Political Calculations
Unexpectedly Intriguing!
May 22, 2018

Earnings reporting season for 2018-Q2 is now mostly in the rear view mirror, which makes now a good time to review the state of dividend cuts for the quarter, which are the early warning system of whether any major industrial sectors are experiencing financial distress. Our first chart of two today reveals that compared to the first quarter of 2018, dividend cuts in the second quarter of 2018 have been announced at a faster pace through the current quarter to date.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter in 2018, 2018Q1 and 2018Q2 (QTD)

However, compared to the second quarter of 2017 (2017-Q2), the current quarter of 2018-Q2 is nearly on exactly the same pace.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter, 2017Q2 vs 2018Q2 (QTD)

As for which industrial sectors are being hammered in 2018-Q2, the following sample of firms that have announced dividend cuts in the current quarter offers some insight. The list is presented in chronological order:

Of the 28 dividend cutting firms in our sample, 16 are in the oil and gas production sector, where we note that 6 of the listings represent firms whose businesses are structured as Master Limited Partnerships (MLP) or Limited Partnerships (LP), which were negatively impacted by a tax rule change that was announced by the U.S. Federal Energy Regulatory Commission in March 2018, which would reduce their earnings and thereby prompt them to cut their dividends. In the oil and gas sector, these are firms that predominantly operate pipelines.

The majority of the remaining 10 dividend cutting oil and gas firms are those that pay monthly distributions of dividends to their shareholders, which fluctuate with their earnings from month-to-month. Here, we suspect that a dip in West Texas Intermediate crude oil prices in the first quarter is showing up as negative noise in the second quarter where these firms dividend announcements are concerned.

The second biggest cutters of dividend payments to their shareholders in 2018-Q2 are to be found in the financial sector, which includes a number of Real Estate Investment Trusts (REIT). Many firms in this sector are sensitive to interest rate hikes, where the Fed has been steadily raising short term rates in the U.S. since December 2016.

The remaining four dividend cutting firms represent the food, healthcare, technology and utility industries respectively.

On the whole, if not for the FERC's tax rule change, we believed that 2018-Q2 would appear stronger than is suggested by our charts above!

Data Sources

Seeking Alpha Market Currents. Filtered for Dividends. [Online Database]. Accessed 18 May 2018.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed Accessed 18 May 2018.


May 21, 2018

If investors have really been concerned about the threat of a potential trade war between the U.S. and China, the S&P 500 will very likely let us know how concerned they've been about it this week.

That's because investors continually absorb new information about the business prospects for the companies, where changes in the expectations for their future earnings are quickly realized in their stock prices. For trade-dependent industries, those changes in expectations can show up in the form of lowered expectations for future earnings, which would tend to lower the value of their stock, while industries that might materially benefit from the imposition of new or higher tariffs will have raised expectations for their future earnings, which would tend to increase the stock prices of firms in the "protected" industries.

All that is highly relevant going into the fourth week of May 2018 because of news reports that came out over the weekend indicating that a potential breakthrough in trade negotations between the U.S. and China has been made, which would avert the negative impact of tit-for-tat tariffs and other trade sanctions between the world's two largest national trade partners.

Since the impact of a trade war is generally believed to offer greater negatives than positives across the entire U.S. economy, the diminishment of the risk of trade war should generally boost stock prices, which we would see in the S&P 500. Since the news broke over the weekend, when markets were closed, we would anticipate seeing stock prices (and stock price futures) gap significantly upward as investors provide their initial response to the positive news when markets open for trading on Monday, 21 May 2018. The following spaghetti forecast chart shows where stock prices stood at the close of trading on Friday, 18 May 2018.

Alternative Futures - S&P 500 - 2018Q2 - Standard Model - Snapshot on 18 May 2018

The better question to ask is how of that positive change will remain at the close of trading, after investors will be flooded with new information about the potential trade deal and whatever other market moving new information comes out during the day.

At present, our spaghetti forecast chart indicates that the S&P 500 is poised where investors would appear to be roughly equally splitting their forward-looking focus between the current quarter of 2018-Q2 and the more distant future quarter of 2019-Q1. If the news of the potential breakthrough in trade negotiations between the U.S. and China holds, and if the risk of a trade war breaking out between the U.S. and China have been greatly weighing on their expectations for the future, it would be reasonable for investors to shift more of their attention on the current quarter of 2018-Q2 in response to this news and send stock prices upward from their current position, where a single-day increase of 3% or more in response to the news would be relatively easy for the market to achieve.

Such a move would also mark a very rare event for the U.S. stock market. For our daily trading records that extend back to 3 January 1950, covering some 17,207 trading days, we count just 104 where the S&P 500 and its predecessor indices closed higher by 3.0% or more, suggesting historical odds of 1 in 165 for such an event, where we have to go back to 26 August 2015 to find the last such occurrence.

Or, it may not change by such an unusually large amount, which will tell us that investors haven't really been all that concerned about the prospects for an economy-damaging trade war between the U.S. and China, where it has only contributed to the regular daily noise of trading in the U.S. stock market.

The cool thing is that we'll find out the answer, either way, perhaps as early as today from the day's news headlines. Speaking of which, here are the major headlines that we made special note of during the past week....

Monday, 14 May 2018
Tuesday, 15 May 2018
Wednesday, 16 May 2018
Thursday, 17 May 2018
Friday, 18 May 2018
Over the Weekend

Looking beyond these headlines, Barry Ritholtz listed the positives and negatives for the U.S. economy and markets during the third week of May 2018.

Update 8:15 AM EDT: As expected, pre-market open stock price futures have gapped up, but by 0.6% for the S&P 500.

Bloomberg Stock Price Futures - Americas - 20180521 8:13 AM EDT

Update 22 May 2018: By the end of the day, the gain was just a little over 0.5%, with a relatively low level of trading noise throughout the day.

S&P 500, 2018-05-15 through 2018-05-21 - Source: Yahoo! Finance

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May 18, 2018

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.

And in the six years that we've been taking these snapshots, we've never seen anything like what has happened to the S&P 500's projected earnings per share during 2018, where those future earnings have been revised dramatically higher in two consecutive quarters.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2014-2019, Snapshot on 16 May 2018

Last quarter, we could directly attribute the change to the passage of the Tax Cuts and Jobs Act of 2017, where money that had previously been subject to corporate income taxes was immediately reclassified as earnings, which boosted the effective earnings per share of the entire S&P 500.

But in 2018-Q2, the projected future earnings per share of the S&P 500 was significantly revised upward again, apparently as the result of an organic improvement in the future business outlook for the companies of the S&P 500. Standard & Poor's Howard Silverblatt included the following comments in his 16 May 2018 report on the S&P 500's earnings.

Q1 2018 estimate (93% real) up 7.2% from year-end 2017, as EPS setting record; 2018 estimate up 7.7%, 2019 up 8.8%. Operating margin record high at 11.05%, 20-year average is 8.08%, as retail pulls it down. Unsung hero, sales posting strong 9.5% Y/Y gain.

Beyond that, Reuters is reporting that the tax cut is also boosting business investment, which would be a contributing factor to the improvement in future earnings expectations.

U.S. companies could plow more of the money saved from sweeping tax cuts into business investment later this year, perhaps even surpassing a jump in first-quarter capital expenditure that was the highest in almost seven years, strategists and analysts said.

Higher spending on technology, equipment and facilities could ease worries that S&P 500 companies have reached a peak in the profit growth investors are counting on to extend the nine-year bull market in equities.

The increased spending in the first quarter follows significant cuts in corporate taxes approved late last year by the Republican-led Congress. Companies have also been returning the tax cut windfall to shareholders via share buybacks and increased dividends at amounts never seen before, highlighted by Apple’s $23.5 billion repurchase in the first quarter.

With data in from 94 percent of S&P 500 companies, first-quarter capital expenditures total $159 billion, up more than 21 percent from a year ago and on track to be the highest year-over-year growth since the third quarter of 2011, according to S&P Dow Jones Indices data.

The upward revision in projected future earnings stands in stark contrast to the typical pattern we observed in quarter after quarter during the Obama administration, where projected earnings would start with high expectations that would go on to steadily erode over time.

We don't know how long the current situation of rising earnings expectations from quarter to quarter might continue, but it's certainly fun to watch while it's happening!

Data Source

Silverblatt, Howard. Standard & Poor. S&P 500 Earnings and Estimates. [Excel Spreadsheet]. 16 May 2018.

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May 17, 2018

There are several different schools of thought for determining how much money you need to save to be able retire someday. Over the next several weeks, we'll explore what those schools are and what they tell you about how much wealth you need to stash away to be able to afford not ever having to work at a job again!

The first approach we'll check in with is the "income replacement" school, where how much you earn at your job determines how much you will need to save. This kind of approach is often championed by investment firms, like J.P. Morgan Asset Management, who provides the following illustration from their retirement guide to illustrate how much of your annual income you need in order to continue living as if you never stopped working when you retire.

J.P. Morgan Asset Management - Income Replacement Methodology 2018

The overall idea is have enough wealth built up by the time that you retire that, after you deduct expenses that you'll never have again, like commuting, work wardrobe, etc., will let you keep being able to spend money as if you never retired in the first place.

But accumulating the amount of money that you need to support the income replacement strategy is easier said than done over the decades of one's working life, where it can be difficult to know if you're on track.

To that end, J.P. Morgan provides the following table to indicate what your accumulated savings needs to be at certain age milestones and income levels to be able to generate the wealth you need to effectively replace your working income in retirement, based on how much they assume you're setting aside and the rates they project for both your investment returns and for inflation.

J.P. Morgan Asset Management - Retirement Savings Checkpoints 2018

But we all know that the world doesn't cooperate quite like that, so the savings multiples indicated in the table can tell you how far away you might be if you choose to follow the income replacement strategy for preparing for your future retirement. We've built the following tool to approximate what those actual savings amount are for the age and income you choose to enter to get to that magic number quicker. If you're reading this article on a site that republishes our RSS news feed, please click here to access a working version of this tool at our site.

Age and Income Data
Input Data Values
Age of Primary Income Earner
Household Income

Milestone Accumulated Savings Target
Calculated Results Values
Accumulated Savings

Our tool works best when covering the range of ages (25 to 65) and annual household incomes ($50,000 to $300,000) indicated on the milestone retirement savings chart. The further outside of those ranges you get, the less reliable the tool's results will be.

The downside of using the income replacement approach to determine how much you need to save up for retirement is that the real world can have very different ideas about how stable your income will be throughout your working life, what actual rates of return might be, and what inflation will be, to name just a few factors. You could easily find yourself in a position where you cannot reasonably attain the income replacement savings targets you might have set, because things change over time. Sometimes dramatically.

There are other approaches to saving for retirement to consider however, which we'll take on in upcoming parts of this series!

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May 16, 2018

Although the media reports that they spend much of their free time killing things, two-thirds of millennials appear to be unable to fully capitalize on their natural killer instincts enough to take on the risks of investing in the stock market to increase their wealth outside of having a job.

Mabel Nuñez: If you can afford the product, you can afford the stock

Whether that's because their parents failed to teach them to invest or because they find it too "scary and intimidating", it seems strange that so many Americans of the millennial generation haven't grasped that investing can be as easy as buying the products that you want to have and isn't much more expensive than that. In fact, to quote Girl$ On The Money's Mabel Nuñez from her presentation (HT: J. Money) at the LOLA Retreat money event for women that was held in New York City last month, "if you can afford the product, you can afford the stock".

That's really a great way to think about it. If you like a product enough to buy it, odds are that there are a lot of other people like you out there also buying it, which is what keeps the company that makes or sells the product in business. And if you and a lot of others like the company a whole lot, odds are that the company makes a positive net margin (or profit) as it does business.

But, if you're only a customer of what the company sells, you're missing out on the opportunity to make money from the company's success in providing the kinds of products and services that you and lots of other people like you are happy to buy at the prices at which they sell them. One way you can do that is to buy shares in the ownership of the companies whose products that you like to buy, which is what you're really getting when you invest your money in those companies' stocks. The stock market is simply the place where you can publicly buy, sell or trade those shares of ownership.

Let's go shopping, shall we? A great resource to find companies whose products that you like to buy is Dividend.com's listing of stocks by their industrial sector, which is kind of like the mall directory for the stock market. Starting here, you can zero in on the companies whose products you like to buy.

Let's say that you like to buy a particular retailer's apparel products. These kinds of businesses will be grouped in the stock market's Services sector, where you can find them listed under Apparel Stores.

We've gone ahead and pulled the list for the Apparel Stores whose shares of stock are available to be bought in the stock market, where we've focused on those company's who pay a dividend to the owners of the shares of stock that they have issued.

Company (Ticker) Dividend
Annual Dividend
(per Share)
Stock Price
(per Share)
American Eagle Outfitters (NYSE: AEO) 2.62% $0.55 $20.97
Abercrombie & Fitch (NYSE: ANF) 3.16% $0.80 $25.31
Buckle Inc. (NYSE: BKE) 4.13% $1.00 $24.20
Cato Corp (NYSE: CATO) 8.04% $1.32 $16.42
Chico's FAS (NYSE: CHS) 3.29% $0.34 $10.35
Citi Trends, Inc. (NASDAQ: CTRN) 1.09% $0.32 $29.45
DSW Inc. (NYSE: DSW) 4.07% $1.00 $24.56
Finish Line Inc. (NASDAQ: FINL) 3.39% $0.46 $13.55
Foot Locker (NYSE: FL) 3.18% $1.38 $43.44
Guess, Inc. (NYSE: GES) 3.67% $0.90 $24.52
The Gap Inc. (NYSE: GPS) 3.19% $0.97 $30.38
Nordstrom Inc. (NYSE: JWN) 3.00% $1.48 $49.32
L Brands Inc. (NYSE: LB) 7.22% $2.40 $33.23
Children's Place Retail Stores, Inc. (NASDAQ: PLCE) 1.50% $2.00 $133.55
Ross Stores (NYSE: ROST) 1.09% $0.90 $82.66
Shoe Carnival, Inc. (NASDAQ: SCVL) 1.22% $0.30 $24.64
Stage Stores (NYSE: SSI) 7.46% $0.20 $2.68

Now, let's put Mabel Nuñez' proposition to the test. Let's say that you happily paid $120 for shoes from Foot Locker (NYSE: FL), where you believe you got a good deal on them.

A single share of stock in Foot Locker cost $43.44 at the close of trading on Monday, 14 May 2018, so there's no doubt that if you could afford to have paid $120 for a pair of shoes, you probably wouldn't have had any trouble in buying a single share of stock in the company. In fact, you could have bought two shares and had change left over, even after paying any commissions or fees to a broker, which is what they call the salespeople of the stock market.

We focused on the dividend paying stocks among the apparel stores for a reason, which is because they provide an opportunity to get a fraction of the profits that the company earns and doesn't reinvest back into the business thanks to your ownership of it. In this example, that would mean that you would get $1.38 every year for every share of Foot Locker stock that you own.

This is where it gets interesting. What if you had the money to buy 100 shares of stock in Foot Locker? While those 100 shares would have cost you $4,344, they would also give you $138 that could pay for the $120 pair of shoes you liked so much in the first place, so not only could you get the shoes, you would have up to $18 left over. And you could potentially do that every year....

Ideally, over time, the management of Foot Locker would work to increase the value of the company, where the value of the shares you own would likewise grow in value. That's the other way that owning stocks can increase your wealth, where say a 10% increase in the price of the stock would increase the total value of the shares you own by the same percentage, which you can collect by selling your shares.

At this point, we should caution that increasing stock prices and dividends over time are not a guaranteed result, where companies that run into financial troubles will sometimes cut their dividends and will see their shares decline in value, which is a risk that comes along with being an owner. It is no different for people who own their own businesses, no matter how big or small that they might be - the value of their business and the income they have left over after paying all their bills and reinvesting in the business is what determines how much they get paid.

That risk can be minimized by diversifying the stocks you own, so that not all your investing eggs are in one basket, and also by periodically selling stocks that are facing such troubles and replacing them with the stocks of companies that have stronger businesses or growth prospects. Companies that are selling the kinds of goods and services that people like you are willing to buy at prices that you believe are a good deal.

Since we're just focusing on individual companies, we'll stop there for now, but there is so much more to investing. On the whole, it's a lot less scary and intimidating than many millennials would appear inclined to believe!

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