Political Calculations
Unexpectedly Intriguing!
August 24, 2016

Every three months, just about at the time that the market's quarterly earnings season ends shortly after the midpoint of the quarter, we take a snapshot of the expectations for future earnings in the S&P 500.

Today, for the first time in the last seven quarters, the trailing twelve month average of the S&P 500's earnings per share has risen, which suggests that the earnings recession which took hold in the fourth quarter of 2015 may finally have bottomed.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 
2011-2017, Snapshot 2016-08-18

Going by S&P's current projections, the index' trailing year earnings per share may return to its pre-earnings recession levels in the first quarter of 2017.

The improvement in the S&P 500's earnings may be directly attributed to the rebound of crude oil prices since they bottomed in early February 2016, which have eliminated the downward pressure on earnings that have prevailed in the market's oil production sector since the end of June 2014.

Through Monday, 15 August 2016, the price of West Texas Intermediate crude oil at the Cushing, Oklahoma terminal stood at $45.72 per barrel, a nearly 75% improvement over the $26.19 per barrel it bottomed at back on 11 February 2016. Oil prices would have to rise by another 136% from that $45.72 per barrel figure to return to the $107.95 per barrel that was recorded on 20 June 2014.

We think that for S&P's latest projection of future earnings to hold, oil prices would have to continue their overall rise. However, since the current quarter of 2016-Q3 began, those prices have been somewhat choppy, so we think it is more likely that the recovery of the S&P 500's earnings per share to levels back above their pre-earnings recession levels will take longer than S&P projects.

This increase in the S&P 500's trailing year earnings per share is the first real positive news that the market has seen for its earnings prospects since mid-2014, and particularly the oil producing sector of the market. After having fallen for six consecutive quarters, it's about time that industry had some good news show up on its bottom line.

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]. Updated 12 May 2016. Accessed 19 August 2016.

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August 23, 2016
Source: U.S. Department of Defense - http://www.defense.gov/Media/Essay-View/CollectionId/15653

InsureBlog's Hank Stern reached out to us last week in connection with an effort to link blogs and other social media outlets with support for much needed disaster relief in the flooding-struck Gulf Coast region of the U.S. We're going to keep the ball rolling by pointing to a number of disaster relief resources that should draw your attention no matter where in the world you are.

With much of the worst flooding having taking place in Louisiana's Acadiana region, a great place to start identifying ways to make the biggest difference with your donation or your volunteer efforts can be found through Baton Rouge's CBS affiliate WAFB's site, which has been regularly updating a list of needs and volunteer opportunities in the region.

We've also selected a handful of charitable organizations that are focused on providing disaster relief across Acadiana, which are tied to national organizations that have been ranked highly by Consumer Reports and the Christian Science Monitor for their effectiveness in putting donated funds into real relief efforts.

American Red Cross

The American Red Cross has channels to either support taking your donations to support their efforts or to direct you to where hands-on volunteers are needed, including for blood donations.

United Blood Services

One of the things we learned during the aftermath of Hurricane Katrina is how rapidly available blood supplies across the nation can dwindle because of the disruption of blood donations in the disaster-affected area of Louisiana and the Gulf Coast. Going to your local Red Cross or UBS blood donation center or participating in a blood drive can do a lot to alleviate a potential shortage that would now in the making.

Catholic Charities Archdiocese of New Orleans

Much of the flooded area falls within the parishes served by the archdiocese of New Orleans, which has a well established distribution network to provide disaster relief services in this area.

Salvation Army

The Baton Rouge, Louisiana Corps of the Salvation Army is actively engaged in providing assistance to families displaced by flooding and is also very much in need of volunteers to support its efforts.

The United Way

There are two branches of United Way that are well positioned to provide disaster relief: United Way of Acadiana and United Way of Southeast Louisiana, both are accepting online donations.

We would be remiss if we didn't recognize how social media is making disaster relief efforts more effective. To that end, we're really impressed by an organization that didn't exist during the days of Hurricane Katrina, but which has already made a big difference in its short history: Crisis Cleanup. Here's a good description of what they're about:

How do you direct 30,000 volunteers from 100 organizations to 5,000 locations across a 500-mile arc in 8 weeks?

You don't. You let them organize themselves.

Crisis Cleanup empowers relief organizations to instantly coordinate response efforts in real time, redirecting thousands of volunteers from to waiting lines to survivors' basements.

Crisis Cleanup was developed by and for field volunteers, team leaders, canvassers, and the people who work one-on-one with survivors whose homes have been affected by flood, tornadoes, earthquakes, wind, fire, or other disaster. Crisis Cleanup can respond to a new disaster the same day, permitting relief organizations to instantly coordinate efforts.

Crisis Cleanup implements a "Craigslist" philosophy to recovery efforts– organizations that are aware of work orders enter them into the system, and organizations with capacity to help can claim and perform the work. The system is not public, but it is open and transparent among participating organizations. No centralized organization is "in charge." This non-threatening approach minimizes duplication and maximizes communication, coordination, and efficiency.

While entering a client into Crisis Cleanup does not guarantee that he or she will be served, it guarantees visibility and maximizes the chances for assistance, while helping relief organizations prioritize their limited resources.

It's been over 10 years since the flooding from Hurricane Katrina demonstrated the need for this kind of decentralized coordination tool for making relief efforts more effective. We're excited to see this particular evolution in how disaster assistance is directed.


August 22, 2016

August 2016 is going to be a long month. We're three weeks into it with two more to go and already, with no sign as yet the summer doldrums in the S&P 500 are anywhere near ready to give way to volatility.

Not that there's anything wrong with that - as an investor, a not-so-volatile, yet almost painfully slow general rise in stock prices is a good thing. Especially as compared to the fireworks that created the echo effect in our standard model's projections of the S&P 500's stock prices through the rest of the quarter.

Alternative Futures - S&P 500 - 2016Q3 - Standard Model - Snapshot on 2016-08-19

The echo effect is the result of our futures-based model's use of historic stock prices as the base reference points from which we project the alternative trajectories that the S&P 500 is likely to follow into the future based upon how far forward in time investors are looking in setting their expectations when making their current day investment decisions. In this case, the echo effect began wreaking havoc with our standard model's projections on Thursday, 18 August 2016, on the anniversary of the beginning of China's August 2015 stock market meltdown.

To try to improve the accuracy of our model during the periods where we know in advance that its projections will be less accurate as a result of the echo effect, we've substituted the average daily trajectory that the S&P 500 has taken through this period of the year, based on historic stock price data going back to 1950, which smoothes out the echo of last year's volatility. The following chart shows how well that worked during the first two days in which we have to compensate for the echo effect.

Alternative Futures - S&P 500 - 2016Q3 - Modified Model 01 - Snapshot on 2016-08-19

Overall, so far, so good, but it's way too early to make any sort of judgment call on how well this modified method will work out to be. At this point though, it is pretty safe to say that Week 3 of August 2016 looks like it ended as it began, not to mention how it behaved in between, with investors appearing to be fairly closely focused on the distant future quarter of 2017-Q2 and the expectations associated with it in setting their investment decisions during the past week.

Compared to last year, that's good news. We'll have to wait to see if the next week will bring any excitement. Until then, here is a selection of market-related headlines that caught our attention during the past week.

Monday, 15 August 2016
Tuesday, 16 August 2016
Wednesday, 17 August 2016
Thursday, 18 August 2016
Friday, 19 August 2016

For a listing of the week's positives and negatives as it relates to the markets and the economy, be sure to check out Barry Ritholtz' succinct summation of the week's events.

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August 19, 2016

Wearable computing technology has a bad track record. Inventions like Google Glass is considered to be an epic fail by some. Meanwhile, Apple Watch has been somewhat more successful, but is still considered to be an application of technology that still isn't ready for prime time.

That's why we were intrigued to see Sony enter the field with U.S. Patent 9,417,106 earlier this week with what must be the future of success in wearable computing technology, in which all the technology is integrated into a wig!

U.S. Patent 9,417,2016 Figure 1

If Sony is right, what once was the height of fashion in the 17th and 18th centuries could rock the fashion world of the 21st century!

Sony's inventor team describes the advantages that might be realized by integrating input and output computing devices into today's toupees (emphasis ours):

One of the aspects of the present disclosure is the usage of a wig and the integration of the components of the computing device into this wig. The usage of a wig has several advantages that, compared to known wearable computing devices, include a significantly increased user comfort and an improved handling of the wearable computing device. As the at least one sensor, the control unit and the communication interface are arranged in the wig, most of the components or all components of the wearable computing device are covered by the wig and are, thus, not visible. Therefore, the user can wear the wearable computing device as a regular wig while looking natural at the same time. Secondly, a wig covers at least a part of the user's head or the entire head of the user, so that there is enough space to place the components of the computing device, i.e. the at least one sensor, the control unit and the communication interface, without limiting the user in his daily life activities. The components of the computing device, i.e. the at least one sensor, the control unit and the communication interface, are preferably arranged within the wig in order to be placed on a peripheral area of the head when the wig is worn by the user. The wearable computing device can thus detect a wide variety of information.

A further advantage relies on the fact that the head area is more sensitive than other body parts, such as a foot, a hand or the waist of the user, where the wearable computing devices known from the prior art are usually arranged. The arrangement within a wig that is adapted to cover at least a part of the user's head enables the user to immediately react even if the computing device provides only small or weak feedbacks. The fact that users instinctively protect their heads more than other body parts is also advantageous, since more sensitive sensors and other computing components may be used without the risk of getting damaged. Moreover, the wearable computing device according to the present disclosure can be easily combined with other wearable devices, such as computer glasses or smart phones.

Finally, an integration of a computing device into a wig as proposed according to the present disclosure enables a usage in many daily life situations. The wig itself may have a fancy or funny appearance, but may also have an inconspicuous appearance so that other people in the surrounding of the user may not even take notice of the wearable computing device. In contrast to wearable computing devices known from the art, the wearable computing device proposed in this disclosure thus has the potential to become very popular and commonly used. The proposed device could even be used as a kind of combined technically intelligent item and fashion item at the same time.

Wigs are useful to enhance a user's appearance and change other's impressions because different hairstyles give different impressions. Thus, many people use wigs. Especially bald people that usually wear wigs in their daily life could take advantage of the wide variety of functions that are provided by the wearable computing device proposed herein. However, other conceivable appliances are film or playing actors that commonly use wigs to play different roles. Also, many so-called "cosplayers" (costume players: a form of role-play) wear wigs and costumes to imitate their favourite characters in comics and animated films. In all cases, users wear wigs to enhance their appearance. However, it is to be noted that the wearable computing device proposed herein may be worn by any people, even by people who usually do not wear wigs.

The future just got a lot more weird than it used to be!

Other Stuff We Can't Believe Really Exists


August 18, 2016

How much does the government benefit when new jobs are created within a community?

Uncle Sam - Source: Library of Congress - https://blogs.loc.gov/digitalpreservation/2014/10/the-library-of-congress-wants-you-and-your-file-format-ideas/

Previously, when we looked at the economic impact of new jobs, we only considered how the economy of a community might change from the addition of jobs added by a single new employer. However, we didn't address the situation where local governments use incentives to attract new employers, where the benefits they bring to a local economy are justified because of the tax revenue those new jobs might generate.

Whether or not those kinds of incentives might make sense for the community depends upon how much additional revenue those jobs bring, which is what we'll explore today.

In doing that, we'll only consider tax revenue generated through income and sales taxes. That means that we're excluding property taxes, since factors other than income can influence the amount of tax revenue generated, and which are also very location dependent (that's a different tool!)

In the tool below, you'll need to enter the number of jobs being contributed by the new employer and the average income for those jobs, along with the sales tax rate for the region where the jobs will be located. You'll also need to enter the average effective federal and state income tax rates that applies for the region, which you can estimate by entering the average income for the new jobs in Neuvoo's state income tax calculator to calculate both the federal and state income tax, then dividing each by the average income of the new jobs to get the rates.

Finally, you'll also need to enter the FICA payroll tax rate that applies for the employees of the new employer, which is currently 7.65%.

Because that's a lot of things to keep track of already, to help keep things simple, we'll only consider the direct jobs contributed by a single employer, without considering the job multiplier effect. If you want to consider that effect, just substitute the relevant income and tax rate information for those additional jobs in the tool below and add it to the total for the new employer's direct jobs.

That's it! Once you have that information, you're ready to plug your numbers into the tool below. If you're reading this article on a site that republishes our RSS news feed, click here to access a working version of this tool!

New Job Information
Input Data Values
Number of Jobs
Average Income of the New Jobs
Sales Tax Rate [%]
Average Effective Income Tax Rate [%]
Average Effective Federal Income Tax Rate [%]
FICA Payroll Tax Rate (Employee Only) [%]

Estimated Tax Revenues from Jobs
Calculated Results Values
Estimated Income Tax Revenue
Estimated Sales Tax Revenue
Total Tax Take from New Jobs

In the tool above, the default data comes from an example provided by the state of Oklahoma, which we selected because the methodology for finding these estimates was developed for that state by David Penn.

To apply this tool for your region of interest, just find the applicable data and plug it in! As a bonus, the tool will also provide an estimate of the lost tax revenue that might result when a business shuts down or otherwise leaves the region.

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