Political Calculations
Unexpectedly Intriguing!
August 18, 2017

As it might be seen in 3D... from space! (HT: TimeandDate):

If you want to see how the Monday, 21 August 2017 eclipse might look from Earth, and more specifically, from any zip code in the United States, Time has an app for that! (HT: Mark Perry)

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August 17, 2017

Now that we're just past the halfway point for the third quarter of 2017, let's take a quick look to see how the pace of dividend cuts in 2017-Q3 compares with the year-ago quarter of 2016-Q3. The following chart shows the data we compiled for both periods from Seeking Alpha's Dividend News resource and the Wall Street Journal's Dividend Declarations database.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter, 2017-Q3 versus 2016-Q3

Compared to the third quarter of 2016, the pace of dividend cuts in the third quarter of 2017 are slightly ahead of the pace set a year ago, with the current level being consistent with recessionary conditions being present within the U.S. economy.

Looking to see which companies among the 26 that have announced dividend cuts at this point of 2017-Q3 can tell us where those recessionary conditions might be found, where we find a strong concentration in two industries of the U.S. economy: the oil and gas production sector with 19, and the financial industry with 6, although most of these are firms with significant real estate holdings, such as Real Estate Investment Trusts (REITs).

If you're doing the math at home, the dividend cuts announced in those two industries add up to 25. The remaining firm in our sample is gun manufacturer Sturm Ruger (NYSE: RGR), which reflects the decline in U.S. gun sales since President Obama's exit from office, which has also negatively impacted sporting goods retailers.

Considering the elephant in the room however, we can identify the decline oil prices during 2017 as the primary contributing factor to the increase in distress in the U.S. oil and gas industry, where sustained crude oil prices below $50 per barrel have been putting that industry's margins under pressure.

As for the REITs, the Federal Reserve's series of interest rate increases since November 2016 would appear to be pinching the profit margins in that sector of the economy, although the exposure to distress appears limited at this time.

Finally, comparing the pace of dividend cuts in 2017-Q3 to what we observed during the first two quarters of 2017, we find that the current level of announced dividend cuts is about the same at this point of time as what we saw in both 2017-Q1 and 2017-Q2, although it had been slightly faster during the earlier part of the quarter.

Data Sources

Seeking Alpha Market Currents. Filtered for Dividends. [Online Database]. Accessed 16 August 2017.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 16 August 2017.

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August 16, 2017

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500 at approximately the midpoint of the current quarter, shortly after most U.S. firms have announced their previous quarter's earnings. Today's snapshot of the trailing year earnings per share for the S&P 500 confirms that the stock market's earnings have continued to rebound off their 2016-Q3 bottom, where they have now finally surpassed their pre-earnings recession levels.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2014-2019, Snapshot on 10 August 2017

The recovery in the S&P 500's earnings has been a significant factor in boosting the value of the S&P 500 since the index bottomed at 1829.08 on 12 February 2017. The index has since gone on to set its all time record closing value of 2477.83 just three weeks ago (26 July 2017).

As a general rule, the picture of the S&P 500's forecast earnings per share provided by Standard and Poor snapped at any give time tends to be quite optimistic, where the earnings growth indicated by their future trajectory will most likely not be as robust as projected.

Data Source

Silverblatt, Howard. S&P Indices Market Attribute Series. S&P 500 Monthly Performance Data. S&P 500 Earnings and Estimate Report. [Excel Spreadsheet]. Last Updated 10 August 2017. Accessed 13 August 2017.

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August 15, 2017
Pennsylvania Supreme Court Room - Source: http://www.bop.pa.gov/PublishingImages/supreme-court-harrisburg-pennsylvania-usa.jpg

In Philadelphia, the city's controversial soda tax has reached the state of Pennsylvania's Supreme Court after being upheld in two lower state courts, but a new legal threat to the city's highly regressive tax may be gaining traction in an unlikely place: Chicago.

Like Philadelphia, the leaders of the city of Chicago have sought to impose a tax on the distribution of naturally and artificially-sweetened beverages within the city, regardless of their calorie content, which means that the tax applies to both regular and diet versions of sweetened beverages that are sold by local retailers, with the dedicated purpose of generating tax revenue for each city's coffers. While some soda tax supporters have claimed that imposing such a tax might produce public health benefits through reducing the consumption of calorie-laden sweetened beverages in favor of "healthier" drinks, and thus reducing the incidence of obesity-related conditions that are believed to be affected by soft drink consumption, the way that Philadelphia and Chicago have structured their sweetened beverage taxes to apply on the sales of both calorie-laden drinks and their closest low-and-no-calorie substitutes ensures that any such benefits will be minimal at best.

In addition, an early study has indicated that no statistically significant change in average individual caloric intake has been realized in Berkeley, the city that pioneered local soda taxes in the United States, which calls the claim of achievable health benefits through taxation into question, although additional studies will be needed to quantify what public health benefit, if any, might be realized from targeting taxes to this class of beverages and to determine if it in any way counteracts their additional economic negatives.

That discussion aside for now, Chicago's attempt to implement its soda tax has repeatedly run afoul of both Illinois' and federal law, for many of the same issues that have been raised in the challenge of the legality of Philadelphia's soda tax.

The rollout of a soda tax in Cook County, Illinois, has been a complete fiasco.

Much to the frustration of businesses and taxpayers in a county that includes Chicago, officials have repeatedly vacillated on applying the soda tax to purchases made with food stamps.

They haven't been able to decide how the tax will be administered or determine how much revenue the tax will generate....

County officials, however, had initially planned to tax distributors, who would pass along the cost in the final sale price of a sweetened beverage. Last Thursday they cancelled that plan when the Cook County Revenue Department pointed out the sales price would still be subject to a sales tax.

A tax on a tax is illegal in Illinois.

A tax on a tax is also illegal in Pennsylvania, which then leads to the legal question of why both courts and public officials in Illinois are making very different legal assessments of the legality of Chicago's soda tax that their peers in Pennsylvania making decisions about the legality of Philadelphia's beverage tax are not. The following excerpts following the first court decision on the legality of Philadelphia's soda tax indicates some of the judicial legal reasoning being applied in Pennsylvania.

Philadelphia Court of Commons Pleas Judge Gary S. Glazer dismissed a lawsuit the American Beverage Association and local retailers and distributors filed against the City of Philadelphia Monday. The soda tax levies a 1.5 cent per ounce tax on distributors of sodas, diet sodas, juices and other sugar-sweetened beverages and is being used to fund pre-K programs, the renovation of recreation centers and to fill in holes in the city's budget....

The ABA and others argued the tax was unconstitutional mostly for two reasons. First that it violated the state's uniformity clause by favoring distributors that sell high-priced lower-volume beverages (a $5 Starbucks drink) will owe less than those who sell low-priced higher-volume beverages (a two-liter bottle of soda). Glazer compared the soda tax to taxes on alcohol and fuel, which can also lead to an unequal tax burden depending on how much they are sold for.

A second argument stated Pennsylvania already taxed soft drinks 6 percent as part of a different tax and that this tax would illegally duplicate the state tax. Glazer wrote Philly's soda tax was not duplicative of the Pennsylvania Beverage Tax because Philly's tax is levied on the distributor and that it was irrelevant that the tax would likely get passed on to consumers, therefore taxing the same subjects — those who purchase beverages — as the state tax.

An argument that SNAP benefits would be used to pay a sales tax was also thrown out by Glazer for the same reason: because the tax is collected on distributors.

The difference in legal outcomes for these cases may be attributed to whether the courts are willing to recognize the economic concept of tax incidence, which recognizes the difference between who is required by legal statute to pay a tax and who is really bearing the cost of paying the tax, where the actual economic burden of paying the tax is shifted in full or in part from one party to another.

What you can see in the Philadelphia court's decision is the deliberate dismissal of the concept of tax incidence, where the legality of its soda tax depends almost entirely upon the arbitrary disregard of that real world factor.

That's not the case in Chicago, where authorities have confirmed that taxing the distributors of sweetened beverages results in part or all of the tax being passed through to retail customers through the prices they pay, which is then subject to sales taxes, rendering that approach to taxing sweetened beverages to be illegal under that state's constitutional prohibition against imposing taxes on taxes.

The difference extends also to the way that recipients of SNAP (food stamp) benefits are now being subjected to Chicago's soda tax, where the city's attempted workaround to impose the tax without being duplicative appears to be in violation of federal policy.

The U.S. Dept. of Agriculture has warned Illinois government if Cook County continues to collect sweetened beverage taxes from food stamp recipients, it could lose millions in funding.

USDA is taking a hard line when assessing what constitutes a violation.

Say you're a SNAP client, you buy a soda, you are charged the tax but you get an immediate refund. You may think no harm, no foul, but Illinois Retail Merchants Association Vice President and General Counsel Tanya Triche Dawood disagrees.

"It is absolutely a violation of our (Illinois) SNAP contract," she tells WBBM's Bob Roberts. "The USDA has been clear about that since Day 1. We've been clear about it since Day 1."

The rule in question forbids food stamp clients from being charged any form of tax on the sweetened beverages. The county has offered merchants the immediate refund as a workaround, but Dawood said the prohibition is absolute and not curable by an immediate refund.

The federal rules for exempting SNAP benefits from state and local taxes applies to all goods eligible to be purchased using the charitable welfare benefits provided by the U.S. government. It does not just apply to sweetened beverages.

Where the situation with Chicago's soda tax creates legal jeopardy for Philadelphia's legal tax lies in the almost opposite ways in which public officials and judges in each jurisdiction are assessing the legality of the tax, which would appear to be a direct outcome of one jurisdiction's arbitrary dismissal of the economic concept of tax incidence and the other jurisdiction's acceptance of its legal applicability. While Pennsylvania's seven Supreme Court judges have yet to weigh in on Philadelphia's soda tax at this writing, should they allow the tax to continue, the wildly different judicial assessments and implementation of similar taxes and provision of welfare benefits in different states will likely result in the legality of state and local soda taxes being decided in federal courts.

Seven Angry Jurists: Do any of these Pennsylvania Supreme Court judges believe in the concept of tax incidence?

The ball, as they say, is now in the hands of Pennsylvania's Supreme Court.

Previously on Political Calculations

Presented in chronological order....

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August 14, 2017

The U.S. stock market has been on what we've described as a boring trend over the last several weeks, even as it has hovered near records highs.

That chain of boredom was broken with the S&P 500 in Week 2 of August 2017, when stock prices hovered at its high level just a few days longer than our dividend futures-based model suggested it could, where it found itself in a scenario similar to that of Wile E Coyote after having run off the edge of a desert cliff, hanging in open space until he looks down....

Metaphorically speaking, and from a behavioral finance standpoint, that's pretty much exactly what happened on Thursday, 10 August 2017.

Alternative Futures - S&P 500 - 2017Q3 - Standard Model - Snapshot on 11 August 2017

Fortunately, stock prices didn't have far to fall. We can however confirm that investors would appear to have locked their focus upon the distant future quarter of 2018-Q2, which matches not only what our dividend futures model is telling us, it also matches what the CME Group's FedWatch tool is telling us. Mike Shedlock has snapshots of what the FedWatch tool is communicating, but here is the short summary of the probabilities for what investors are expecting for the timing of the Fed's next change in short term U.S. interest rates after last week.

  • 2017-Q3 (20 September 2017)
    • Decrease to 75-100 bps: 4.1%
    • Unchanged at 100-125 bps: 95.9%
  • 2017-Q4 (13 December 2017)
    • Decrease to 75-100 bps: 2.6%
    • Unchanged at 100-125 bps: 61.5%
    • Increase to 125-150 bps: 35.2%
    • Increase to 150-175 bps: 0.7%
  • 2018-Q1 (21 March 2018)
    • Decrease to 75-100 bps: 2.2%
    • Unchanged at 100-125 bps: 52.7%
    • Increase to 125-150 bps: 39.1%
    • Increase to 150-175 bps: 5.9%
    • Increase to 175-200 bps: 0.2%
  • 2018-Q2 (13 June 2018) (Now Most Likely Quarter for Change in Federal Funds Rate)
    • Decrease to 75-100 bps: 1.7%
    • Unchanged at 100-125 bps: 41.3%
    • Increase to 125-150 bps: 41.8%
    • Increase to 150-175 bps: 13.5%
    • Increase to 175-200 bps: 1.7%
    • Increase to 200-225 bps: 0.1%

2018-Q2 is when the combined odds of the Fed hiking its Federal Funds Rate above its current range of 100-125 basis points (1.00 to 1.25%) finally exceeds 50%, where that action is not expected until the Fed's 13 June 2018 meeting.

The headlines for the week in the markets had a good amount of noise in them, particularly related to North Korea, which really says more about the media's interests than what's motivating the markets.

Monday, 7 August 2017
Tuesday, 8 August 2017
Wednesday, 9 August 2017
Thursday, 10 August 2017
Friday, 11 August 2017

Elsewhere, Barry Ritholtz summarized the positives and negatives for the U.S. economy and markets for the week that was.

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