Political Calculations
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April 28, 2017

One of the great pleasures we've enjoyed over the years was the Discovery Channel's Pitchmen, which featured TV's legendary salesmen Billy Mays and Anthony Sullivan as they searched for newly invented products that they could feature in the kind of 30-minute infomercials that often populate very late-night television programming.

While many of the kind of products that are often presented in that kind of advertising tend to be somewhat offbeat or don't have great reputations for quality, Sullivan and Mays' Pitchmen was fascinating to watch from both the perspective of the stories of the inventors and inventions they were evaluating and also from their make-or-break business assessment of what makes for a successful product, where even the best laid plans for a seemingly compelling product was no guarantee of success. In a lot of ways, Pitchmen was Shark Tank before Shark Tank, but better because it never got mired down in that big broadcast network show's Queen for a Day-type pleading.

We were recently taken back to those days because of a story at Core77 featuring an inventive design solution to the problem of how to protect what's yours inside a refrigerator, which linked to the following vintage two minute-long ad from 2010 (the best part is when the bear makes its appearance!)

You can actually still buy the original Fridge Locker through Amazon, or at brick and mortar retailers like Bed Bath & Beyond, the Container Store, and Wal-Mart.

The best way you can tell if a product is successful is if it's still being sold, years after it was first pitched to the public!


April 27, 2017

Is Philadelphia's new soda tax really meeting its backers political expectations?

BillyPenn ran the following headline, which suggests that things might be looking pretty rosy for the city's coffers:

Philly soda tax revenue way up in March

And so they would seem to be! Here are the figures for the revenues collected by the City of Philadelphia from its controversial soda tax from the article, which update previously reported numbers for January and February 2017, and provide a preliminary value for March 2017:

Sugary beverage tax collections increased in Philadelphia this month by nearly a million dollars compared to the previous month, the city's Department of Revenue announced today.

So far, the city has received $7 million in collections for the month of March for the three-month-old sugar-sweetened beverage tax. Those taxes were due April 20. That's well over the $5.9 million revenue collected in February following the first month of the soda tax and also an increase over the $6.2 million collected in March following the second month.

That's three months worth of data, so let's summarize how much of Philadelphia's soda tax was collected for the months of January, February and March 2017, as well as describe how the earlier data was revised:

  • January 2017: $5.9 million (previously revised up from $5.7 million)
  • February 2017: $6.2 million (revised down from $6.3 million)
  • March 2017: $7.0 million (preliminary data)

Those figures seem like an improving trend, however as we're about to demonstrate, they also reveal that Philadelphia's soda tax collections are consistently falling between 8-to-10% short of the figures that the city's politicians were anticipating they would be collecting.

That assessment is based on our estimates of the soda taxes that would need to be collected each month based upon the seasonal pattern for U.S. soft drink consumption to add up to the $92.4 million that Philadelphia's mayor and city council were counting upon to pay for new pre-Kindergarten schooling, "monumental" public park improvements, and to fund generous raises for the city's unionized employees among other general expenses. The following chart updates the previous edition to take the city's newly reported and revised sweetened beverage tax revenue data into account.

Desired vs Actual Estimates of Philadelphia's Monthly Soda Tax Collections, 2017 (Revised Data for Jan-Feb 2017, Preliminary Data for Mar-2017)

If the current pattern for the soda tax collections continues through the whole year, the city of Philadelphia will find itself somewhere between $7.4 million and $9.2 million short of the total funds that its politicians are depending upon to fund their goals for new spending, which would put the city's total soda tax collections for the year somewhere between $83 million and $85 million.

For their part, Philadelphia city officials are holding out hope that they will succeed in collecting every dime they thought they would in 2017:

City officials wrote in a news release that Department of Revenue officials "remain confident" the tax will reach its fiscal year 2017 goal of bringing in $46 million (which covers six months of beverage distribution). The city expects to make more than $90 million over a full year of the beverage tax.

To hit their stated mid-year target of $46 million worth of soda tax collections, Philadelphia's city government will need to collect an average of nearly $9 million per month from April through June 2017.

But if the current pattern for the city's sweetened beverage tax revenues holds and the city's soda tax revenues fall short, it will be interesting to see which political constituency within the city will get stiffed because the city's leaders didn't get all the money they were counting upon.

Previously on Political Calculations

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April 26, 2017

Economics writer Robert Samuelson is worried. Specifically, he's worried about why stock prices have risen so much in response to Donald Trump's election as U.S. President on 8 November 2016.

In worrying, he not only conveys the conventional wisdom that seeks to explain the "Trump Rally" as some sort of outpouring of animal spirits linked to the promised policy changes that Donald Trump advocated on the 2016 campaign trail, but also zeroes in on the historically elevated price-to-earnings (P/E) ratio of today's stock market.

The theory of the Trump Rally is simple: He has brightened the economic outlook. Big business and personal tax cuts, combined with relief from over-regulation and higher infrastructure spending (roads, ports), will boost economic growth. Faster growth will raise profits — and higher profits tomorrow justify higher stock prices today. In theory, stocks represent the present value of (estimated) future profits.

But there's the rub. What if those profits don't materialize?

Immediately after the election, it was possible (though naive) to think that Trump could quickly convince the Republican Congress to pass his economic agenda. Now, that optimism seems unrealistic. The difficulty of repealing the Affordable Care Act showed the limits of the White House's power. Similarly, big tax cuts may be doomed by budget deficits. Progress on infrastructure and regulation is also grudging.

So: If the main reason for the Trump Rally is missing, what's holding stock prices up? Good question.

Let's be clear: Stock prices are historically high by many traditional measures. Consider the price-earnings ratio, or P/E. It shows the relation between stock prices and underlying earnings (profits). Since 1936, the P/E ratio of the Standard & Poor's 500 stocks has averaged 17 based on the latest profits and stock prices, says Howard Silverblatt of S&P Dow Jones Indices. Now, the P/E is almost 24.

Leaving aside the modern day paganism of the animal spirits aspects of Samuelson's worries, we can confirm that Samuelson is making a very common and very basic mistake in advancing his narrative, one that many market observers make. That mistake lies in focusing on the ratio of stock prices with respect to their future profits, or rather their earnings per share, in assessing the relative valuation of stock prices, because earnings have very little to do with stock prices. Stock prices are really much more driven by the expectations for their dividends per share.

That's an important distinction because publicly traded firms often set their dividends independently of their earnings. Where earnings can fluctuate considerably from quarter to quarter for many firms, the consistency of dividends lets the stock prices of these firms be comparatively less volatile.

The following animated chart illustrates that point by flipping through the data we have for the average monthly price (blue), trailing year earnings (green) and trailing year dividends (red) per share for the S&P 500 from January 2007 through March 2017. If you're accessing this article on a site that republishes our RSS news feed, you may want to click through to our site to see the animation.

Animated Chart: Monthly Average S&P 500 Price per Share, Trailing Year Earnings per Share, Trailing Year Dividends per Share, January 2007 through March 2017

In this chart, you can see that the changes in stock prices for the S&P 500 has been much more proportional in magnitude to the changes in the index' trailing year dividends per share than they have been with the index' trailing year earnings per share.

You can also see that difference is really exaggerated during the period of the Great Stock Market Crash of 2008-2009, when earnings nose-dived, but dividends were considerably more stable. Stock prices behaved much more like dividends than they did like earnings.

The chart also shows that same dynamic on a much smaller, but more currently relevant, scale for the period from July 2014 through February 2016. This period coincides with the timing of when global oil prices collapsed from the record highs they were recording in the previous three years, where many firms in the U.S. energy sector saw their precious earnings drop like rocks right along with their revenues thanks to the collapse of oil prices during that time.

In response to that deteriorating business outlook, many of these firms sought to maintain their dividends at the levels they were before their revenues and earnings fell, betting that they would be able to rein in their costs and continue being able to sustain their dividends unchanged. For these firms, that bet has paid off to this date as their stock prices proved to be far more stable than their revenues and earnings would suggest. The disproportionately larger decline of their earnings per share shrank the value of the denominator in the P/E ratio math, accounting for why their P/E ratios have escalated to be so high.

Since February 2016, oil prices have rebounded and somewhat stabilized, but not by so much to allow both revenues and earnings recover to their pre-oil price collapse levels, so we still have elevated P/E ratios within that sector of the market. That outcome then affects the S&P 500's P/E ratio because the energy sector makes up a significant percentage share of the market index, and a disproportionately larger share of its earnings.

That's the mathematical reason for why today's stock market index can appear to be so apparently elevated when measured by P/E ratios and is why they otherwise inexplicably would seem to be capable of to levitate in the absence of greater earnings.

S&P 500 Average Monthly Price per Share to Trailing Year Earnings per Share (P/E) Ratio, January 2007 through March 2017

Samuelson also worries about the lack of growth of those earnings with respect to stock prices as a potential trigger for falling stock prices.

Stock prices have outrun profits' growth. According to Silverblatt, either added profits will materialize or, if they don't, stocks will decline. "The P/E is high," he says. "We are paying [in today's stock prices] for future and expected earnings. At some point, we need to see them."

As we've demonstrated, that's not necessarily true. So long as firms have sufficient earnings and free cash flow to sustain their established levels of dividends, there's every reason to think that they will also sustain their stock prices, even with very high P/E ratios, for prolonged periods of time. It would only be if their business outlooks deteriorated with the dual whammy of declining earnings and free cash flow that they would finally be compelled to announce the dividend cuts that would ensure declines in their stock prices.

Speaking of which, 2016 isn't the only time in U.S. stock market history when firms with falling revenues and earnings bet that they could outlast the business conditions that led to their financial distress. Very similar bets were placed by a lot of economically distressed companies back in 2006 and 2007. A lot of those companies proceeded to lose their bets after their business outlooks soured to the point where they could no longer put off cutting their dividends, which is what really sent stock prices crashing throughout 2008 and into 2009.

On a final note, if you want to play with the math that describes how all that works, here it is!

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April 25, 2017

The Consumer Federation of America recently put out a press release that reports that they've found that 1.1 million student loan borrowers in the United States have gone 270 or more days without making payments on their Federal Direct Student Loans, with more than $137 billion worth of the loans issued by the U.S. government now qualifying as being in default by that standard.

Update 27 April 2017: The figure of 1.1 million defaults only applies to the number of student loans that went into default during 2016. Altogether, through December 2016, there were a total of 4.2 million student loans in default, the combined balance of which adds up to $137 billion. We're afraid that the CFA missed noting that total figure in their press release, and we've updated our charts and analysis accordingly to reflect the corrected total of for the number of Federal Direct Student Loans in default.

Data from the CFA's press release has made the rounds among multiple news outlets, but we have a pretty basic question: Are those big numbers?

They certainly seem like big numbers, what with all the millions and billions being thrown about, but how do these numbers fit into the bigger U.S. government-issued student loan story?

We decided to dig down into the press release's details to find out. Let's start with the biggest numbers, where we discover that $137 billion worth of Federal Direct Student Loans are in default, against the larger total of $1.3 trillion worth of Federal Direct Student Loans that have been issued through the end of December 2016.

Federal Direct Student Loans, Amounts in Default and Not in Default as of December 2016

Here, we calculate that the percentage of student loans that have gone 270 or more days without having had a payment made upon them represents about 11% of the total amount borrowed. That means that some 4.2 million people whose student loans require that they make some sort of scheduled payment went more than 9 months without making any.

To tell if that's a big number or not requires that we put that number into some kind of context. Here, we'll draw on the U.S. Federal Reserve's data for the delinquency rates on loans and leases issued by all commercial banks in the U.S., where for the fourth quarter of 2016, we find that the total delinquency rate is 2.04%. That value had previously peaked at 7.4% back in the first quarter of 2010, following the bottoming of the Great Recession.

But another important thing to consider is that delinquency rate would include all private-sector issued loans and leases that have payments that are past due, including those that have gone without payment for much less than 270 days. That figure tells us that the default rate of 11% for Federal Direct Student Loans is, to put it in Trumpian terms, "Yuge!"

Going by the standard of simple delinquency, the WSJ reported back in April 2016 that 40% of student loan borrowers were delinquent on their scheduled student loan payments, meaning that they were at least 15 to 31 days behind.

The next question that we'll tackle is whether the 4.2 million student loan borrowers who have defaulted on making payments on their Federal Direct Student Loans is a lot. The following chart shows how they fit into the total number of 42.4 million Americans who have taken out Federal Direct Student Loans.

Federal Direct Student Loan Borrowers, Number In Default and Not in Default as of December 2016

Click here to see the previous version of this chart, which only broke out the 2016 defaulters.

Here, we discover that the 4.2 million Americans that have defaulted on their Federal Direct Student Loans is about 10% of the total number of Americans who have borrowed money from the U.S. government to pay for a university or college education in the United States, and that the 1.1 million defaults in 2016 represent 3% of the total.

What we find here is that a relatively small portion of the total population of federal student loan borrowers is responsible for the very high default rate for the Federal Direct Student Loan program. 38.2 million, or 90% of student loan borrowers, have not gone 270 days or longer without making their scheduled student loan payments to Uncle Sam's hired student loan servicers.

The combination of low number of defaulters and relatively large amount of defaulted student loans tells us that these individuals have truly racked up what might be considered to be gargantuan hefty student loan debt. Let's next find out how much debt that is.

Average Federal Direct Student Loan Balance, Number In Default and Not in Default as of December 2016

Click here to see the previous version of this chart, which divided the full $137 billion of defaulted student loans among 2016's defaulters.

The average student loan balance in the U.S. is $30,650. For Americans who haven't defaulted on their student loans, that average figure drops to $30,434. But for Americans who have defaulted on their payments to their U.S. government creditor, the average balance on their Federal Direct Student Loan is $32,714.

To put that latter number into context, consumer personal finance site Nerdwallet reports that the average amounts of debt for the U.S. households that report having the indicated kind of debt for 2016:

  • Credit cards: $16,748
  • Mortgages: $176,222
  • Auto loans: $28,948
  • Student loans: $49,905
  • Any type of debt: $134,643

The average amount of a Federal Direct Student Loan in default for a single American is nearly double the amount of credit card debt for the combined accounts of Americans living in a single household. It also exceeds the average amount of the combined auto loans held by American households.

But maybe the most scary aspect of the average balance of a defaulted Federal Direct Student Loan is that only $2,280 separates that loan gone bad from the average balance of a student loan that is not in default.

Because the U.S. Department of Education, which administers the Federal Direct Student Loan program, borrows money through the U.S. Treasury to issue these student loans, it must charge all borrowers a higher rate of interest to make up the $137 billion gap in its direct student loan program that is caused by a small minority of borrowers, or else U.S. tax revenue must either be diverted or additional money borrowed to make up the difference in paying back the U.S. government's creditors.

The U.S. student loan implosion therefore has a very real cost to both U.S. taxpayers and to Americans seeking to borrow money from the U.S. government to pay for their higher education.

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April 24, 2017

There's an old saying among coders, the polite phrasing of which goes as follows: "To err is human; To really foul things up requires a computer."

We definitely had a mischievous daemon do a number on us last week, where we managed to repeatedly refer to Week 2 of April 2017 as being Week 3 of April 2017, with all references to the week being consistent with a week further ahead in time than the week we were describing (now since fixed)!

So if your last contact with us was that post, and you've now come across this one, that's why it seems like we're talking about the third week of April 2017 again, when in reality, we really are reviewing Week 3 of April 2017 this time. Really!

So let's start with the most significant observation we can offer about what happened to the forward-looking outlook of S&P 500 investors during the third week of April 2017, where we think that the news of the week combined with the onset of earnings season to shift investors more strongly toward focusing on the current quarter of 2017-Q2 as being the most likely period in which the Fed will next hike short term interest rates in the U.S. by what appears to be a 2-to-1 margin.

Alternative Futures - S&P 500 - 2017Q2 - Standard Model - Snapshot on 21 April 2017

That's a significant shift compared to what we've seen over the last several weeks, where that probability has ranged near the 50-50 mark, keeping within a narrow margin of an even split.

As for why that's our thinking, here are the headlines we flagged during the week to provide the context in which stock prices reacted. You'll notice that we're starting to pick up news headlines related to the potential shutdown of portions of the federal government as early as Week 4 of April 2017, mainly because it's another element of noise to add on top of the noise from other geopolitical concerns. Outside of noise, history indicates that particular event would be pretty much of a nonfactor where the stock market is concerned, where even a prolonged event would have little to no economic impact as well.

Monday, 17 April 2017
Tuesday, 18 April 2017
Wednesday, 19 April 2017
Thursday, 20 April 2017
Friday, 21 April 2017

This was a day that began and ended in France as a greater geopolitical concern....

That's it for the overall context of the market's forward-looking concerns this week, where we've definitely erred on the side of documenting the week's high noise to signal ratio. Be sure to follow this link for Barry Ritholtz's succinct summation of the week's pluses and minuses for the U.S. economy and markets for that additional context and a touch more signal.

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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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