins of the major foreign holders of debt issued by the U.S. government through the end of March 2016, the halfway point of the federal government's fiscal year. With that new information, we can update our visualization of all the money that the U.S. federal government has borrowed and currently owes through the end of March 2016.

Spring 2016: To Whom Does the U.S. Government Owe Money?

In the chart above, we've grouped Belgium and Ireland together, next to the pairing of Mainland China and Hong Kong, because major banks in these nations have been increasingly acting as intermediaries for China's total holdings of U.S. government-issued debt securities. Along with a number of banks in the United Kingdom, which have served a similar role in recent years, we believe that a good portion of China's ownership of U.S. Treasuries is being incorrectly attributed to these nations.

Meanwhile, Brazil's holdings have fallen over the past year, as falling oil prices and falling exports to China have taken a toll on the South American nation's economy. Back in 2011, we had noted the rise of Brazil's holdings of U.S. Treasuries were an indication that it was a rising world power. Those holdings peaked in 2014 and since then, Brazil's status has faded along with its economic and now political challenges.

But perhaps the biggest news in the U.S. Treasury's updated data is that discontinued its previous grouping of "oil exporters" as a single category, instead presenting the U.S. Treasury holdings of Saudi Arabia, United Arab Emirates, Kuwait, and others individually for the first time since it began reporting the data in 1974. Of these nations, Saudi Arabia had the largest holdings at $117 billion, accounting for 0.6% of the total public debt outstanding for the U.S. government.

Much of those holdings were accumulated in the time from when oil prices began surging in 2004 until global oil prices began falling dramatically in mid-2014.

Like China however, many of Saudi Arabia's actual holdings of U.S. government-issued debt securities are likely being attributed to other nations. Since Saudi Arabia recently threatened to sell off $750 billion worth of U.S. Treasuries and other assets, which suggests the nation maintains most of these assets in non-direct accounts based in other nations.

Data Sources

Federal Reserve Statistical Release. H.4.1. Factors Affecting Reserve Balances. Release Date: 2 April 2015. [Online Document]. Accessed 15 May 2015.

U.S. Treasury. Major Foreign Holders of Treasury Securities. Accessed 15 May 2015.

U.S. Treasury. Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2015 Through March 30, 2015. [PDF Document].

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May 23, 2016

Quite a lot has happened since we last commented on the S&P 500 and the news events that influenced it during the first part of the third week of May 2016. In short, the following major events happened:

  • More officials at the U.S. Federal Reserve indicated that they were likely to hike interest rates at their upcoming June 2016 meeting.
  • The minutes of the Fed's April meeting released during the week confirmed that the Fed is actively considering that move.
  • The Fed appears to have quietly launched a new round of quantitative easing (QE).

Following what happened over the preceding several days, U.S. investors appear to have focused on 2016-Q3 in setting the level of the S&P 500. Our alternative futures chart shows how the rest of Week 3 of May 2016 played out for the S&P 500.

Alternative Futures - S&P 500 - 2016Q2 - Standard Model - Snapshot on 2016-05-20

Here are the more significant headlines from the rest of Week 3 of May 2016 that caught our attention:

Wednesday, 18 May 2016
Thursday, 19 May 2016
Friday, 12 May 2016

The Fed's net increase in its holdings of Mortgage Backed Securities (MBS) is reminiscent of the actions it took in 2012, when it became clear that the U.S. economy was beginning to slide toward recession during the summer of 2012, where the Fed's first action in QE 3.0 was to begin making large MBS purchases to further stimulate the nation's real estate market.

The Fed's intervention at that time succeeded in preventing the U.S. economy from falling into recession before the November 2012 elections, but following the elections, the Fed was forced to expand its QE efforts to offset the negative impact from the U.S. government's fiscal policies, where large tax increases desired by President Obama on all working Americans were set to take effect on 1 January 2013.

As we saw in 2012, the Fed's new MBS purchases should have little effect, if any, on U.S. stock prices. They are really a way to partially offset the full impact of its next planned interest rate hike, which they will now likely announce on 15 June 2016, but which will be implemented in 2016-Q3, which is why investors are focusing on this future quarter.

On a final note, we think that there is a pricing anomaly in the CBOE's implied forward dividends contract for S&P 500 in the second quarter of 2016 (CBOE: DVJN), which suddenly jumped in value from 113.00 to 116.40 on Wednesday, 18 May 2016, which has been sustained over the last several trading days. (You can estimate the amount of ordinary dividends that will be paid out for the S&P 500 during 2016-Q2 by dividing the value of these contracts by 10).

Since that large increase hasn't also shown up in the implied forward dividends for 2016-Q3 (CBOE: DVST), 2016-Q4 (CBOE: DVDE) and 2017-Q1 (CBOE: DVMR), which would confirm that the change is the result of a sustained improvement in the expectations for future dividend payments, it instead suggests that something unusual is going with the DVJN contract.

That is something that is possible because these contracts are periodically very thinly traded, which allows such pricing anomalies to occasionally develop. It will be interesting to see how long that situation might persist.

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