Category Archives: SP 500

Dividends: U.S. Continues Economic Contraction in February 2015

Following its apparent contraction in January 2015, it appears that the U.S. economy continued to contract in February 2015.

We're basing that assertion on the number of publicly-traded U.S. companies that announced they would be reducing their cash dividend payments to their shareholders during the month of February 2015. With 38 companies taking that action, the number is lower than the 57 firms that took similar actions in January 2015, but is still well elevated above the number that would appear to correspond to a shrinking economy.

Monthly Number of Public U.S. Companies Announcing Dividend Cuts, 
January 2004 through Present (February 2015)

We believe that the number of companies cutting their dividends in February 2015 is a better indicator of the current level of distress within the U.S. economy than the higher January 2015 figure, because we suspect that earlier figure was elevated by those companies whose deteriorating business outlook was such that they should have acted to cut their dividends in 2014, but delayed until the new year.

Speaking of which, we think we've identified most of the entities whose stocks trade on the NYSE or NASDAQ stock market exchanges, using data from Seeking Alpha's Market Currents reports (filtered for Dividends) and the Wall Street Journal's daily listing of Dividends Declarations. The table below presents the full list that we were able to assemble from these sources:

Publicly Traded U.S. Companies Cutting Dividends in February 2015
Date Company Symbol Old Dividends per Share New Dividends per Share Percent Change
2-Feb-2015 North Eur Oil Royalty Tr NRT $0.39000 $0.35000 -10.3%
2-Feb-2015 EV Energy Partners EVEP $0.77400 $0.50000 -35.4%
4-Feb-2015 EV Energy Partners LP EVEP $0.77400 $0.50000 -35.4%
4-Feb-2015 Nuveen Lgn/Sh Cmdty TR Fd CTF $0.13500 $0.11900 -11.9%
5-Feb-2015 Sabine Royalty Tr UBI SBR $0.28281 $0.27708 -2.0%
5-Feb-2015 Magic Software MGIC $0.09500 $0.08100 -14.7%
6-Feb-2015 Alon USA Partners L.P. ALDW $1.02000 $0.70000 -31.4%
6-Feb-2015 Chesapeake Granite Wash CHKR $0.50790 $0.44960 -11.5%
6-Feb-2015 ECA Marcellus Trust I ECT $0.20300 $0.18000 -11.3%
6-Feb-2015 Evolution Petroleum EPM $0.10000 $0.05000 -50.0%
6-Feb-2015 STRATS Sers 2006-1 P&G . Ser 2006-1 GJR $0.01570 $0.01535 -2.2%
6-Feb-2015 STRATS Tr Allstate 2006-3 GJT $0.01752 $0.01708 -2.5%
9-Feb-2015 Northern Tier Energy LP NTI $1.00000 $0.49000 -51.0%
9-Feb-2015 Whiting USA Trust I WHX $0.50934 $0.28308 -44.4%
9-Feb-2015 Whiting USA Trust II WHZ $0.64201 $0.32726 -49.0%
10-Feb-2015 Medley Capital MCC $0.37000 $0.30000 -18.9%
10-Feb-2015 Oaktree Capital Group OAK $0.62000 $0.56000 -9.7%
10-Feb-2015 PPLUS FR Call Ser GSC-2 PYT $0.19583 $0.19167 -2.1%
11-Feb-2015 Fifth St Finance FSC $0.09170 $0.06000 -34.6%
11-Feb-2015 KKR KKR $0.45000 $0.35000 -22.2%
12-Feb-2015 Ellington Financial EFC $0.25278 $0.25000 -1.1%
12-Feb-2015 SunTr Banks Dep. Shs STIA $0.77000 $0.65000 -15.6%
12-Feb-2015 Pengrowth Energy PGH $0.04000 $0.02000 -50.0%
13-Feb-2015 Deswell Industries DSWL $0.05000 $0.03500 -30.0%
18-Feb-2015 Cross Timbers Royalty Tr CRT $0.16025 $0.15170 -5.3%
18-Feb-2015 Hugoton Royalty Tr Un HGT $0.03968 $0.03609 -9.0%
18-Feb-2015 Permian Basin PBT $0.03673 $0.03146 -14.3%
19-Feb-2015 MetLife Floating Ser A META $0.25278 $0.25000 -1.1%
20-Feb-2015 CVR Energy CVI $0.75000 $0.50000 -33.3%
20-Feb-2015 CVR Refining L.P. CVRR $0.54000 $0.37000 -31.5%
20-Feb-2015 Dom Res Black Warrior Tr DOM $0.18065 $0.17455 -3.4%
20-Feb-2015 Vanguard Natural Rscs VNR $0.21000 $0.11750 -44.0%
26-Feb-2015 Mesa Royalty Tr MTR $0.16336 $0.07262 -55.5%
26-Feb-2015 Pacific Coast Oil Trust ROYT $0.03212 $0.00614 -80.9%
26-Feb-2015 Safe Bulkers SB $0.04000 $0.02000 -50.0%
28-Feb-2015 Full Circle Capital FULL $0.06700 $0.03500 -47.8%
28-Feb-2015 Lamar Advertising Co LAMR $0.84000 $0.68000 -19.0%
28-Feb-2015 TICC Capital Corp TICC $0.29000 $0.27000 -6.9%

The list predominantly consists of small, oil industry or other natural resource extraction-related firms, which is connected to the large and so-far sustained decline in global oil prices that began in July 2014 that has negatively affected their revenues. There are also a number of financial firms on the list that have also declined with these industries, along with a sprinkling of firms in other industries, such as software and advertising.

That these firms are small is a key reason why stock market indices have not followed suit. The dividend cuts represented by these firms simply are not big enough to even move the needle for market capitalization weighted indices like the S&P 500.

That is perhaps surprising considering how dramatically the index' expected future earnings per share through 2015 has changed over the past three months. However, that can be easily explained as most larger companies operate with greater margins of safety that allow them to absorb volatility in their expected earnings without cutting promised dividends, at least in the short term, which is why their stock prices haven't collapsed along with their projected earnings. Which is just what we should expect to happen since expectations for dividends per share, and not earnings, are the fundamental driver of stock prices.

So far, those cuts in expected future earnings haven't really transformed into cuts in expected future dividends. What they do represent however is a much more difficult business environment for the U.S. oil industry, where the distress is forcing dramatic cuts to extraction and to exploration activities, which is already negatively impacting other businesses that support the industry as these companies are instituting massive cuts to their spending as they struggle to remain solvent.

Under U.S. law, firms that will be laying off significant numbers of workers must provide their affected employees at least 60 days of notice in advance of the layoffs taking effect. Since January and February 2015 has seen many announcements of such mass layoffs in the industry, which will extend beyond mere oil workers, we should see a considerable increase in the number of Americans filing initial unemployment insurance claims in March and April 2015 should the recent rebound in oil prices not prove to be sufficient to forestall tens of thousands of pending layoffs in the industry.

Data Source

Standard & Poor. Monthly Dividend Action Report. [Excel Spreadsheet]. Accessed 2 March 2015.


In Which We Provide Forward Guidance to the Fed

Of all the things we never expected to find ourselves doing, providing policy guidance to the Federal Reserve is probably at the top of the list.

That's all the more unexpected because we've never had any contact with any official at any level of any branch of the U.S.' central banking institution.

NASA - Source: http://www.nasa.gov/centers/langley/news/researchernews/rn_HorowitzLeaderDog_prt.htm

And yet, if you listen to the things that a number of the Fed's most influential officials have been saying, you'll find our fingerprints all over them.

It all begins with some key observations and insights we've offered over the years. On that count, our having quantified how the action of investors collectively shifting their forward looking focus from one discrete point of time in the future to another point of time in the future can influence otherwise inexplicable changes in stock prices is likely our major contribution, followed by our observation that the Fed was using stock prices to assess the effectiveness of its monetary policies.

Those two things together allowed us to identify and quantify mistakes made by top Fed officials as they attempted to provide forward guidance to markets. And that, in turn, allowed us to describe how they could repair the damage and more effectively use forward guidance as a monetary policy tool by emphasizing the timing of when the Fed will implement changes using its more traditional arsenal of tools.

The Fed was listening. Now they're applying the lessons they've gleaned from our observations and suggestions.

Over the last several weeks, we've been observing, with increasing frequency, the statements of highly influential Fed officials who have gone out of their way to set the expectation that the Fed will begin hiking short term interest rates above its current 0-to-0.25% level by the end of the second quarter of 2015.

And we know that forward guidance has been effective because of the trajectory that U.S. stock prices has taken during these last several weeks, which becomes even more clear after our simple adjustments to account for the past volatility of U.S. stock prices, which we use as the base reference points from which we can otherwise project future stock prices within a relatively narrow range of noise.

Alternative Futures for S&P 500, 2015Q1 Likely Trajectories for Stock Prices When Investors Are Focused on Indicated Future Quarter

Provided, of course, that we know just how far investors are peering into the future when they make their investment decisions today, which is why we show each of the likely trajectories for investors focused on any of the next four quarters ending in the future. And that's where the Fed's forward guidance efforts come into play, because the Fed's outsized ability to affect interest rates can affect how far forward in time investors look from the present, which then tells us which future trajectory to follow. At least while investors aren't distracted by the alternative futures.

Guide Right Forward March - Source: http://www.loc.gov/resource/ihas.200211693.0/?sp=1

The way that works is that when the Fed says it is going to do something by the end of a certain time period, investors will adapt their investments to be consistent with the expectations for the investment returns that associated with that period of time in the future. We can then tell from the actual trajectory that stock prices follow how tightly investors have set their forward looking focus on the quarter that coincides with the anticipate action on the part of the Fed.

That's the way in which the Fed's forward guidance has been shaped and made more effective, even at the so-called lower zero bound, by our insights and what the Fed has absorbed from our guidance of how to better employ this tool. As long as the Fed's action is considered to be credible given the current state of economic affairs, the Fed can use the model we've developed of how stock prices work as a means of assessing the degree to which markets have bought in to the Fed's preferred policies.

Here, the greater the deviation from the projected trajectory associated with the future point of time to which the Fed has directed investors, the more statements or actions using the other tools the Fed has available to it will be needed to bolster the credibility of its preferred policy. If the gap can't be closed after all that, that provides the indication the Fed needs that it should pursue a different, and more credible, policy.

The best part? It doesn't matter if you've never heard of us or even believe any of what we've just described is possible. It is the way the world works, whether you like it, understand it, or not.

As for what good this does, if you happen to be an investor or just someone who needed more economic stability before you could justify proceeding with plans to expand your business or investments in today's world, you've benefited from the Fed's more effective implementation of its forward guidance policy. As for us and our role in providing guidance to the Fed in implementing those forward guidance policies since mid-2013, you're welcome.

Winter 2015 Snapshot of Expected Future S&P 500 Earnings

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500. As we'll show you today, expected earnings per share for the S&P 500 throughout 2015 have plummeted from the levels that Standard and Poor had projected they would be back in November 2014.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2010-2015, Snapshot on 15 February 2015

The table below quantifies the carnage for what can now be described as the very sudden onset of an earnings recession, one that is currently forecast to run through the third quarter of 2015:

Expected Future Earnings per Share for the S&P 500
Future Quarter 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4
On 13 November 2014 $109.96 $118.23 $124.48 $131.07 $134.89
On 15 February 2015 $102.89 $103.34 $103.77 $105.00 $112.83
Change in Expectations -$7.07 -$14.89 -$20.71 -$26.07 -$22.86

Much of the decline in earnings expectations is tied to the decline in global oil prices, which primarily affects the oil industry, and also affects the business outlook for financial institutions and capital equipment manufacturers.

It is also interesting to note a comment by S&P's Howard Silverblatt regarding the extent to which a significant number of companies in the S&P 500 have reduced the number of shares that are outstanding in the market:

Q1, Q2 and Q3 2014 had 20% of the issues, 1-in-5, reducing their year-over-year share count by at least 4%, therefore adding at least a 4% tailwind to their current EPS.

If not for those actions to reduce the number of outstanding shares in the market in 2014, the earnings per share data would appear far worse, and the outcome for 2014-Q4, for which earnings are still in the process of being reported, would be even more negative. The same would be true for the index' dividends per share.

More significantly, since expectations for dividends per share are the primary driver for stock prices, it would be safe to say that the outcome for stock prices in 2014 would not have been as positive as they turned out to be in the absence of such financial engineering.

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 15 February 2015. Accessed 18 February 2015.

Crude Oil Prices in the Driver’s Seat?

We found an interesting correlation between how Brent crude oil prices have changed and the value of the S&P 500 since the beginning of 2015:

S&P 500 Index Value and Brent Crude Oil Spot Prices, 
26 December 2014 to 13 February 2015

If one were to consider Brent crude oil prices as a significant driver of the stock market, the two large deviations in stock prices with respect to the trajectory of oil prices might be described as speculative rallies that didn't pan out - they weren't supported by fundamentals.

And perhaps the best evidence for that hypothesis to to see how the expectations for future dividends per share evolved with respect to the trajectory of Brent crude oil prices:

S&P 500 2015-Q4 Expected Dividends per Share and Brent Crude Oil Spot Prices, 26 December 2014 to 13 February 2015

Hope this helps clarify the third comeback rally for stock prices in 2015 would seem to have some legs!

S&P 500: How Long Will "Normal" Last?

Mainly for the sake of taking a snapshot in time, here is an update of our chart showing the major trend that has existed in the U.S. stock market since 4 August 2011.

S&P 500 Index Value vs Trailing Year Dividends per Share, 
30 June 2011 Through Present (30 January 2015)

Keeping in mind that we're well aware that stock prices do not follow any sort of normal distribution for extended periods of time (and technically, what we're showing is really a kind of lognormal distribution!), how long do you think the current period of "normality" might continue to last for the U.S. stock market?

The big question going into February 2015 is how long can energy companies with falling revenues as a result of falling oil prices continue to support paying their dividends at the levels they've previously indicated by either borrowing (in effect, betting that oil prices and their revenues will adequately recover within a relatively short period of time) or by cutting their spending as much as possible to preserve their profitability/existence?

The danger for the stock market lies in whether these companies, which have largely powered the economic recovery in the U.S., will be forced to either stall out the growth of their dividends or to cut them outright. Either of these scenarios could cause the existing state of order in the stock market to break down.