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22 октября, 11:13

S&P 500 Investors Splitting Their Focus Between 2019-Q1 and 2019Q3

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The S&P 500 (Index: SPX) ended the third week of October 2018 much the same way as it ended the previous week, with investors appearing to split their forward-looking focus between the future quarters of 2019-Q1 and 2019-Q3. In between, the U.S. stock market continued to show signs of heightened volatility, with fourth quarter earnings pulling investors attention in one direction (upward), and concerns over the frequency and timing of future interest rate hikes by the Fed pulling it in the other (downward). By the end of the week, investors appeared to be putting a stronger weight on the what U.S. interest rates will be a year from now (60%) than they were upon earnings to come in the nearer term (40%), as visualized by the relative spacing between the actual trajectory of the S&P 500 against the potential trajectories assocated with either 2019-Q1 or 2019-Q3 indicated in our spaghetti forecast chart. At least, that's what we were able to glean from the market moving news headlines from the week, which provide the context of what influenced investors to go along with what our dividend futures-based model projected during Week 3 of October 2018. Monday, 15 October 2018 Tech stocks drag down Wall St. as earnings worries weigh Tuesday, 16 October 2018 Oil up; Iran, Saudi supply worries offset U.S. supply growth U.S. regains crown as most competitive economy for first time since 2008: WEF Trump widens Fed critique, calls it 'my biggest threat' Wall St. rallies over 2 percent with earnings, data boost Big U.S. banks end third quarter on high note Wednesday, 17 October 2018 Oil falls below $80 on rising U.S. stockpiles Despite Trump criticism, Fed sees need for more rate hikes Wall St. falls as investors eye a united hawkish Fed Thursday, 18 October 2018 Oil falls on concerns over escalating trade row Fed plans would put rates 'quite a way' into restrictive area: Bullard Fed's Quarles eyes more dovish rate path, U.S. productivity boost Wall St. slides as Saudi Arabia, Italy add to economic concerns Friday, 19 October 2018 Oil up but posts weekly loss on stock build, trade tensions Fed's Kaplan sees two-three more rate hikes to hit 'neutral' level U.S. existing home sales fall for sixth straight month S&P falls on interest rate, trade concerns; P&G lifts Dow Meanwhile, Barry Ritholtz outlined the week's markets and economics news' positives and negatives. There are seven of each, with an disconcerting new entry at the top of the negative column....

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19 октября, 11:28

The Constants Inside the Fine Structure Constant

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On 24 September 2018, mathematician Michael Atiyah announced that he believed that he had cracked the Riemann Hypothesis at the Heidelberg Laureate Forum, which if his proof holds, would represent a very big deal. Not just because the proof would come with a one million dollar price from solving one of the Clay Mathematical Institute's millennium problems, or because it describes the distribution of prime numbers, but also because it would automatically prove a lot of other mathematical hypotheses that rely on the Riemann hypothesis being valid for their contentions to hold. For more information about what the Riemann Hypothesis is, we recommend viewing either Numberphile's 17-minute video or 3Blue1Brown's 22-minute long video on the topic, both of which are well done but offer different strengths in presentation. What we found interesting in Atiyah's announcement is that he claims the proof came about because of work he was doing (leaked here?) to analytically derive the fine structure constant from physics, which is fascinating in and of itself. In the following video from the University of Nottingham's Sixty Symbols project, Laurence Eaves provides a blissfully short 5-minute long explanation of the significance of the fine structure constant, which is the measure of the strength of the electromagnetic force governing how electrically-charged elementary particles interact. The three fundamental constants that are combined in the fine structure constant are: The elementary charge of an electron (e) Planck's constant, divided by both 2 and pi (h) The speed of light (c) If we include pi, there are technically four universal constants in the formulation. It's estimated to be very nearly equal to 1 divided by 137, where if it were exactly equal to that ratio, would really be extraordinary because the value 137 happens to also be a Pythagorean prime number. As it happens, the denominator in the fine structure constant is currently estimated to be 137.035999138..., so it's close, but not quite.

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18 октября, 11:46

Starbucks' Adult Sippy Cup Lids Design Fail

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Not long ago, thanks to a botched drink order, we had our first experience with the new style plastic "adult sippy cup" lids that Starbucks (NYSE: SBUX) announced would replace plastic straws for all its iced beverages back on 9 July 2018. Starbucks promoted the new lids as a way to reduce the amount of plastic waste that ends up in the world's oceans, where the company's press release featured the comments of environmental activist Nicholas Mallos: “Starbucks’ decision to phase out single-use plastic straws is a shining example of the important role that companies can play in stemming the tide of ocean plastic,” said Nicholas Mallos, director of Ocean Conservancy’s Trash Free Seas program. “With eight million metric tons of plastic entering the ocean every year, we cannot afford to let industry sit on the sidelines.” Starbucks' adult sippy cup lids are being first rolled out in the North American cities of Seattle, Washington and Vancouver, British Columbia, even though neither city, nor any city in North America, nor the entire continent of North America, is a major source of plastic waste that enters the world's oceans each year. At present, neither Starbucks nor the Ocean Conservancy has indicated how they will reduce the total volume of plastic trash entering the world's oceans from the places that are primarily responsible for the practice. It's already been remarked that the new plastic lids use more plastic than the combination of plastic straws and the "flimsier" plastic lids that they are replacing, as can be seen in the following investigative report: What hasn't yet been much remarked upon is that the thicker plastic used in Starbucks' adult sippy cup lids makes them less effective at their primary purpose: containing the iced beverage within its cup without spilling. The thicker plastic makes the lid design more rigid than its predecessor, which makes it much easier to pop off the top of the cup with a very light amount of pressure, applied either to the lid or to the upper portion of the body of the plastic cup. The previous flat lid design didn't have that problem, because it was much more flexible, allowing it to remain attached to the cup when handled similarly. If you get one, try the following experiments for yourself, each of which represents very common ways that these kinds of beverages are handled by consumers, particularly if they are drinking them on the go, such as in a car: Apply a light amount of pressure at a single point on the underside of the lid where it is attached to the cup. Pick the cup up by the lid at several points around the lid and squeeze gently. Hold the plastic cup near the top, but not touching the lid, and squeeze gently. In each case, you should discover that the lid pops off much more easily than the old-style flat lid design does, greatly increasing the risk of spills. Although our experiments currently involve a sample size of just one cup, where perhaps Starbucks' inattentive baristas [1] randomly provided us with an extraordinarily poor lid/cup combination, our first experience suggests that Starbucks' new adult sippy cup lids are not ready for prime time as they would appear to be less effective as lids than the design they will replace. The funny thing is that if Starbucks would rather that customers pop the tops off their iced beverages when they consume them, the practice of drinking them on the go be damned, they could have simply eliminated the plastic straws and kept their existing plastic lids, which are actually designed to be used as coasters when consumers choose to drink their iced beverage from a lid-free cup. That's something else at which the Starbucks' new lid design also fails. [1] Remember, we only got the cup because they botched our drink order, where they chose to provide us with an altogether different beverage than the one we ordered. We chose to go along with it because it came with the new cup and lid design, which we wouldn't have had the chance to play with if they had gotten our order right. For us, it's additional evidence that the company is increasingly troubled, where it is perhaps skimping on employee training as well as product testing as part of a series of poorly considered cost reduction strategies in trying to boost its bottom line.

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17 октября, 11:32

Trends in U.S. Student Loan Defaults

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The U.S. Department of Education has updated its statistics on the number of student loan defaults occurring within three years of a borrower beginning repayment. The latest data covers borrowers who began making payments on their student loans during the U.S. government's 2015 fiscal year, which ran from 1 October 2014 through 30 September 2015, who have subsequently stopped making scheduled payments for a prolonged period of time without making arrangements to either defer them or to seek relief from them during the following three years. The following chart shows the number of student loan borrowers who have defaulted within three years after starting to make payments in each fiscal year from 2009 through 2015 according to the type of four year degree-granting institution they attended, covering proprietary (or for-profit) universities, public universities, and private (or non-profit) universities. For student loan borrowers who attended four-year degree granting institutions and began making payments during the U.S. government's 2015 fiscal year, 531,653 went on to default on their student loan debt over the next three years. Of these, 51% attended public universities, 34% attended proprietary (or for-profit) institutions, and 15% attended private universities. The next chart shows the percentage of student loan borrowers for each type of institution that began repaying their student loans, but went on to default on them within the following three years. We find that although public universities account for the largest number of defaulting student loan borrowers, a larger percentage share of students who attend proprietary (or for-profit) institutions have consistently defaulted on their student loans. The final chart reveals the average annual cost of college tuition and fees for each type of institution, which is based on data from the 2016-17 academic year, which is the closest we could get to 2015 for all three types of four year degree-granting institutions. The $9,670 value shown for public institutions applies for state residents eligible for in-state tuition rates, where the average public university tuition and fees for out-of-state residents is $24,820. Since March 2010, when President Obama signed legislation putting the U.S. government into the student loan business, most of these defaults represent money borrowed from the U.S. government. Today, about 90 percent of loans made to students and their families are from the federal government, which does not follow the same lending standards required of financial institutions. The federal government holds around $1.4 trillion in student loans on its books and is currently seeing a double digit delinquency and default rate. 10.3% of student loan borrowers who started making payments on their debt to the federal government in 2015 have defaulted. That figure has come down and stabilized over the last several years, but is still a double-digit problem for the demographic group with the lowest rate of unemployment in the U.S. economy. Meanwhile, many who are making payments on their student loans aren't getting very far in paying them down. Just as alarming as the high number of defaults on federal student loans is that less than half of new borrowers are able to put a dent in their principal balance within three years of entering repayment. Currently, the U.S. government makes it very difficult, if not nearly impossible for borrowers to have their student loan debts discharged through bankruptcy proceedings, which is pretty much what you would expect for any creditor who has the power to write the rules to benefit itself by forcing the repayment of any loan that it has either guaranteed or issued. If it cannot be discharged in bankruptcy and the money borrowed is owed to the government, it isn't debt. It's taxes. The sooner that's fixed by transforming student loans back into debt, among other reforms, the better it will be for everyone involved. ReferencesU.S. Department of Education. Official Cohort Default Rates for Schools, by Institution Type. [PDF Documents: 2009-2011, 2012-2014, 2013-2015]. 26 September 2018. Accessed 13 October 2018. College Board. Trends in Higher Education. Average Published Undergraduate Charges by Sector and by Carnegie Classification, 2017-18. [Online Document. 17 November 2017.

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16 октября, 11:23

GE's Looming Dividend Cut

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It's been several months since we last considered the deteriorating situation for the future of dividends at General Electric (NYSE: GE), where we wrote that either GE or its dividend, and quite possibly both, were set to shrink. Four months and one CEO later, and that statement holds even more true today, where we believe that it is no longer a question of "if", but of "when" and "by how much". On 12 October 2018, GE announced it would delay the release of its fourth quarter financial statements until the end of the month to allow the company's new CEO, Larry Culp, to complete his "initial business reviews and site visits". At the same time, we're coming up on the one year anniversary of when GE's then new CEO, John Flannery, slashed its quarterly dividend in half, from $0.24 per share to $0.12 per share, so it's a good time to look at what's changed for investors, which we can do by looking at just one number: the company's market capitalization. When GE declared its last quarterly dividend of $0.24 per share on 7 September 2017, GE's market cap was nearly $208 billion. Exactly one year later, when declaring its fourth quarter dividend payment for 2018, GE's market cap was $108 billion, which is pretty close to where it stands today, just over a month later. That missing $100 billion goes a long way toward explaining why GE now has a new CEO. That decline also gives us an indication of how much GE's new manager may be looking to cut the company's dividend. The following chart shows the relationship between GE's market cap and its aggregate dividend payouts for each quarter since 12 June 2009. Given the historical relationship captured in the chart, at GE's current day market cap of $108 billion, we would anticipate a 35-40% reduction in the size of the company's dividends, from $0.12 per share to about $0.07 per share, which for all practical purposes, is already baked into the company's average share price over the five weeks. Culp could announce this change today and there would be minimal impact to the company's stock price. But, that 35-40% lower dividend payment is for a General Electric that still has its health care division, which it has been planning to spin off. Without it, GE will need to cut its dividend by more than that percentage, because it won't have the revenues, earnings, and cash flow that it provides to the company to sustain a dividend reduced by only 35-40% from today's level. We think then that it's very likely that once the new CEO's review of the company's operating and financial situation is complete, GE will suspend its dividend altogether. The change would help preserve what has been the company's increasingly distressed cash flow, which some analysts have indicated is not sufficient to cover both GE's current quarterly dividend of $0.12 per share and its operating requirements. Other analysts believe that GE's dividend is safe. Based on the information we have today, we are not in that camp. ReferencesDividend.com. General Electric Dividend Payout History. [Online Database]. Accessed 14 October 2018. Ycharts. General Electric Market Cap. [Online Database]. Accessed 14 October 2018. Yahoo! Finance. General Electric Company Historical Prices. [Online Database]. Accessed 14 October 2018.

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15 октября, 11:04

The View of the S&P 500 From the Futures

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The second week of October 2018 was one of the most interesting for the S&P 500 (Index: SPX) in quite some time. For our purposes, to qualify as interesting, the S&P 500 needs to change in value by 2% or more on any given day, and Week 2 of October 2018 had two days that met that simple threshold, Wednesday, 9 October 2018, when it fell by more than 3% and Thursday, 10 October 2018 when it continued to fall by another 2%. In doing so, investors moved the market by shifting their forward-looking focus from 2019-Q1 toward the more distant future of 2019-Q3. Through the end of the week on Friday, 12 October 2018, the level of the S&P 500 in our dividend futures-based model indicates that investors are splitting their attention between these two quarters, putting a slightly heavier weighting on the nearer term future of described by the expectations associated with 2019-Q1 than they are for 2019-Q3. Why focus on 2019-Q3 at all? Starting with basic fundamentals, the dividend futures for the S&P 500 associated with this upcoming quarter have been flat at $14.00 per share since 12 July 2018, where they represent a deceleration in the year-over-year rate of growth of trailing year dividends per share for the index. As such, the expectation that the rate of growth of S&P 500 dividends, and by extension, U.S. economic growth, will slow during this future quarter has been baked into investor considerations for quite some time. Since there has been no change in these fundamental expectations, we can rule out any growing fear of a stalling stock market and economy at this time as a causal factor behind the S&P 500's latest Lévy flight event. Ditto for any news items related to the ongoing low-level trade war between the U.S. and China, which for all the noise in the news it has generated since it began earlier this year, has not produced a noticeable impact on dividend futures to date. What has changed very recently however is investor expectations of a Fed rate hike in 2019-Q3, which would explain why investors would focus on this particular point of time in the future at this point of time in the present. With the U.S. economy continuing to grow strongly, and with the lowest official unemployment rate since the late 1960s, the probability that the Fed will continue its series of interest rate hikes in this quarter has very recently surged above 50% according to interest rate futures. This change in investor expectations has also coincided with a period of heightened volatility in intraday stock price values, which peaked with the U.S. stock market's Lévy flight event on 10 October 2018. The following chart shows the probabilities indicated by the CME Group's FedWatch tool for upcoming rate hikes as of the close of trading on 12 October 2018. We see that investors are currently giving better than even odds of a quarter percent or greater rate hike occurring when the Fed meets on 19 December 2018 (2018-Q4), then again on 20 March 2019 (2019-Q1), and again on 18 September 2019 (2019-Q3). Since the week's Lévy flight event prompted us to feature a special mid-week edition of our weekly S&P 500 Chaos series, we only have two additional days of news headlines to catch up on. Here's the rest of the week's market-moving news.... Thursday, 11 October 2018 Oil falls 3 percent as equity markets drop, inventories climb U.S. 30-year mortgage rate hits seven-and-a-half year peak: Freddie Mac Trump calls 'loco' Federal Reserve 'too aggressive' Call 'em crazy, but Fed officials likely to keep raising rates Wall Street tumbles again, world equities at one-year low S&P tumbles as investors shun risk Friday, 12 October 2018 Oil turns lower as weaker demand outlook weighs Wall St. rebounds with technology stocks leading the way Global stocks rebound but S&P 500 posts biggest weekly loss since March Most S&P 500 stocks are deep in correction territory Looking for a bigger picture of the week's major economics and markets news? Barry Ritholtz' has outlined the week's positives and negatives. As a special bonus, he also wrote one of the better analytical pieces of the week: The Stock-Market Meltdown That Everyone Saw Coming! Absolutely essential reading, and the only other piece we know of that even mentioned properly mentioned random walks in describing what happened with stock prices in the aftermath of the week's Lévy flight event.

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12 октября, 11:04

Tax Avoidance and the Philadelphia Soda Tax

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To what extent have Philadelphia's residents been able to avoid that city's controversial soda tax? Until recently, that was an open question, where we've had very little available data to provide any solid insight into the answer. But now, thanks to a combination of tax revenue reports from the city and a recently published working paper by John Cawley, David Frisvold, Anna Hill, and David Jones, we can reasonably estimate how much tax avoidance behavior is occurring within the city. To set the stage, we've already estimated the number of ounces of sweetened beverages have declined as a result of the tax based upon its tax revenue data and the city's estimates of both how much annual revenue it expected to collect from the tax and how much city officials believed the volume of soda sales would decline as a result of their successfully imposing the tax, finding a total reduction of 3.182 billion ounces of beverages subject to the tax occurred during the 2017 calendar year. Since the city's 1.5 cent-per-ounce sweetened beverage tax was imposed on both regular and diet drinks distributed for retail sale in Philadelphia, we assumed that 25% of this amount was made up of low-to-no calorie diet beverages, the same percentage share that diet drinks made up of all soda sales in the U.S. in 2016. We then assumed that the remaining 75% of the reduction in the quantity of taxed beverages in the city had an average caloric level of 11.7 calories per ounce, about the same as a can of Coca-Cola, to approximate how many calories the tax would have eliminated from the caloric intake of Philadelphians during the year. For Philadelphia's 2017 population of 1,580,863 people, that works out to be a reduction of 17,612 calories per year, or rather, a reduction of 48.3 calories per day, which would be realized if, and only if, Philadelphians did not substitute other calorie-laden beverages or foods for the beverages subjected to the tax that they avoided purchasing in the city because of the tax. How realistic that outcome would be hinges on the extent to which Philadelphia consumers engaged in strategies to avoid paying the PBT. This is where the National Bureau of Economic Research working paper provides essential information telling us the extent to which they were successful. Here is a key excerpt from the paper's findings. Overall, we find that the estimates of the impact of the tax on the consumption of added sugars from SSBs and the frequency of consuming all taxed beverages are negative but not statistically significant for children and adults. Additionally, the point estimates are modest in size. For children, the estimate for added sugars is a decrease of 2.4 grams per day, which is a decrease of 12.5 percent. A gram of added sugars is 4 calories, so this estimate implies a decrease of only 9.6 calories per day or roughly 0.6 percent of the daily recommended caloric intake. For adults, the estimate of a decrease of 5.9 grams of added sugars per day translates to a reduction of 23.6 calories per day or roughly 1.2 percent of the recommended 2,000 calories per day; this estimate is not statistically significant once we control for demographic and socioeconomic characteristics. To illustrate the magnitude of the point estimate, Hall et al. (2011) estimate that a sustained reduction in consumption of 10 calories per day leads to an eventual weight loss of 1 pound, with roughly half of the weight loss occurring after one year. Thus, the estimated reduction of 23.6 calories per day by adults implies a long-term reduction of slightly more than 2 pounds. The following two charts, Figure 1 for adults (left) and Figure 2 for children (right), reveal the reductions in grams of added sugars in the beverages subject to the Philadelphia Beverage Tax for each group by the total number grams of added sugars consumed daily before Philadelphia's soda tax was implemented. As you might imagine, it shows bigger effects for those who had higher levels of pre-tax consumption, but overall, the average impact for Philadelphia's population indicated by our annotations (in red) reveal the statistically small changes involved for both adults and children. It is important to recognize at this point that the authors' survey was limited to measure changes in the consumption of non-alcoholic beverages, where they sought to establish the extent to which Philadelphia consumers of beverages subject to the tax changed their consumption patterns within this product category. As a result, the study captured the extent to which consumers substituted untaxed non-alcoholic beverages for taxed beverages, regardless of whether these drinks were directly exempted from the tax, as in the case of bottled water, milk or 100% juices, or if consumers chose to avoid the tax by purchasing the drinks subject to it from locations outside of the city's jurisdiction. Approximately 27.8% of Philadelphia's population is Age 20 or younger, which tells us that there would be a total of 440,078 children in the city. Multiplying this number by the average reduction of 9.6 calories per day for this demographic group suggests that 4,224,749 daily calories were reduced in this portion of the city's population. Meanwhile, the city's adult population of 1,140,785, who consumed 23.6 fewer calories per day on average, would see an aggregate daily reduction of 26,922,521 calories. Combined, that's a daily reduction of 31,147,275 calories, or 19.7 calories per Philadelphia resident per day, the equivalent of a reduction of 4.9 grams of added sugars per person per day. The difference between the maximum reduction of 48.3 calories per day per resident that would have occurred without any tax avoidance behavior and the estimated 19.7 calories per day per resident that is estimated to have occurred within just the category of non-alcoholic beverages is 28.6 calories per day per resident, which at 59.2%, represents the portion of the total potential reduction in calorie consumption that the city's tax revenue data says occurred, but really didn't because of the tax avoidance strategies that Philadelphians used to get around the unpopular law. Since this figure is based only on the portion of taxed beverages that contains calories, it represents a low-end estimate for the amount of tax avoidance occurring in Philadelphia. Factoring in the contribution of diet beverages would potentially put the figure as high as 79%, which assumes diet drinks account for 25% of all taxed non-alcoholic beverage sales in the city. Meanwhile, this outcome does not consider any of the impact of drinking-age adults substituting any alcohol-based beverages for the city's newly taxed soft drinks, whose calorie content would further reduce the estimated reduction of 23.6 calories per adult resident per day for non-alcoholic beverage consumption indicated by the NBER's working paper. Right now, we've only put an upper bound on what that net change might be, which we'll revisit in future weeks to produce a more refined estimate.

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11 октября, 11:14

Stock Prices in Third Lévy Flight Event of 2018

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As long time observers of stock prices, we don't start getting excited about any single day change in their level unless they go up or down by more than two percent. But when they change by more than three percent within a single day, we get excited because that means that it is very likely that stock prices may very likely have entered into a Lévy flight. What's a Lévy flight, you ask? Where stock prices are concerned, it is similar to a random walk, but with one big difference. Instead of having the sizes of all the movements be relatively small and similar in size to one another, as we find in a statistical random walk, the size of some of the movements are disproportionately large compared to most of the others. More so than would be predicted by a normal distribution. The typical level of volatility for stock prices can be estimated from the standard deviation of its daily percentage change from its previous day's closing value, which we've previously found to be equal to about one percent of its previous day's closing value. If stock prices then truly behaved normally, we would expect the daily percentage change in stock prices to fall within two percent of the previous day's closing value about 95% of the time. Stock prices changing by more than three percent however would be fairly rare events, where we would only expect that kind of event to happen no more than 0.3% of the time. But, stock prices do not behave normally over time, where the number of occurrences of these large single day movements is greater than would be predicted if a normal Gaussian distribution applied. The variation in stock prices instead appears to be better described by a Lévy distribution, which is similar to a Gaussian distribution, but has fatter tails, corresponding to a higher rate of occurrences for sudden large movements. And that brings us to today, because we're seeing the third Lévy flight event of 2018, following the first in January and the second in February. Here's what October 2018's event looks like on our spaghetti forecast chart for the S&P 500. For our dividend futures-based model of how stock prices work, we typically see the stock market enter into Lévy flight whenever investors suddenly shift their forward-looking attention from one point of time in the future to another. The size and direction of the change that occurs is then influenced by the change in the growth rates of dividends that are expected to be paid at the two points of time in the future. That gives the change in stock prices during Lévy flight events their quantum random walk-like characteristics. While the onset of these events is almost always random, what stock prices do after they begin has been predictable, where we have nearly 10 years of observations to back our discovery of the phenomenon. Here's what that means for the stock market today. Going into the second week of October 2018, investors had been closely focused on the future quarter of 2019-Q1 in setting stock prices, which can be seen in how closely the actual trajectory of the S&P 500 was tracking along with our model's forecast trajectory associated with 2019-Q1. Until 10 October 2018, when investors suddenly shifted their attention toward a different point of time in the future, which our spaghetti forecast chart suggests is 2019-Q3, which corresponds with a deceleration in the expected growth rate of dividends. What we don't have as yet is a clear reason why they would suddenly shift their attention to this more distant future quarter. To find out if there is a clear suspect, we checked the dividend futures data to see if there had been any meaningful change in the expectations for future dividend payments. There wasn't, so we ruled out a fundamental change in expectations as a potential causal factor. We next looked at the CME Group's FedWatch tool, where searched for signs of changes in what investors expect for future interest rate hikes in the U.S. The closing data for 9 October 2018 that we found here indicates that investors going into 10 October 2018 were expecting quarter point rate hikes in December 2018 (

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10 октября, 11:18

U.S. Crude Oil Exports to China Zero Out

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It wasn't just U.S. soybean exports that encountered some serious shenanigans in August 2018 as part of China's trade war strategy with the United States. International U.S. trade data indicates that U.S. crude oil exports to China also collapsed during the month. In this case, all the way to zero. Unlike what happened with soybeans however, U.S. crude oil shipments didn't get diverted to another nation, but instead, never left the U.S. The following chart shows the value of U.S. crude exports to the world, to China, and to the world excluding China in the period since the U.S. government lifted a 40-year oil ban on the export of crude oil from the United States in mid-December 2015, where since the end of 2016, U.S. crude oil exports to China have made up 20-25% of the nation's total exports to the world on average. What makes the decline to zero in August 2018 particularly notable is that U.S. crude oil exports to China had just topped $1 billion in a single month in June 2018. They then dipped back to $853 million in July 2018 before plunging to zero in August 2018, as China simply stopped buying crude oil from the U.S. during the month. BIMCO, the world's largest international shipping association, explains what appears to have happened and its impact on the shipping industry. In August, no US seaborne exports of crude oil to China were recorded. A massive change to the export pattern seen since early 2017. Chinese buyers, led by the world’s top tanker charterer Unipec, were rumoured to have stayed away – and new data proves it. Now rumours have it, that Chinese buyers returned in early October, data will eventually show if this is right and to what extent at a later stage. Despite being left out of the ‘official’ trade war at the last minute, crude oil was removed from the Chinese USD 16 billion list before it came into force on 23 August 2018, crude oil exports are now taking centre stage. BIMCO’s Chief Shipping Analyst Peter Sand comments: “The tanker shipping industry is hurt when distant US crude oil export destinations like China, are swapped for much shorter hauls into the Caribbean and South, North and Central America. Meanwhile, that it is primarily a Chinese-influenced phenomenon is verified by the near record-level of crude oil exports from the U.S. to the rest of the world, which dipped slightly in August from their record high of $3.67 billion in July 2018. For the U.S. oil industry, China's trade war strategy may provide it with a silver lining. The industry was straining its capacity to export crude oil to meet China's demand, where the reduction in China's purchases may provide it with the breathing space it needs to complete a number of pipeline and export infrastructure projects that will ultimately allow it to export much higher volumes in 2019. At the same time, many U.S. shale oil producers have been missing out on the recent increase in global oil prices to over $70 per barrel in mid-September 2018, where they had locked in their selling price at $55-$58 per barrel in futures contracts. After those contracts expire, should the U.S. and China resolve their trade differences, they stand to benefit from a significant windfall if prices remain elevated while the U.S.' export capacity increases. It's a lot of ifs. Especially for trade negotiations that appear to be moving on the slow track.

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09 октября, 11:32

Serious Shenanigans for U.S. Soybeans

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Ken Roberts analyzes import-export data over at Forbes, and when the U.S. trade data for August 2018 came out, he quickly found that there were some serious shenanigans going on with U.S. soybean exports, starting with a major year over year decline for shipments to China. In U.S. Census Bureau data released Friday, China's percentage of U.S. soybean exports fell to less than 2% for the month of August. In and of itself that is a stunning and precipitous decline, even with 25% tariffs in place. What that means is that U.S. exports to China for the month are down 94.75% from the same month a year ago. China, which ranked No. 1 a year ago, now ranks No. 18 as a buyer of U.S. soybeans. Historically, very low levels of U.S. soybean exports to China in the month of August is not unprecedented. The following chart shows our estimate of the monthly quantity of soybeans exported from the U.S. to China from January 2012 through August 2018, where we find that soybean shipments in 2013, 2014 and 2015 were also very low. But the evidence of soybean shenanigans is to be found in the volume of shipments from the U.S. to the rest of the world. But wait. Here's what makes me wonder what is going on: U.S. soybean exports are increasing this year, not decreasing, as you might expect. Not only in value but in tonnage as well. (So it's not a pricing fluctuation issue.) So, what's happening? Since we have the data, let's show how U.S. monthly soybean shipments to the rest of the world has evolved over the same period of time as our first chart. 2018 is seeing a dramatic shift in the destination of U.S.-produced soybeans, where an unprecedented increase in exports to the rest of the world has been taking place since the end of April 2018. But where else in the world are those soybeans going? Previously, when we dug into the U.S. trade data, we found destinations that included places like Egypt, Mexico, Pakistan, and the Netherlands were the international leaders, so when we looked at the data for August 2018, we were expecting to see these same countries ranking near the top of the list.

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08 октября, 11:23

S&P 500 Investors Focus on 2019-Q1 in Week 1 of 2018-Q4

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In the first week of October 2018, S&P 500 (Index: SPX) continued to firmly fix their forward-looking focus on 2019-Q1 in setting stock prices. At least that's our takeaway from observing the trajectory of the S&P 500 against what our dividend futures-based model projects should happen when investors are closely focused on 2019-Q1, as shown on our spaghetti forecast chart. And since the third quarter of 2018 is now long past over, it's time to roll the chart forward to see what our model projects for 2018-Q4.... We believe that investors are primarily focusing on 2019-Q1 because of the current uncertainty for whether or not the Fed will hike interest rates in that quarter, where as of Friday, 5 October 2018, the CME Group's FedWatch tool is now indicating a 57.2% probability that the Fed will follow up a quarter point rate hike in December 2018 with another one in March 2019. That the odds of a 2019-Q1 rate hike are better than even is a relatively development, where there has been a lot of movement in the interest rate futures trading that helps determine the probability in recent weeks. As for what other new information was noteworthy during Week 1 of October 2018, the following list captures the headlines that we believe were most influential. Monday, 1 October 2018 U.S., Canada confirm they have reached new trade deal with Mexico Oil rises to 2014 highs on Iran Sanctions, NAFTA deal Fed's Kashkari sees no need for interest rate hikes Boston Fed's Rosengren: Job market too tight for too long poses risks Rosengren: No financial alarm bells, but lots of 'yellow lights' NAFTA replacement deal lifts Dow, S&P; Nasdaq negative Tuesday, 2 October 2018 Too much oil? Texas boom outpaces supply, transport networks Fed's Powell says U.S. outlook 'remarkably positive' Tariffs could lift U.S. prices but no sign yet: Fed's Powell Dow closes at record but Facebook drags on S&P, Nasdaq Wednesday, 3 October 2018 Brent hits new four-year high on Iran supply worries U.S. crude oil shipments to China 'totally stopped' amid trade war: shipping executive Fed's Evans says comfortable with a December rate hike Fed can hold rates 'relatively indefinitely' when mildly restrictive: Evans As U.S. bond market swoons, Fed policymakers sanguine, for now Fed's Mester says U.S. bond yield jump not of immediate concern Financials lift Wall Street, but rate worry caps gains Thursday, 4 October 2018 Oil falls from four-year highs; Wall Street weighs U.S. Treasuries sell-off has ripple effect across globe, stocks sink Wall Street stumbles as bond yield climb continues Friday, 5 October 2018 Oil prices mark weekly gain ahead of Iran sanctions A decade of U.S. economic sluggishness may have just snapped back to normal Traders bet Fed will keeping raising interest rates Fed's Williams sees 'ways to go' before rates pinch growth Fed's Bostic urges getting to neutral monetary policy stance Wall Street falls as solid jobs report boosts bond yields Buybacks to top use of S&P 500 companies' cash in 2019: Goldman Sachs For more of the week's other economics and market-related news, be sure to check out Barry Ritholtz' succinct summary of the week's positives and negatives.

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05 октября, 17:21

U.S. Exports to China Collapse in August 2018

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According to international trade data published by the U.S. Census Bureau, U.S. exports to China collapsed in August 2018. The following chart reveals that the gap between the trailing twelve month average of the combined value of goods traded between the U.S. and China has fallen nearly $1.1 billion below its pre-trade war trend, or roughly by 1.9% of the dollar value of that trade. Our next chart, showing the year over year growth rate of U.S. exports to China and China's exports to the U.S. from January 1986 through August 2018, shows that August 2018's decline from pre-trade war levels is primarily due to a plunge in U.S. exports to China, which dropped by 12.7% from September 2017's levels. The next chart shows all of the available data for the value of the U.S. exports to China from January 1985 through August 2018, where we see that August 2018's exports has dropped to levels last seen in mid-2015, when China's economy was experiencing recessionary conditions. We'll explore the internals of the data in greater detail next week, but we would initially attribute the plunge in U.S. exports to China's targeting the U.S.' principal exports to China, soybeans and oil, by substituting alternative suppliers and products. Reuters described the impact to U.S. oil shipments to China earlier this week: U.S. crude oil shipments to China have “totally stopped”, the President of China Merchants Energy Shipping Co (CMES) said on Wednesday, as the trade war between the world’s two biggest economies takes its toll on what was a fast growing businesses. Washington and Beijing have slapped steep import tariffs on hundreds of goods in the past months. And although U.S. crude oil exports to China, which only started in 2016, have not yet been included, Chinese oil importers have shied away from new orders recently. “We are one of the major carriers for crude oil from the U.S. to China. Before (the trade war) we had a nice business, but now it’s totally stopped,” Xie Chunlin, the president of CMES said on the sidelines of the Global Maritime Forum’s Annual Summit in Hong Kong. Meanwhile, the South China Morning Post explained China's soybean strategy back in August 2018. As the man who is responsible for feeding about 800,000 pigs in China’s biggest pork-producing province, Li Xueya and his team have been vacillating for months about when to place their major orders.... Li says the impact can be minimised by changing the animals’ diets and looking for alternatives to soybean meal, a commonly used source of protein which normally accounts for about 20 per cent of hog feed. “We won’t die…but our profits will be somewhat affected,” he said.... Ma Wenfeng, an analyst from Beijing Orient Agribusiness Consultant, said China had been importing far more soybeans than it really needed and could do without US imports in the short run.... He said the use of excess soybean meal had meant farmers were using less corn meal and as a result the state reserves have plenty of corn meal that farmers could use to feed their animals. Between the two export product categories, U.S. soybean producers will likely be more negatively impacted since they have more negative exposure to China's trade war strategy of avoidance. U.S. oil producers are somewhat more insulated from the impact because they have supply chain bottlenecks that are limiting their ability to deliver oil to global markets, which would be eased by China's reduced demand. Combined with supply contracts that limit U.S. producers' ability to profit from rising oil prices, the U.S. oil industry's limitations and challenges may provide it with more breathing room to cope with the negative fallout from China's trade tactics.