Political Calculations
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October 24, 2017

The U.S. government's 2017 fiscal year officially ended on 30 September 2017. From the end of its 2016 fiscal year (FY2016) a year earlier, the total public debt outstanding of the U.S. government increased by $671.5 billion, rising from $19,573 billion (or $19.6 trillion) to $20,245 billion (or $20.2 trillion) during FY2017.

The following chart shows the major breakdown of who the U.S. government has borrowed that total $20.2 trillion from:

FY 2017 (Preliminary): To Whom Does the U.S. Government Owe Money?

According to the U.S. Treasury Department, the U.S. government spent some $665.7 billion more than it collected in taxes during its 2017 fiscal year. The difference between this figure and the $671.5 billion that the total national debt actually rose can be attributed to the government's net borrowing to fund things like Federal Direct Student Loans, which collectively account for nearly $1.1 trillion of the government's $20.2 trillion debt, or 5.4% of the total public debt outstanding.

Put differently, the U.S. national debt would be 5.4% less at roughly $19.1 trillion if not for the federal government's takeover of the student loan industry from the private sector in March 2010. Since that time, approximately $1 of every $10 that the U.S. government has borrowed has been for the purpose of funding its student loan program.

Overall, 69% of the U.S. government's total public debt outstanding is held by U.S. individuals and institutions, while 31% is held by foreign entities. China has resumed its position as the top foreign holder of U.S. government-issued debt, with directly accounting for 6.9% between institutions on the Chinese mainland and Hong Kong.

Beyond that, China likely has additional holdings that are currently being shown as being held in the international banking centers of Belgium and Ireland, which together account for 2.0% of the U.S. national debt, where China's holdings are believed to represent a significant portion of the amounts currently being credited to both these nations.

The largest single institution holding U.S. government-issued debt is Social Security's Old Age and Survivors Insurance Trust Fund, which is considered to be an "Intragovernmental" holder of the U.S. national debt, and which holds 13.9% of the nation's total public debt outstanding. The share of the national debt held by Social Security's main trust fund is expected to fall as that government agency cashes out its holdings to pay promised levels of Social Security benefits, where its account is expected to be fully depleted in just 17 years. Under current law, after Social Security's trust fund runs out of money in 2034, all Social Security benefits would be reduced by 23% according to the agency's projections.

The largest "private" institution that has loaned money to the U.S. government is the U.S. Federal Reserve, which accounts for nearly one out of every eight dollars borrowed by the U.S. government. It lent nearly all of that total since 2008, mainly through the various quantitative easing programs it operated from 2009 through 2015 in its attempt to stimulate the U.S. economy enough to keep it from falling back into recession. In September 2017, the Fed announced that it would begin reducing its holdings of U.S. government-issued debt.

Data Sources

U.S. Treasury. The Debt To the Penny and Who Holds It. [Online Application]. 30 September 2017.

Federal Reserve Statistical Release. H.4.1. Factors Affecting Reserve Balances. Release Date: 28 September 2017. [Online Document].

U.S. Treasury. Major Foreign Holders of Treasury Securities. Accessed 21 October 2017.

U.S. Treasury. Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2017 Through September 30, 2017. [PDF Document].


October 23, 2017

The third week of October 2017 saw the S&P 500 close at a new all time high on each day of the week, which is the first time that's happened since 1998.

In the meantime, the trajectory of the S&P 500 continues to track along the top edge of the range we first forecast back in early September 2017.

Alternative Futures - S&P 500 - 2017Q3 - Standard Model - Connected Dots for 2018Q2 Trajectory Between 20170908 and 20171108 - Snapshot on 20 October 2017

The S&P 500 index continues to track along near the top end of that range, shown as the red-shaded box, in which we assumed that investors would largely remain focused on the distant future quarter of 2018-Q2 as we accounted for the past volatility of stock prices on our dividend futures-based model. That adjustment has another two and a half weeks to run before we expect to be able to return to using the raw projections of our standard model.

From our perspective, one of the bigger stories of the past week was General Electric's (NYSE: GE) earnings announcement, which had been expected to come with a dividend cut announcement that would have noticeably affected the expectations for future S&P 500 dividends.

As GE announced its earnings before the start of trading on Friday, 20 October 2017, indicating that its future earnings would be on the order of 30% below their previous forecasts as its cash flow was also strained, GE's stock price at first plunged by 7% of its previous day's closing value in the day's pre-market trading.

What didn't happen however was GE's anticipated dividend cut announcement. Going by our theory of how stock prices work, where the fundamental driver of stock prices is expectations for their underlying dividends per share, that would mean that the initial reaction of investors to the company's earnings and cash flow announcement would likely turn out to be a short-lived noise event. And so it was, as GE's stock price reversed its plunge and went on to close up on the day by 1%, which ZeroHedge described as "GE-Dip-Buying-Panic".

As Bloomberg summarizes, the dollar rose, Treasuries sank and all three broad stock indexes are heading for a record close on bets a budget compromise will bring Washington closer to agreeing on Trump’s promise of tax reform. The dollar touched a three-month high and 10-year Treasury yields approached 2.4% while the Canadian dollar tumbled after inflation and retail sales missed estimates. Some clarity on a budget resolution, a good quarter of earnings and the anticipation of an announcement of the next Fed chair has led to market confidence. One stock clearly bucked the earnings trend; GE posted results before the bell, missing analysts’ estimates significantly and slashing its profit forecast. The stock erased losses after falling 7% in premarket trading.

So - GE did this...

ZeroHedge: GE on 20 October 2017

GE investors however are not yet out of the woods with respect to a potential dividend cut. The company may still announce that it will cut its dividend at its upcoming shareholder meeting on 13 November 2017. How that may affect the company's investors will now largely depend on how much of that anticipation is already reflected in the company's stock price, which has fallen by a quarter since the beginning of the year.

Meanwhile, there was a lot of other stuff that happened that was worth noting during Week 3 of October 2017....

Monday, 16 October 2017
Tuesday, 17 October 2017
Wednesday, 18 October 2017
Thursday, 19 October 2017
Friday, 20 October 2017

Barry Ritholtz notes a number of usually strong statistics among the positives and negatives for the U.S. economy and markets in Week 3 of October 2017.

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October 20, 2017

Every October, many stock market investors celebrate their own pre-Halloween scare tradition, thanks to a calendar-based phenomenon called the "October Effect", which is "the theory that stocks tend to decline during the month of October."

As Investopedia goes on to describe it, "the October effect is considered mainly to be a psychological expectation rather than an actual phenomenon. Most statistics go against the theory." And indeed, that's true. Examining the month's track record over the years, one finds that truly scary market events like the Black Monday Crash of 1987, which celebrated its 30th anniversary this week, are often balanced against the month's coincidental timing in marking the beginning of long term rallies.

Still, we can still offer some insight into why both those phenomenons exist in the month of October. It is because the second week of the month marks the beginning of the year's fourth quarter's earnings season, which is the time that publicly-traded U.S. firms will announce if they are doing better or worse than expected for the year, where company leaders will also communicate changes in their expectations of how their businesses will perform in the next year.

ZeroHedge is reporting an example of the negative side of this dynamic play out on this Friday, 20 October 2017, with General Electric (NYSE: GE), which for GE investors, looks like a Black Friday-type event.

While it may not have slashed its dividend, yet, General Electric shares plunged 5% in the pre-market after the company cut its 2017 profit forecast while its new CEO grapples with one of the deepest slumps in the iconic US manufacturer's history. The company reported that adjusted earnings this year are expected to be only $1.05 to $1.10 per share, down over 30% from a previous range of $1.60 to $1.70 a share. This is also sharply lower than the sellside consensus of $1.54 a share.

ZeroHedge: GE Slides, 20 October 2017

For the current quarter, the industrial conglomerate and maker of jet engines and gas turbines reported adjusted Q3 EPS of 29 cents, nearly 50% below the 50 cent consensus estimate.

As Bloomberg reports, the revision underscores the severity of the challenges facing Chief Executive Officer John Flannery, who took over Jeffrey Immelt's longtime post in August. With hurdles from poor cash flows to slumping power-generation markets, GE is by far the biggest loser on the Dow Jones Industrial Average this year and has seen a quarter of its market value evaporate.

The cut is the latest step in what is shaping up to be a dramatic repositioning of GE under its new leadership. Flannery this month welcomed a representative of activist investor Trian Fund Management to GE's board and announced several management changes. He is seeking deep cost cuts and has said he will consider all options, including portfolio changes.

In addition to GE no longer using a "shadow" private jet for its CEO, not to mention slashing its fleets of private cars and other corporate perks as the WSJ infamously reported yesterday, expect thousands more in layoffs from what was once America's most iconic company, which in turn will follow to more complaints by the Fed about America's growing "qualified labor shortage." And now we wait news on the fate of the company's dividend which wall street expects to be "massively" cut.

Now, balance that bad news against the week's example from the positive side of the future expectations adjustment ledger, where Netflix (NASDAQ: NFLX) reported much higher than expected earnings and more importantly, a higher level of subscriptions, which portends a brighter earnings future for the streaming media delivery company going into 2018.

It's that kind of stuff that makes October an exciting month for investors. Whether its a scary month or the beginning of a new market rally all hinges on how expectations for 2018 will be collectively set by all the publicly-traded companies who will announce any changes in their outlooks during this earnings season.

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October 19, 2017

2017 hasn't been a good year for General Electric (NYSE: GE), and now, the company's new CEO, John Flannery, who took over from Jeffrey Immelt in August 2017, is shaking up the company as its financial problems are reaching a crisis point, all while its stock price continues its 2017 trend of descent.

GE Stock Price History - 2017 - Snapshot on 2017-10-17 - Source: Google Finance

That much is evident from the just announced departure of the company's new Chief Financial Officer, Jeff Bornstein, who had just moved into the CFO position at the same time Flannery was elevated to be GE's Chief Executive Officer. The unexpected change points to ongoing issues with the company's financial situation, which appears to be deteriorating.

GE's management has been over-promising and under-delivering, and you only have to look at the nearly 27% decline in the company's stock price this year to see the impact. GE hasn't formally abandoned its EPS targets for this year and the next, but the commentary around those targets has grown increasingly negative. Moreover, there are signs of deteriorating quality of earnings. Consider:

  • GE significantly missed its own expectations for cash flow generation by $1 billion in the first quarter.
  • On the second-quarter earnings call, Bornstein guided investors toward the bottom end of the full-year earnings and cash flow guidance ranges.
  • Immelt's long-held target of $2 in operating EPS in 2018 is significantly above the analyst consensus of $1.63.

In a nutshell, market analysts believe that GE isn't going to make its earnings numbers, and what's more, they also believe that GE's cash flow is in trouble.

... when GE reported a cash flow shortfall of $1 billion in the first quarter--with $300 million of it from contract assets--it highlighted the fact that GE has been booking revenue and earnings which haven't been dropping through into cash flow as yet.

The combination of lackluster earnings and strained cash flow means that the company will likely be forced to cut its dividend. As a general rule, companies need at least one of these two things working in their favor in order to sustain their dividends without negatively impacting their other operations and costs, but since GE has neither of these going for it at this time, there is a very real possibility that the company will be compelled to slash its dividend in the very near future as part of an overall restructuring initiative. As in today or tomorrow, with a potential 25% cut from the current quarterly dividend payout of $0.24 per share down to $0.18 per share....

Since GE is one of the largest company's in the U.S., at least as measured by its market capitalization, what happens to GE will have a noticeable effect on major stock market indices like the S&P 500 (Index: INX). Because we use the future expectations associated with the index' dividends per share to project its future trajectory, we wondered how much GE cutting its dividend might affect those future expectations.

So we built the following tool to do the math. If you're accessing this article on a site that republishes our RSS news feed, please click through to our site to access a working version of the tool. The default stock price, market cap, and dividend data in the tool applies for General Electric and the S&P 500 as of the close of trading on 17 October 2017.

Individual Company Stock Data
Input Data Values
Stock Price per Share
Dividends per Share Paid During Last 12 Months
Number of Shares Outstanding
New Dividends per Share Paid During Next 12 Months
Reference Market Cap-Weighted Index Data
Reference Market Capitalization of Index
Reference Index Value
Current Stock Market Index Data
Current Index Value
Index Dividends per Share Paid During Last 12 Months

Market Capitalization and Dividend Change
Calculated Results Values
Index Dividends per Share To be Paid Over Next 12 Months
Change in Index Dividends per Share

For the default data that applies for GE in October 2017, we find that should the company cut its dividend by 25% from its current dividend level, the impact to shareholders of S&P 500 index funds would a reduction of $0.23 per share in their annual dividend payouts, or a little under 0.5%.

Because we built this tool to be able to consider the impact of a change in dividends paid out by any dividend-paying component of a market cap-weighted stock market index, you're more than welcome to use it to consider the dividend change situation at other companies - just make the appropriate substitutions in the tool, and we'll take care of the math.

The tool however does not consider what the other dividend-paying components of the index are doing with their dividends, so it should be used only to consider what effect that a change in a single company's dividend policy might have on the dividends that would be paid to investors in a market cap-weighted index fund.

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October 18, 2017

We're busy behind the scenes today here at Political Calculations, but to mark the occasion of new highs for the U.S. stock market, we thought we might revisit the past for the S&P 500 and its index predecessors.

First, a quick look at the average value of the S&P 500 in each month since January 1871.

S&P 500 Average Monthly Index Value, January 1871 to October 2017 (Through 17 October 2017)

Now that you've seen the chart, you might want to extract some of the data for certain periods from it. That's where our The S&P 500 At Your Fingertips tool comes into play, because not only can we tell you what the value of the S&P 500 or its predecessor indices was in any of those months, we can also tell you the index' earnings per share and dividends per share, as well as the rates of return that were realized between any two of months that you might select, both with and without considering the effects of inflation and dividend reinvestment! We update this tool monthly.

But wait, that's not all! Our Investing Through Time tool uses that data to estimate how much the inflation-adjusted value of an investment made between any two months from January 1871 through the present might be worth. If you're the kind who wants to consider worst case scenarios, just set "June 1932" as the end date for your hypothetical investment.... We also update this tool monthly.

We also present a tool for the Quarterly Data for the S&P 500, Since 1871, since that provides the raw data we use for the earnings and dividend data in the other two tools. We update this tool annually, where it presently provides data through the fourth quarter of 2016.

Finally, we'll revisit the data for the average monthly value of the S&P 500 in chart form, but this time, using a logarithmic scale.

S&P 500 Average Monthly Index Value, January 1871 to October 2017 (Through 17 October 2017)

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About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

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