Political Calculations
Unexpectedly Intriguing!
April 16, 2014

According to preliminary data published by the U.S. Census Bureau, the trailing twelve month average of median sale prices for new homes fell in February 2014 after peaking a month earlier.

The preliminary new home sale price for February 2014 was $261,800, which was up from January's revised $260,800. However, the trailing twelve month average for median new home sale prices, which smooths out seasonal variations in the data, fell to $265,100 in February 2014 from January's 265,375 - the first contraction we've observed in the data for some time.

The Census Bureau's monthly data is typically revised upward for several months after it is first reported, as it takes time for larger sales occurring in a given month to be recorded.

Our chart below shows how the trailing year average of median new home sale prices have evolved with respect to median household income in the U.S. over the last 15 years. Note that the falling housing prices came as median household income saw its biggest increase since August 2012.

U.S. Median New Home Sale Prices vs Median Household Income, 1999-Present, through February 2014

Unless upcoming revisions to the preliminary data change this result, February 2014 would mark the first time since June 2012 that the trailing year average of median new home sale prices declined from the previous month. July 2012 marks Month 0 of the period that coincides with the inflation of a new bubble in the United States according to the data we track.

The 19 month long period of month-over-month price increases in the twelve-month average from July 2012 through January 2014 would be the longest recorded since the 32 months of steady month-over-month increases recorded between January 2004 and September 2006, which coincides with the peaking of the first U.S. housing bubble.

As noted in other analysis, the ISM Non-manufacturing Report on Business for March 2014 indicates that the real estate, rental and leasing industry contracted in March 2014. If so, we may now be witnessing a peak in the second U.S. housing bubble.

Previously on Political Calculations

We were among the first to declare that a second housing bubble was forming in the U.S. economy, and we were the first to back it up with an objective framework of analysis and data. Our ongoing analysis is chronicled below....

Data Sources

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 24 March 2014. [Note: All this data is reported in terms of current (nominal) U.S. dollars.]

Sentier Research. Household Income Trends: February 2014. [PDF Document]. Accessed 11 April 2014. [Note: We've converted all data to be in terms of current (nominal) U.S. dollars.]


April 15, 2014

Suppose you're one of the millions of Americans for whom it makes much more financial sense to pay the Obamacare tax than it does to buy health insurance and do not have health insurance through your employer. To avoid getting hit with a larger tax bill than you might otherwise expect when you file your taxes for 2014, how much extra should you have withheld from each of your paychecks today?

Our latest tool will help you answer this critical question, because the IRS' withholding tables for 2014 do not take the Affordable Care Act's income tax increase for 2014 into account.

Just enter the indicated data in our tool, and we'll do the math that will apply for you for the 2014 tax year (it will not apply for 2015 or any year afterward).

Paycheck Data
Input Data Values
How Often Are You Paid?
Your Expected Annual Income

How Much Extra Should You Withhold for the Obamacare Tax?
Calculated Results Values
Extra Amount to Have Withheld from Each Remaining Paycheck in 2014
Your Expected Obamacare Tax for 2014

In the tool above, we assume that you haven't had any extra amount withheld from your paycheck to pay for the Obamacare income tax for 2014, and will need to do so over your remaining paychecks for the year. We also assume that you will be filing as a Single individual for the year, have no dependents to claim on your income taxes and that you are not eligible for Medicaid.

Depending upon how expensive health insurance is in your region, you may be exempt from the tax if the annual cost of the premiums for a "Bronze"-level plan exceeded 8% of your annual household income, so you'll want to confirm if that's the case for you.

These are important considerations because even though the IRS has not been given explicit directions to punish taxpayers who might underwithhold their income taxes by the amount of their Obamacare tax, you will still owe the money. The IRS is busy proving that it will come after you, or your children, to collect it, decades after the agency decides that they "loaned" you the amount you may have underwithheld. No matter how small it is, with interest and penalties.

Update: The IRS backs down on collecting "debts" owed to Social Security that are more than 10 years old. Still, if you're going to be on the hook for Obamacare taxes this year, and your regular paycheck withholding doesn't account for it, look for the IRS to take the money you owe for Obamacare from your refund next year.

And remember, even though paying the tax is frequently much more affordable than Affordable Care Act health insurance, there are better and cheaper options available to you. If you want more affordable options and to avoid having to pay Obamacare's doubled income tax rates for the 2015 tax year, now is a good time to get familiar with those options.

Have a happy tax day!

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April 14, 2014

By now, most of our readers will know that we anticipated last week's stock market "correction" and that we communicated it weeks ago. Our updated alternate futures chart below confirms how closely the real world followed our forecast:

Alternative Futures for S&P 500, 31 March 2014 - 30 June 2014 (With Echo Effect), Snapshot on 11 April 2014

That's why we were fascinated to read Barry Ritholtz's take on the event, which he later reposted on his blog:

Whenever we see any sort of disruption in markets an explanation usually follows. The headlines will explain that “Markets are going up/down because of this good/bad thing.” News anchors will solemnly intone why the volatility is significant and what it means for one thing or another.

None of these casual explanations can withstand close examination. They are often things that have existed for months or years, and so can’t account for what happened yesterday.

Stocks are fully valued, and have been for a while, so why is it that valuations suddenly matter after not mattering at all? The market for initial public offerings is too hot? Wait, the Federal Reserve is going to end quantitative easing, something it has been warning us about for two years? Now it suddenly matters?

Of course, all of these narratives serve a singular purpose: They give the appearance of meaning and rationality to actions that are meaningless and irrational. The daily action in the markets is a form of noisy, random, Brownian motion. If you are looking for a clear reason as to why stocks did what they did, then you are in the wrong line of business.

Normally, we would be in full agreement with Barry's assessment. But because we're in such a unique position of having seen what happened in the market all last week coming well in advance of its arrival, we probably can provide more insight into the nature of the event than the ordinary market observer.

We would describe it as being much like an aftershock to an earthquake. Except in this case, the aftershock was more pronounced than the original shocks, thanks to a confluence of factors from both a year ago and from a month ago.

To understand why takes getting into the math behind how stock prices work, which we'll let you do on your own.

Really Long Equation

In this case, we're fortunate in that the volume of noise in the stock market is relatively low while investors went into the event strongly focused on the future quarter of 2014-Q3 in setting today's stock prices, which ends just under five months from now.

The basic explanation for the event can be found in the financial news reports that coincide with the various factors that would be entered into our math, for which we're confident that you can successfully use a search engine like Google to identify. If it helps, because the calendar is involved, so is the bond market. You will specifically be looking for events where capital flows would have moved money between the stock and bond markets, where you'll find synchronized changes in stock prices and bond yields, where both suddenly rose or fell together in response to the specific real world events that drove the markets at those times.

We say the event is an aftershock because the investment decisions that were made at these times tied up the money associated with them, where maturity and option expiration dates had to be reached before new actions could be taken based on newer information.

And that is pretty much the how, when and why of what happened in the markets last week, which to us, are the more interesting aspects of the event.

The good news, if you can call it that, is that the market fell by less than our model forecast on Friday, 11 April 2014. While still well within our expected range (indicated by the green-shaded vertical error bars for investors focused on 2014-Q3 in our chart above), the positive noise here will contribute to dampening future aftershocks. From our perspective, it would appear that the event is largely over.

That's not to say that stock prices couldn't still move downward in the near term, as could happen with the arrival of a new and negative noise event or if investors were to shift their focus away from 2014-Q3 to either the nearer term 2014-Q2 or the more distant future of 2015-Q1. And speaking of 2015-Q1, now that we have the finalized value for dividends paid in 2014-Q1, we've made our quarterly adjustment to the expected change in the growth rate of dividends per share for that future quarter.

Change in the Expected Growth Rates of Trailing Year Dividends per Share with Daily and 20-Day Moving Average of S&P 500 Stock Prices, through 2014-04-11

As a final note, we'll observe that this most certainly isn't the first that time we've successfully charted the future course of the stock market or correctly called turns in it, which even Barry Ritholtz would have to admit is quite the parlor trick for something so seemingly impossible.

But our really long time readers know that the truth of how we do what we do is far more unsettling....

Previously on Political Calculations

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April 11, 2014

In less than a week, the deadline for filing for 2013's federal income taxes will be upon us. That makes this a very good time to find out how many pages it takes to explain the U.S. federal tax code!

Our source for this data is the Wolters Kluwer CCH Standard Tax Reporter, which has updated their data through the 2013 tax year:

Wolters Kluwer CCH Standard Tax Reporter, 2013

We find that for those filing their personal income taxes on 15 April 2014, they must comply with the terms of a tax code that takes 73,954 pages to explain. To tax professionals.

Just for fun, we thought it would be interesting to find out how fast the U.S. tax code has been growing during President Obama's tenure in office. Here, we turned to an older version of the graphic above to find out that through 2008, the year before President Obama was sworn into office, the U.S. tax code was just 67,506 pages long.

In President Obama's first two years in office, when his political party also controlled both the U.S. House of Representatives and the U.S. Senate and used its control to impose massive new taxes on the American people like the Patient Protection and Affordable Care Act, the U.S. tax code grew to be 71,684 pages long, which works out to be an average exponential rate of 3.0% per year.

If it had been allowed to continue growing at that rate, the U.S. tax code would effectively double in length every 24 years.

After 2010 however, the Democratic Party lost control of the U.S. House of Representatives, with one of the outcomes of that loss being that the U.S. federal tax code has grown much more slowly in all the years since.

From 2010 to 2013, we find that the growth of the U.S. federal tax code has decelerated to grow at just a third of the rate that it did when the Democratic Party controlled the U.S. Congress and the White House. The tax code has grown at an exponential rate of just 1.0% per year since 2010, a pace that would have it double in size every 72 years.

Altogether, the U.S. federal tax code has grown at an average exponential rate of 1.8% per year since 2008.


April 10, 2014

If you wanted one word to describe the U.S. economy in the first quarter of 2014, the word 'tractionless' comes immediately to mind.

The latest real evidence for that assessment comes not from the latest jobs report, which many found disappointing but instead from the U.S. stock market, where once again, the number of publicly-traded U.S. companies who announced they would be cutting their dividends during the month of March remained at elevated levels. Levels that are consistent with recessionary forces at work in the U.S. economy:

Monthly Number of Public U.S. Companies Announcing Dividend Cuts, January 2004 through March 2014

Unlike the unemployment rate, which is usually a lagging indicator of the health of the economy, the number of companies announcing dividend cuts each month is a coincident indicator - something that tells us about the state of the economy today, in real time.

And what the elevated number of companies acting to cut their dividends in March 2014 tells us is that at least some parts of the U.S. economy are contracting rather than expanding.

Just for fun, we turned to the Institute of Supply Management's reports for March 2014 to see which sectors of the economy are producing the least traction. Here's the quick summary for both manufacturing and non-manufacturing industries. First, for manufacturing industries, where the reports were generally positive:

The four industries reporting contraction in March are: Apparel, Leather & Allied Products; Wood Products; Electrical Equipment, Appliances & Components; and Miscellaneous Manufacturing.

And now for non-manufacturing industries, which is where most of the drag on the U.S. economy would appear to be originating, and which one respondent's comments points the finger at a major reason why:

The five industries reporting contraction in March are: Mining; Educational Services; Health Care & Social Assistance; Real Estate, Rental & Leasing; and Other Services.

Let's run through the non-manufacturing industries where we have some insights briefly:

Mining: The sluggishness in the U.S. mining industry can likely be traced directly back to the Chinese government's decision last year to slow down the growth of the nation's economy. With that nation growing much more slowly, it requires far fewer resources produced through mining to sustain it.

Educational Services: There is a major slow down underway for education services, particularly for for-profit universities, which are reporting declining enrollment levels.

Health Care & Social Assistance: We cannot do any better than to quote what one respondent to the ISM's survey said about what's hurting that particular industry:

"Healthcare reform continues to adversely impact hospital projected/actual revenue." (Health Care & Social Assistance)

Real Estate, Renting & Leasing: The major story here is the decline of demand for real estate in the U.S., where the rapid rise in prices driven by large investment firms who were buying up large quantities of distressed residential properties from 2012 to 2013 ultimately led them to stop buying so much property as their potential returns on their investments declined. Combined with the Fed's decision to taper its quantitative easing programs, which made buying real estate more expensive because of the corresponding hike in mortgage interest rates, the amount of economic activity in the real estate sector has been falling as a result.

And there you have it. While likely not enough to pull the entire U.S. economy down into recession, we at least now have some idea of which parts of the economy are experiencing recessionary conditions at the present time.


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