Political Calculations
Unexpectedly Intriguing!
May 24, 2017

A story for investors in a single chart: the quantified expectations of the S&P 500's future dividends per share, as projected 2017-Q2 through 2018-Q2, as told by two different sets of dividend futures!

The Expected Future for S&P 500 Dividends Per Share, Snapshot on 23 May 2017

The story is told by our two main sources for information about the expectations of future dividends for the S&P 500: CME Group and IndexArb. Here are some quick notes about the data....

  • IndexArb uses a "bottoms-up" approach to estimating the dividends per share of the S&P 500 index, built up from the projected cash dividend payments projected for each of the index' dividend paying component firms after accounting for each firm's market capitalization. The CME Group's projected dividends are produced through a more "top-down" approach, where the trading of options contracts linked to future S&P 500 dividend payouts sets the projected dividend per share level for future quarters extending out through the current and next four quarters.
  • The "quarters" for both sources run from the end of the third Friday of the month ending the previous quarter through the end of the third Friday of the month ending the indicated quarter. As such, the data reported for both sources will not match with the quarterly dividend data reported by Standard and Poor for the S&P 500, since S&P follows regular calendar quarters when reporting dividends per share for the index.
  • Because of that term mismatch, S&P's reported dividends and the dividend futures will tend to greatly differ from each other for the data that applies to the last quarter of the year and to the first quarter of the next year. This apparent discrepancy arises because a number of firms that pay annual dividends will pay them out during the last week of the year, or in the case of firms that pay variable dividends, where they'll pay their largest dividends of the year during that last week, with both dividend paying strategies affected by tax considerations. Where dividend futures are concerned, that mismatch in the terms covered by a quarter will most often make Q4 dividends appear low and Q1 dividends appear high compared to the S&P's "official" dividends per share accounting.
  • IndexArb's dividend futures data follows a cumulative payout approach, where the value for each indicated quarter represents the projected total dividends per share that will be paid out between the current day and the third Friday of the month ending the indicated quarter. Values for the actual dividends per share can be calculated by taking the indicated dividends per share that apply for the quarter of interest and subtracting the indicated dividends per share for the preceding quarter. For the current quarter, the last time that math can be done is on the last day that the value of dividends per share remaining to be paid out in the preceding quarter is reported. In the chart above, the projection for IndexArb's 2017-Q2 dividends per share was made on 8 March 2017.
  • Since the CME Group's dividend futures data continues all the way through the expiration of the quarter's options contracts, changes can continue to be observed for that stream of data, which is why we use it in our long-running S&P 500 forecasting project. We had previously used dividend futures data provided by the Chicago Board of Exchange in our project, but they opted to discontinue their reporting at the end of April 2017.

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May 23, 2017

Although you wouldn't know it from the just completed earnings season for 2017-Q2, the number of dividend cuts announced to date in the current quarter indicate that recessionary conditions have returned in May 2017 after largely having been on hold in April 2017.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter in 2017, Snapshot on 2017-05-22

After outperforming the pace of dividend cuts recorded in 2017-Q1 during the first month of the quarter, 2017-Q2's pace of dividend reduction announcements quickened to match 2017-Q1's pace during the last several weeks, before quickening further to exceed it during the last week.

Compared to a year earlier however, 2017-Q2 is still markedly better, with considerably fewer dividend cuts having been announced during the quarter through the same point of time.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter, 2016-Q2 versus 2017-Q2, Snapshot on 2017-05-22

According to the online databases recording dividend declarations in near-real time of both Seeking Alpha and the Wall Street Journal, we can trace the apparent increase in economic distress in the U.S. to the oil and gas sector, where at least six multiple master limited partnerships declared during the last week that they would reduce their monthly dividend distributions to their shareholders by anywhere from 7% to 52%.

Those particular dividend cuts likely have a lot to do with falling revenue attributable to sizable percentage dips in oil and gas prices during the current quarter.

We've also seen recent upticks in the number of dividend cutting firms in the financial sector and also that produce chemicals used in the agricultural sector.

Though we keep hearing reports of struggling U.S. retailers, we have so far only seen one, Stage Stores (NYSE: SSI) announce a dividend cut this year. This will be an industry to watch should retail sales turn negative, increasing the distress in the industry.

Data Sources

Seeking Alpha Market Currents. Filtered for Dividends. [Online Database]. Accessed 22 May 2017.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 22 May 2017.


May 22, 2017

In Week 3 of May 2017, the S&P 500 provided a small demonstration of what can happen to stock prices whenever investors shift their focus from one point of time in the future to another.

Because we've already discussed that "almost interesting" event, where investors partially shifted their forward-looking attention from 2017-Q2 to 2017-Q3, we'll simply note that the S&P rebounded in the latter part of the week as investors had reason to shift their focus back toward 2017-Q2, with stock prices behaving accordingly.

Alternative Futures - S&P 500 - 2017Q2 - Standard Model - Snapshot on 19 May 2017

Stock prices aren't the only data that suggest that a partial shift in focus for how far forward in time investors are looking took place during Week 3 of May 2017. U.S. Treasury futures also communicated similar information, as Mike Shedlock observed:

The futures market is starting to question the June rate hike thesis. For its part, the bond market is behaving as if the Fed is hiking the economy into a recession. Here are some pictures.

June Rate Hike Odds

Mish Annotated: CME Group FedWatch June Rate Hike Odds

No Hike in June Odds

  • Month ago – 51%
  • Week Ago – 12.3%
  • Yesterday – 21.5%
  • Today – 35.4%

The CME Group provides this data through its FedWatch tool, which uses futures contracts for the Federal Funds Rate to divine the probability that the Fed will hike that particular interest rate by the various upcoming meeting dates of the Federal Reserve's Open Market Committee (FOMC). They've been providing that kind of insight from futures contracts since at least the last quarter of 2015.

We've been using dividend futures to do somewhat similar analysis, where the Fed has often had an outsized role in determining how far forward in time investors in the U.S. stock market focus their attention, where our dividend futures-based model can explain a good portion of why stock prices behave as they do whenever investors shift their forward looking attention.

At least, when that information is combined with the more significant market moving breaking news of the week....

Monday, 15 May 2017
Tuesday, 16 May 2017
Wednesday, 17 May 2017
Thursday, 18 May 2017
Friday, 19 May 2017

For the week's major economic data points, be sure to check out Barry Ritholtz' succinct summary of the week's positives and negatives.

Note: Following our confirmation of the CBOE's decision to terminate reporting its implied future DVS indicators at the end of April 2017, we switched to using the CME Group's S&P 500 Quarterly Dividend Index Futures quotes in their place for our analysis, with the changeover taking place on 11 May 2017. The change in data source accounts for the apparent volatility on that date for the alternative future trajectories that our model projects for the S&P 500 for when investors would be focused on either 2017-Q3 or 2018-Q1 in our chart above.

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May 19, 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 confirms that the stock market's earnings have continued to rebound off their 2016-Q3 bottom, where they will likely recover to their pre-earnings recession levels during the current quarter of 2017-Q2.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2014-2019, Snapshot on 4 May 2017

The recovery in the S&P 500's earnings has been a significant factor in boosting the value of the S&P 500 since the index bottomed at 1829.08 on 12 February 2017. The index has since gone on to set its all time record closing value of 2402.67 earlier this week (on 15 May 2017).

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 4 May 2017. Accessed 18 May 2017.

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May 18, 2017

As a general rule, and as it happens, one backed up by statistics, we don't often get very excited about single day moves in the S&P 500 unless the value of the index changes by more than two percent of its previous day's closing value. We're making an exception for Wednesday, 17 May 2017, because we get to once again demonstrate how stock prices really work.

Let's revisit the stage we began setting in earnest just one week ago, which we described in greater detail earlier this week. We've emphasized the key takeaways in the following text.

In Week 1 of May 2017, the probability that investors expecting the Federal Reserve to next hike U.S. short term interest rates before the end of 2017-Q2 reached 90%. As a result of that strong focus by investors upon the current quarter of 2017-Q2, the S&P 500 (Index: INX) has developed a real potential to experience the "ticking clock" problem.

The ticking clock problem for the S&P 500 arises whenever investors become strongly focused on the current quarter as they make the investing decisions that affect the value of the S&P 500 index. Because the clock on the current quarter is ticking down, investors only have a limited amount of time during which they can maintain their attention on the current quarter before they will be forced to shift their forward-looking attention to another point of time in the future.

The potential for a problem as a consequence of that shift in focus arises because of the expectations associated with the next period of time in the future to which investors might next collectively target their attention. If those expectations include an acceleration in the rate of growth of the index' dividends per share, then the shift in attention will drive an increase in stock prices, which would not be considered to be much of a problem.

If however those expectations include a deceleration (or negative acceleration) of the expected growth rate for the S&P 500's dividends per share, then the shift in attention will drive a decrease in stock prices. How much they might potentially move would then be a factor of the magnitude of the difference in those future expectations between the quarter they are currently focused upon and the quarter to which they set their attention to next.

Our dividend futures-based model for projecting the alternative future trajectories for the S&P 500 allows us to show how stock prices will likely be set as investors might focus their attention on specific points of time in the near future.

Alternative Futures - S&P 500 - 2017Q2 - Standard Model - Snapshot on 11 May 2017

If investors shift their attention to focus upon 2017-Q3, say because Fed officials begin communicating that they'll next hike interest rates in that quarter, that shift in attention will likely produce as much as an 8-10% decline in stock prices with respect to its projected trajectory. If investors fully redirect their focus to the 2017-Q4, then stock prices may rise by as much as 5%. And if investors have reason to split their focus between the two quarters, stock prices will fall somewhere in between, weighted to whichever future quarter investors are more strongly directing their attention toward.

As for telling how far forward investors may be looking, that takes paying attention to the market's news to understand the context of the market's information environment....

  • Should investors redirect their attention to 2017-Q3, that shift in focus would represent why the "Sell in May" stock trading strategy might matter in 2017, even though we basically debunked the evidence to support the calendar effect as the result of statistical outliers last week! As we hinted in that post, it would be purely coincidental if it turns out to have any bearing this year!

On 17 May 2017, the S&P 500 declined by 1.84% to close at 2357.83, which is a bit shy of the 2% threshold that usually marks where we find the stock market doing something interesting. We're calling the day interesting however because the Nasdaq (Index: IXIC) slumped by 2.57% to close the day at 6011.24, which technically makes the day almost interesting.

Alternative Futures - S&P 500 - 2017Q2 - Standard Model - Snapshot on 17 May 2017

So do we find a shift in investor focus from the current quarter 2017-Q2 toward 2017-Q3? Why, yes, we do (after accounting for the mild echo from past stock price volatility that is slightly skewing the accuracy of our model's projections at this time)! Via ZeroHedge:

We warned last week that behind the scenes, professionals were increasingly speculating on a delay to the "baked in the cake" June rate hike.

The sudden surge in interest in Eurodollar calls (vs puts) suggests more than just a few prop bets are being placed on the fact that The Fed does not hike rates in June.

ZeroHedge: Eurodollar Futures - 20170517 - Source: http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/05/10/20170511_rates.jpg

Well the last few days have seen that started to be reflected in the primary markets... as US macro data collapses (and Trumptopia tumbles).

ZeroHedge: June 2017 Rate Hike Odds - 20170517 - Source: http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/05/14/20170517_hike_0.jpg

And we know how much The Fed hates surprising the market. However, by now it is becoming clear to even the most resentful permabulls - and even Goldman  - that the longer the Fed delays the day of reckoning out of pure fear of the unknown, the greater the chaos and loss in asset values when the Fed no longer has the luxury of picking when to pull the switch.

It wouldn't be ZeroHedge if their outlook weren't both gloomy and doomy. For our purposes however, there's no guarantee that stock prices will steadily travel all the way to where our model indicates that stock prices would be if investors were fully fixated on 2017-Q3. Instead, what's more immediately significant is the vertical distance between the trajectories indicated for investors focused on 2017-Q2 and investors focusing upon 2017-Q3 - that wide distance between them provides the space where the market's day-to-day volatility will have the real potential to be genuinely interesting, with the attention of investors perhaps swinging back and forth between those two points of time until things finally settle down.

Until that happens, it could make for some interesting times for the market in the very near term future.

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