China Back in Recession, U.S. Economy Sluggish

Now that we're well past the statistical anomalies associated with the timing of the Chinese New Year/Spring Festival holiday, the year-over-year growth rates of the value of trade between the U.S. and China indicates that China's economy has likely fallen back into recession, while the U.S. economy is growing, if sluggishly, through May 2013:

The data in the chart above has been adjusted to reflect what each nation's economy "sees" in terms of its own currency. For the most recent trends in the overall data, the value of the U.S. dollar has been falling steadily with respect to the value of the Chinese Yuan since May 2010, as the relative value of U.S. goods in China has fallen while the relative value of Chinese goods in the U.S. have become more expensive.

References

U.S. Census Bureau. Trade in Goods with China. Accessed 03 July 2013.

Board of Governors of the Federal Reserve System. China / U.S. Foreign Exchange Rate. G.5 Foreign Exchange Rates. Accessed 03 July 2013.

Whither Dividend Futures

Previously, we've discussed the role that dividend futures data, or rather, the quantified future expectations of investors, plays in setting today's stock prices. But where can you get dividend futures data?

We have two sources for dividend futures data. First, we regularly collect the distant futures data reported by IndexArb on its Dividend Analysis page, which reports the daily dividend futures data for the S&P 500, the Nasdaq 100 and also the Dow Jones Industrial Average. The image below represents a snapshot we took of the data back on 1 July 2013:

Originally developed to support trading based upon index arbitrage, which uses the data to help determine the "fair value" for stock index prices, what IndexArb is really reporting with these raw numbers is the amount of dividends per share expected to be paid out to shareholders for each index from the current day to the end of each of the indicated futures contracts, which expire on the third Friday of the month ending the indicated quarter.

So, if you want to find out what the quarterly dividend is for a given future quarter, you need to take the raw value provided in IndexArb's data and subtract the raw value for the quarter immediately preceding it.

For example, if we take the value for the S&P 500's dividends per share to be paid out by the end of the March 2014 contract of $26.474 and subtract the value for dividends per share to be paid out by the end of the December 2013 contract of $16.847 we find that investors would appear to be expecting that S&P 500 companies will be paying dividends of $9.627 per share in the first quarter of 2014.

Our second source of future dividends data for the S&P 500 is a bit easier to read to determine what level of dividends per share that investors expect to be paid in future quarters. That source is the Chicago Board of Exchange, which posts four separate dividend future options for the next four quarters, in which the price of each quarter's options is set to be 10 times the amount of dividends per share expected in the quarter. The table below provides links to the data for each of the CBOE's quarterly dividend futures contracts, along with the value we recorded back on 1 July 2013 for reference:

Data for Dividends for Future Quarter Ending in Indicated Month	Value Recorded on 1 July 2013
Implied Forward DVS Indicator - March	91.67
Implied Forward DVS Indicator - June	94.11
Implied Forward DVS Indicator - September	86.98
Implied Forward DVS Indicator - December	92.72

Although we presented the table in seeming chronological order, in reality, the earliest data belongs to the month ending the current quarter, which the other data following in order after that. For the data presented in the table above for 1 July 2013, the March and June contracts end in 2014, while the September and December contracts end in 2013.

Dividing the March contract data by that factor of 10, we see that this source expects that dividends in the first quarter of 2014 will be $9.167 per share. That's $0.46 per share less than what IndexArb's dividend futures expects, which in our experience, is really atypical, as they'll normally be within 5-20 cents of one another!

Why such a large difference between the two dividend futures for 2014-Q1? We suspect that the answer has a lot to do with how each of our sources determines their expected value of future dividends. IndexArb uses a "bottom-up" approach, where it takes the dividends that are expected to be paid by each company making up an index and then weights them accordingly per the companies' relative size within the index.

As part of that bottom-up build up, and in the absence of information indicating otherwise, IndexArb assumes that the actions of the past will be repeated in the future. For example, if a number of companies acted to boost their dividends by a particular amount in the first quarter of 2013, they assume they will boost their dividends by a similar amount in the first quarter of 2014.

By contrast, the CBOE's dividend values are determined through the trading of option contracts, with the price being set through more of a "top-down" process, where they start with the value expected for dividends in the future quarter, which is then adjusted through trading activity as new information about the future is absorbed. The value of the CBOE's dividend futures options is then particularly affected by news about the dividend plans of the most heavily-weighted components of the index, without necessarily considering all of the underlying changes occurring throughout the entire index that IndexArb captures.

In this case, it appears that the investors who have actively traded the CBOE's dividend futures contract for 2014-Q1 have made an assessment that the dividend hikes of the first quarter of 2014 are likely to be considerably less than the dividend hikes that were recorded for the first quarter of 2013. We believe that particular assessment was made on 13 May 2013, after it became clear that investors had shifted their forward-looking focus to the first quarter of 2014 in setting stock prices, which we observed in the form of a sudden downward shift from the CBOE's previously recorded value for this option on 10 May 2013. Only this particular future dividends contract changed its value this way at the time.

For our part, we're using a blend of the two sources in our ongoing market analysis, in which we're using the CBOE's futures data for 2014-Q1, but IndexArb's data otherwise. Here, we recognize a number of unique factors drove the dividend increases in the first and second quarters of 2013 related to the resolution of the so-called "fiscal cliff" tax crisis that will not be repeated in 2014, which we think the CBOE's data is capturing at present, but which we think that IndexArb's data is not as yet.

At some point in the future, we expect that the dividend futures represented by these two sources will converge toward each other as the quality of information regarding the future for dividends in that distant quarter improves.

How Long Should a Yellow Light Be?

If you've ever driven a car in a place that has installed red-light camera technology for traffic enforcement, you've probably noticed that the yellow lights at the intersections with those cameras are a lot shorter in duration than they are at non-monitored intersections.

The reason why is pretty straightforward. The state and local governments that generate revenue from issuing traffic tickets for people who violate red lights benefit if they can trap more drivers into entering an intersection after the traffic signal changes from yellow to red. And a very easy way to do that is to set the duration of the yellow caution signal at red-light camera intersections to be shorter than at other intersections, which makes it more difficult for drivers to anticipate how long they will have before the light may turn red.

But how long should a yellow light really be if what we really want is safe intersections? We've taken the math developed by the Institute of Traffic Engineers (ITE) and build the tool below to do it for you. You just need to enter the data that applies for your intersection of interest, and we'll do the rest!

(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!

Driving Data
Input Data	Values
Velocity of Vehicles Approaching Intersection [miles per hour] - The 85th Percentile Velocity for traffic approaching the intersection, if known, or a speed that is greater than or equal to the Posted Speed Limit.)
Reaction Time to Brake [seconds] - The time needed to note the change in the traffic signal from Green to Yellow and to step on the brakes.)
"Safe and Comfortable" Deceleration Rate [ft/s²]
Road Grade [%] - The grade or slope of the road approaching the intersection (positive if uphill, negative if downhill.)

How Long Should a Yellow Light Be?
Calculated Results	Values
Minimum Yellow Light Duration [seconds]

In the tool above, we've entered the median values measured for both the Reaction Time to Brake and the "Safe and Comfortable" Deceleration Rate, which are in close agreement with the values recommended for use by the Institute of Traffic Engineers.

Our tool then provides the minimum duration that a traffic signal should be yellow before switching to be red. If the traffic signal at your intersection of interest has a notably shorter yellow light, that's a pretty good indication that you might be dealing with a red light ticket trap.

Not to mention a potential traffic hazard, put in place by a government bureaucracy that cares more about getting money from traffic tickets than they do about the safety of the public.

Reliving the Big Bay Boom

What happens when 18 minutes worth of a regular Fourth of July fireworks show is compressed into less than a minute when a technical malfunction causes all the fireworks to go off at once?

Depending upon your point of view, it's either the best grand finale ever, or the worst fireworks show ever. In either case, that's exactly what happened in San Diego last year:

It will be interesting to see if San Diego's fireworks show planners recognize the opportunity to take this experience to create a truly spectacular experience this year. Have a great Fourth of July holiday!

The GDP Multiplier for QE

After adding an update to our original post for predicting GDP for the U.S. in the first quarter of 2013 that was based on earlier estimates of the amounts of government spending, tax hikes and quantitative easing taking place in the quarter, we thought the results based upon more final estimates of these quantities deserved a post in their own right.

Here are the values that need to be entered into the tool below to coincide with the actual levels of government spending cuts, expected tax increases and the Fed's quantitative easing that took place in the first quarter of 2013, per the BEA's third estimate for GDP for the quarter and the change in the Fed's total asset holdings over the quarter (as measured by the change in the Fed's total assets from 26 December 2012 to 27 March 2013) and our earlier estimate of the expected increase in tax collections for the quarter:

• Government Spending Cuts (Federal, State, Local): -$24.2 billion


• Expected Tax Collections from Tax Hikes: +$56.3 billion


• Total Federal Reserve Quantitative Easing: +$295.0 billion

We've updated our tool in this post with these values:

GDP and "Input Shocks"
Input Data	Values
Nominal GDP for the Previous Period [billions]
Change in Expected Federal Government Tax Collections [billions]
Change in Federal, State & Local Government Spending [billions]
Federal Reserve Net Quantitative Easing [billions]
Fiscal Policy Multipliers (Estimated Range)
Government Spending (0.6-0.7)*
Government Taxes (-3.0)
Quantitative Easing (0.8-1.0)

* If unemployment rate ≥ 7.5%. Multiplier is 0.5 if unemployment rate < 7.5%.

Individual Effects of Fiscal and Monetary Policies Upon GDP
Calculated Results	Values
Effect of Change in Government Spending on GDP [billions]
Effect of Change in Government Taxes on GDP [billions]
Effect of Change in Monetary Policy on GDP [billions]
Combined Effects of Fiscal and Monetary Policies Upon GDP
Combined Effects on GDP [billions]
Estimated GDP for Next Period [billions]

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!

You shouldn't be surprised to find that we come very close to the BEA's third estimate for GDP in 2013-Q1 of $15,984.1 billion in the tool above with these values, as our tool's results are nearly within 0.05% of it. If the amount of the Fed's quantitative easing in 2013-Q1 totaled up to $303.4 billion, our estimated GDP multiplier of 1.0 for QE would be dead on target.

What that means is that there isn't much of a multiplier effect for the economy from quantitative easing - it basically boosts the economy by $1 for every $1 worth of quantitative easing the Fed does. It does however make a positive contribution to GDP and it can clearly offset the impact of expected fiscal policy shocks.

In fact, as our tool demonstrates, if not for the effect of the Fed's amped up QE program in the first quarter of 2013, we would be discussing the United States' new recession instead.

Image Credit: North Dakota (ND.gov) Youth

On the Mark with 2013-1Q GDP!

Nearly three months ago, just after the BEA released its third estimate of GDP for the fourth quarter of 2012, we gave the following odds in forecasting where GDP in the first quarter of 2013 would be recorded:

Using our modified-limo forecasting method, we would anticipate that real GDP in 2013-Q1 has the following odds of falling in the indicated ranges (all values are given in terms of constant 2005 U.S. dollars):

• A 68% likelihood of falling between $13,581.8 billion and $13,867.2 billion.


• A 95% likelihood of falling between $13,439.1 billion and $14,009.9 billion.


• A 99% likelihood of falling between $13,296.4 billion and $14,152.5 billion.

The midpoint of our target ranges is $13,724.5 billion. We note for reference that this would correspond to an annualized real growth rate of 1.7%. [We forecast GDP - not GDP growth rates, which are very susceptible to big swings with just small changes in actual GDP.]

We did one other thing as well in our forecast - we took the over, which means that we expected that GDP would be recorded to be above our midpoint value of $13,724.5 billion.

So how did we do?

Would you believe that we just about completely nailed it?

The BEA reports that real GDP in 2013-Q1 came in at $13,725.7 billion, just 0.01% above the midpoint of our forecast range!

Not too shabby, especially because all we did was assume that GDP would grow at the same rate it averaged over the two preceding quarters!

Speaking of which, in now looking forward to where GDP will be recorded in 2013-Q2, well, we'll present our visual results, but we're not going to discuss them in detail, because they'll all be different by the time the data is actually reported!

The reason why is because the BEA is on the verge of a major revision for current and historic data, which will be released on 31 July 2013. That revision will re-base all the seasonally-and-inflation-adjusted values of real GDP to be in terms of constant 2009 U.S. dollars, instead of the 2005 U.S. dollars that the BEA has been reporting over the last several years. (Our chart above shows the data in terms of constant 2005 U.S. dollars).

So we're going to hold off on officially forecasting where real GDP in 2013-Q2 will end up until we have the BEA's revised numbers. Because we'll have enough work later dealing with all the changes that will be part of the BEA's upcoming data revision!

The Fed Attempts to Walk It Back

Last week, we indicated how the Federal Reserve could avoid having a rout develop in the stock market (emphasis ours):

This analysis assumes that Bernanke's comments succeed in shifting the forward looking focus of investors to an earlier future, which would mark a shift in the expectations for the fundamentals driving the market. At this writing, it is too early to tell if such a fundamental shift has occurred, which is why we are presently classifying the market's reaction as a noise event. Depending upon how the Fed responds to the markets' reaction, it is still possible at this writing to arrest and reverse the decline in stock prices.

Now, we've gone into such basics in this article because we know that Federal Reserve Chairman Ben Bernanke and his successor are going to read it and might like to finally learn a little bit about how things like stock prices actually work. And then, maybe, do something that would shift the focus of investors back to the first quarter of 2014, in a way that ensures the Fed's credibility is not damaged.

So guess what other notable members of the Federal Reserve have been doing in the past week? Emphasis ours, again:

A top U.S. central bank official warned financial markets they’re reading the Federal Reserve wrong if they think a tightening in monetary policy has gotten closer.

"A rise in short-term rates is very likely to be a long way off" even as it's possible that the central bank may slow the pace of its bond-buying program later this year, Federal Reserve Bank of New York President William Dudley said Thursday.

The official noted a shift in market rates that's happened since the last gathering of the monetary-policy-setting Federal Open Market Committee is seen by observers as signaling rate rises could come "much earlier than previously thought." Mr. Dudley, who is at the core of Fed monetary policy decision making, said "let me emphasize that such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants."

Has it worked? When combined with the unexpectedly bad GDP revision for the first quarter of 2013, which confirmed slower than expected growth for the U.S. economy in 2013, Dudley's statement appears to have been successful in redirecting investors toward the expectation that any drawdown in the Fed's net acquisition rate of U.S. Treasuries is further off in the future than they had been led to expect from Ben Bernanke's original comments that created the potential crisis. Our chart below shows how the Bernanke Noise Event has evolved:

At this juncture, it appears that the Fed has initially succeeded in arresting the decline caused by Fed Chairman Bernanke's poorly considered press conference comments. Reversing it by fully redirecting investors to focus back upon the first quarter of 2014 will require additional effort on their part, and without that ongoing effort, we wonder if a sustained split in focus might not take hold in the market.

We might observe the effect of such a split in having the change in the growth rate of stock prices fall consistently between the levels defined by the expected changed in the growth rates of dividends per share in our chart above, rather than closely paralleling the level associated with a specific future quarter as they more typically would behave.

That outcome would represent a large percentage of investors having set their expectations in accordance with future quarters in 2013, while another large percentage of investors are setting their forward-looking focus back upon the first quarter of 2014, which was the near universal future point of focus prior to investors developing concerns about the future for the Fed's QE programs.

We'll next update this chart in two weeks to see how things played out.