Political Calculations
Unexpectedly Intriguing!
February 22, 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 reveals that the stock market's earnings have continued rebounding off their 2016-Q3 bottom, but that they are growing at a slower pace than Standard and Poor had projected just three months ago.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2014-2019, Snapshot on 16 February 2017

At present, the earnings recession that began taking hold in the U.S. stock market in 2014-Q3, as falling oil prices impacted the earnings of U.S. firms in the energy production sector of the economy, appears to be set to be over sometime in the next few months as the S&P 500's trailing twelve month earnings per share recovers to their pre-earnings recession levels.

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 16 February 2017. Accessed 17 February 2017.

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February 21, 2017
Sugary Drinks - Source: National Institute of Health - https://directorsblog.nih.gov/2012/11/13/weighing-in-on-sugary-drinks/

On 1 January 2017, the city of Philadelphia's new tax on the sale of sweetened beverages went into effect. Imposed on bottled and canned soft drinks made with either natural or artificial sweeteners, including those that add virtually no calories to the beverages being sweetened, the tax is aimed at reducing the incidence of obesity among Philadelphia's population, which the city claims to be a public health crisis.

Official revenue figures and updated obesity statistics from the city for the tax's first weeks in force are still pending, but Bloomberg has gotten a sense of how effective the tax has been at curbing sweetened soft drink purchases within Philadelphia's city limits from the retailers and distributors who fulfill the demand of the city's residents for the products.

Philadelphia’s six-week-old tax on sweetened beverages is already taking a toll on drink distributors and grocers, with some reporting sales drops of as much as 50 percent.

Canada Dry Delaware Valley -- a local distributor of Canada Dry Ginger Ale, Sunkist, A&W Root Beer, Arizona Iced Tea and Vita Coco -- said business fell 45 percent in Philadelphia in the first five weeks of 2017, compared with the same period last year. Total revenue at Brown's Super Stores, which operates 12 ShopRite and Fresh Grocer supermarkets, fell 15 percent at its six retailers in the city.

"In 30 years of business, there's never been a circumstance in which we've ever had a sales decline of any significant amount," said Jeff Brown, chief executive officer of Brown's Super Stores. "I would describe the impact as nothing less than devastating."

With sales having declined by that magnitude in its month and a half in effect, it's a safe bet that the city of Philadelphia will not be seeing the $91 million in revenue from having imposed the tax on the city's soft drink consumers that it was counting upon to fund the city's expanded prekindergarten programs, park improvements and to pay for the very generous raise that the city granted to municipal union employees shortly after the city council passed the soda tax.

The city's tax amounts to a 1.5 cents-per-ounce surcharge on top of what was the regular retail price for the bottled and canned regular or diet beverages sweetened with sugar or with a number of sugar substitutes, regardless of their relative effects on the health of consumers. A 12-ounce can would have its cost increased by 18 cents, while a 2-liter container would see its cost to retailers increase by over $1.00, which is as much as the retailers might have charged consumers for a 2-liter container of soda pop before the new tax was imposed.

Although directly levied on distributors, a significant share of Philadelphia's soda tax is passed through to consumers, just as the economics of tax incidence would suggest.

The higher taxes are drying up the distributors' business, with negative impacts on their ability to keep employees on their payrolls:

Canada Dry Delaware Valley Chief Operating Officer Bob Brockway said he expects his business will decline by at least a third over the course of the year. He distributes more than 20 percent of all soft drinks in Philadelphia market. Even though retailers just outside the city limits have gotten a sales bump, that increase isn't enough to offset the drop in Philadelphia. Brockway said he'll have to lay off 30 of his 165 employees in the area in March. Depending on summer sales, the layoffs will probably continue, he said....

At Brown's stores, many of which were established in places previously designated as food deserts, beverage sales are down 50 percent. Jeff Brown said he’s had to cut 5,000 to 6,000 hours of employment per week, the equivalent of about 280 jobs. Beverages are the biggest category in a grocery store, he said, with 4,000 products. When consumers drive outside the city to find cheaper prices, Brown said he's losing the non-beverage portion of their carts as well.

The city of Philadelphia could have avoided this situation if its leaders had been more honest in their rationale for imposing the tax, where if the city's leaders were truthful about their desire to address the public health crisis of obesity that they claim justifies the tax, they would have levied it across a wide range of products that share similar sweetened calorie content as the sweetened soft drinks they chose to tax, minimizing the effective tax rate to consumers.

They would then have dedicated the proceeds from that tax to funding to the city's public health programs to specifically address obesity related health concerns.

Ideally, they would also have acted to proportionately reduce other city sales taxes so that the total tax burden on people in the community where they apply remains unchanged. Otherwise, the impact of the new tax would be highly regressive in disproportionately impacting low income earners.

If the city government was then successful in reducing consumption of these products through the tax, the costs of the public health problems related to their consumption will also go down and they would be able to easily get by without the tax revenue from that source, without any impact to their ability to provide other city government services.

On the other hand, if they're not successful in reducing people's consumption of these products, then they'll have the source of revenue they need to address the public health problem they claim to be the justification for the tax.

But if the politicians advancing the tax use any part of the money they collect through the tax for some other reason, which is exactly what they've done in Philadelphia, they should stop claiming that the tax was for the purpose of addressing a legitimate public health concern and admit that it was all really a ruse to cram through the greater spending they desired.

Previously on Political Calculations


February 20, 2017

In Week 3 of February 2017, we closed out our five-week long prediction of the range into which the S&P 500 would close on each trading day from 5 January 2017 through 14 February 2017. The final results are presented in the following chart.

Alternative Futures - S&P 500 - 2017Q1 - Standard Model - Snapshot on 2017-02-17

This is second time that we've attempted the feat with our "connect the dots" approach for coping with the periods where we know in advance that the accuracy of our standard forecasting model will be negatively impacted by the echo effect of past volatility, which arises as a result of our model's use of historic stock prices as the base reference points from which we project future stock prices. As with that previous attempt, stock prices generally fell within our specifically projected range (actually, this time they all fell entirely within the predicted range, whereas back in 2016-Q4, they dropped just outside our projected range on two trading days during that previous prediction period).

It will be another couple of week's before the echoes of past volatility will once again prompt us to attempt another override prediction, but until then, our standard model's forecast will stand - to read that forecast in the chart above, you just need to determine how far forward in time investors are looking as they go about making their current day investment decisions, then identify the range that coincides with that point on the investment horizon.

As best as we can tell right now, they're focusing on either 2017-Q1 or 2017-Q2, for which our dividend futures-based forecasting model doesn't make much distinction. That observation is based in part on the market-driving news headlines that came out during Week 3 of February 2017.

Monday, 13 February 2017
Tuesday, 14 February 2017
Wednesday, 15 February 2017
Thursday, 16 February 2017
Friday, 17 February 2017

The Big Picture's Barry Ritholtz spelled out the pluses and minuses in the news for the U.S. economy in the trading week ending on Friday, 17 February 2017.

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February 17, 2017

Two years ago, Ramiro Gómez created a map that says as much about civilization as photographs of the lights from cities at night from space: a map of all the pubs in the United Kingdom and in Ireland.

Ramiro Gómez: Britain and Ireland, Drawn from Pubs

A little over two years later, computer scientists from the University of Waterloo in Canada have managed to connect all the dots that fall within the United Kingdom, as they used an algorithm they developed to solve a unique version of the "traveling salesman problem", to connect the dots in the shortest amount of distance without repeating any stop.

The result, of course, can only be described as the world's most epic pub crawl....

University of Waterloo: UK 24727: A shortest-possible walking tour through the pubs of the United Kingdom - all line version

HT: Frank Jacobs.

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February 16, 2017

Mark Bertolini is the CEO of Aetna (NYSE: AET). Yesterday, he gave an extended interview with the WSJ's Dennis Berman on the topic of the future of health care, in which he made big news by describing the Affordable Care Act (ACA), which is more popularly known as Obamacare, by saying that "it is in a death spiral."

But the part of his comments that really stood out to us came just after the 14-minute mark of the interview, where he said:

You know that mathematics education in the United States is working when someone says, let's see, I'm going to pay this much premium, I've got a $6,000 deductible, the average deductible across the country is $3,600 dollars, it's up 15% this year alone, right, and when I go to the doctor I'm going to pay cash, nobody anticipates spending a day in the hospital or going to the doctor more than once... so premium, plus deductible, plus paying cash... why do I do this? I'll just pay the penalty and move on.

We here at Political Calculations have been happy to help provide Americans with that particular mathematics education since 17 September 2013, when we introduced our tool "ObamaCare: Should You Pay the Premium or the Tax?" (a 2017 version is also available), in which we made the kind of personal finance math described by Bertolini easy to do for any American with an Internet connection.

So, in a way of speaking, we're the solution to the game of Clue featuring the all-but-confirmed death of Obamacare: it was Political Calculations, on the Internet, with Math!

That said, we do have some thoughts on how to address the situation that Bertolini describes as the result of the adverse selection that has drawn in the sickest Americans eligible for Obamacare while driving out the healthiest Americans. In our view, that outcome will be exceptionally valuable in making good on the failed promise of Obamacare to provide people with pre-existing conditions with the ability to obtain affordable health insurance coverage. Unlike the other failed Obamacare promise that "if you like your health care plan, you can keep it", we think it may be possible to make that kind of health insurance portability a reality, so long as it can be separated from the all the other, excessively wasteful baggage of the Affordable Care Act.

If you want a teaser, we think that the solution to that issue is not subsidized health insurance, but rather reinsurance, which is an idea that we'll explore more at a later date.

In the meantime, if you'd like to see what else Aetna's CEO had to say on about the future of health care, here's the WSJ's full video of the 50-minute interview, but we'll warn you in advance that it starts off with over four and a half minutes of some especially awful background music before it gets going.

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