Political Calculations
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August 20, 2014

Once a quarter, about halfway through, we take a snapshot of the earnings per share that investors expect to earn in the S&P 500 over the next several quarters. Since our previous snapshot in mid-May 2014, the earnings outlook for investors has eroded somewhat over the last three months:

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2010-2015, 14 August 2014 Snapshot

Through the end of 2014, the level of earnings has dropped to a level between what investors had previously expected back on 15 August 2013 and 14 November 2013, before expectations of higher earnings growth took root in the first quarter of 2014.

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August 19, 2014

Two weeks ago, USA Today's Adam Shell asked: "Is it just a pullback, coming correction or beginning of bear market?"

One week ago, David Rosenberg asked: "Market correction? Was that it?"

So what was it really?

Would you believe a brief reversion to the mean?

S&P 500 Index Value vs Trailing Year Dividends per Share, 30 June 2011 Through 15 August 2014

And yes, it's over. For now. Hope this helps clear things up for everybody!

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August 18, 2014

Once again, the change in the growth rate of stock prices has re-converged with the change in the growth rate of dividends expected in 2015-Q2 in our standard baseline model of how stock prices work. Mind the notes in the margin in the latest update of our favorite chart below.

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

What that means, of course, is that if one recognizes that investors are focused on the future quarter of 2015-Q2 in setting today's stock prices, stock prices are currently just about exactly where they might be expected to be!

Alternative Futures for S&P 500, 30 June 2014 - 30 September 2014 (Without Echo Effect), Snapshot on 2014-08-15

Since this is a new description for us, "standard baseline model" refers to our original model, where we've incorporated historic price and dividend data from one year ago as the baseline from which we project each of the alternative trajectories that stock prices today might follow. Those trajectories are then distinguished by the expectations of the changes in the growth rate of dividends that are expected at different points of time in the future. As we've long observed, stock prices will tend to converge with the trajectory that coincides with the expectations associated with the specific point of time in the future to which investors have focused their forward-looking attention as they make investment decisions today.

The data suggests that investors have been and are currently focused upon 2015-Q2 in setting today's stock prices, since this quarter marks the period of time at which the Federal Reserve is most likely to act to increase short term interest rates in the U.S. for the first time in several years.

Since our stock price forecasting method incorporates historic stock price data, its projections of stock prices are subject to the volatility associated with what we describe as past noise events, which we describe as echoes. Noise events are the relatively short duration periods of time during which stock prices can deviate considerable from their forecast trajectory, which often coincide with major events in the news, which we've also observed would also appear to coincide with investors suddenly shifting their forward-looking attention to a different point of time in the future. Those sudden shifts in focus produce volatility in the level of stock prices.

Where our forecasting methods are concerned, the echoes of these past noise events can create apparent deviations between what our model would appear to project for the trajectory of stock prices, which are really just artifacts of our using historic stock price data that include these periods of volatility. They look like new noise events, but they aren't. They're the echoes of past noise events.

To get around that limitation, we recently adopted the practice of resetting the historic baseline reference points we use for making our future projections to a different point of time in the past. The chart below shows how our model has performed during the current quarter to date after we incorporated the historic stock price and dividend data from two years ago rather than from one year ago as we do in our standard model.

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, Historic Baseline Set Two Years Earlier, Snapshot on 2014-08-15

With this baseline reference, which is absent of the effects of the series of echoes that defined the volatility in the period from mid-June through mid-October 2013, we find that stock prices are tracking along with the future trajectory associated with the expectations consistent with 2015-Q2.

It's kind of a curious thing, but we're now in a period where the two projections for 2015-Q2 will track somewhat closely with one another - at least until 12 September 2014. Until then, it would seem that the echoes are off!

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August 15, 2014

"If you build it, he will come."

That line from the film Field of Dreams is one of the most memorable in movie history.

The story told in the motion picture is about an Iowa farmer who hears magical voices that lead him to take a portion of his farm out of production and to instead build a baseball field where he had previously grown corn. Once built, the field attracts the spirits of a number of the most talented professional baseball players from the game's earliest decades, but at a real world price - the farmer risks losing his family's farm because he can no longer grow and sell enough crops to pay back his loans. Ultimately, the fairy tale ends as a stream of people travel to the magical baseball diamond in the middle of Iowa, willing to pay the farmer for the experience of seeing baseball's bygone greats play once again.

Every time a local or state government seeks to use taxpayer dollars or to borrow money by issuing bonds for the sake of building a brand new sports stadium for a professional sports franchise, they are, in essence, trying to recreate the fairy tale told in Field of Dreams. If they build it, they claim, they will reap a financial reward that's far greater than the cost.

How do you suppose that works out in the real world?

Let's tell the story of how the city of Mesa, Arizona built a new baseball stadium complex, which would be the spring training home for the Chicago Cubs in addition to being the focal point of a major urban development project. Let's pick up the story from the stadium's grand opening on Saturday, 22 January 2014:

On Saturday, Mesa takes the wraps off Cubs Park, a 15,000-seat stadium designed to keep the Chicago Cubs in town for at least the next 30 years of spring training.

It’s the centerpiece of a complex whose baseball facilities alone priced out at $84 million in public money for the ballpark, several practice fields and a 70,000-square-foot clubhouse that will serve as the Cubs’ Western headquarters.

Mesa tacked on $15 million for infrastructure in and near the baseball facilities. And, after voters approved park-bond money in 2012, the city added $7.7 million more to turn next-door Riverview Park into a showplace with a play area designed to knock kids’ socks off.

One thing that's important to recognize right off the bat is that Mesa had been the spring training home of the Chicago Cubs since 1952. Building the stadium complex didn't attract the Cubs or their fans to Mesa, because they had been coming for decades.

But would a new stadium attract new fans? New fans who would spend money in Mesa, boosting the city's revenue from sales taxes?

After the team's first spring training at the new field, the numbers are now in:

Day after day this spring, Cubs Park bulged with the biggest crowds ever to attend Cactus League games, with wallets open not just for tickets but for stuff at the next-door Riverview shopping area.

But that did not translate into a citywide boost in sales-tax collections, one of the most closely watched numbers in a city that greatly depends on that source of revenue.

The March sales-tax report showed Riverview pumped $397,000 into the city treasury, a 5.7 percent increase from the same month in 2013.

Citywide, March sales taxes totaled $12.8 million, almost exactly the same as the previous year and $219,000 short of what the city had projected.

Fans did indeed flock to the new stadium, but instead of stimulating Mesa's economy as a whole through their increased spending, what really happened was that they had simply shifted where they were doing their spending within the city. They spent more in the area adjacent to the new facility, but spent less elsewhere in the city. They hadn't boosted their spending at all and the city of Mesa failed to realize their dream of more sales tax revenues from the professional sports field they built.

That outcome is an old lesson, but one that most politicians have repeatedly failed to learn.

It seems that when it comes to professional sports, politicians are just not that bright. But then, they would appear to get a really good deal on really good seats, so maybe that's what really motivates them to support their local fields of schemes.


August 14, 2014

Going by the year-over-year growth rate of of the value of trade between the United States and China, which we've adjusted to account for the changing currency exchange rate for each nation's currency, it would appear that the U.S. economy rebounded in June 2014, while China's economy decelerated slightly.

Year Over Year Growth Rate of U.S.-China Trade, January 1986 - July 2013

Taking the average of each month's year-over-year growth rate for the first and second quarter of 2014, we find that on average, the value of China's imports to the U.S. in 2014-Q2 grew twice as fast as they did in 2014-Q1, at an average rate of 7.8% versus the first quarter's 3.7%.

At the same time, the growth rate of the value of the U.S.' exports to China grew substantially slower in 2014-Q2 than in 2014-Q1, falling to 3.7% in the second quarter compared to the average 8.3% that the U.S. exports increased in the first quarter.

That recent trend appears set to continue into the third quarter of 2014 according to China's less reliable trade data:

BEIJING—China's exports surged in July on the back of strong demand from the U.S., Europe and Southeast Asia, while imports fell, surprising markets on both counts and resulting in a record monthly trade surplus.

The news was largely welcome in Beijing, as the world's second-largest economy struggles to regain growth- and foreign-trade momentum after this year's weak start, although negative import growth underscores continued weak domestic demand.

According to figures released by the General Administration of Customs on Friday, exports expanded 14.5% year-over-year, nearly double the 8% growth forecast by 15 economists in a Wall Street Journal survey and a sharp increase from the 7.2% year-over-year increase recorded in June.

Imports, meanwhile, fell 1.6% during the same period, following a 5.5% on-year expansion in June. The survey predicted a 3% rise.

The rate of growth of the value of goods imported by a country provides a key indication of its relative economic health. A nation that is experiencing more robust economic growth will tend to import an increasing value of goods, while a nation importing a falling level of goods indicates that its economy is experiencing contractionary conditions.


Board of Governors of the Federal Reserve System. China / U.S. Foreign Exchange Rate. G.5 Foreign Exchange Rates. Accessed 11 September 2013.

U.S. Bureau of Labor Statistics. Employment Situation Report Archive. Accessed 11 September 2013.

U.S. Census Bureau. Trade in Goods with China. Accessed 11 September 2013.


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