US Corporations Survive the "Great Recession"

The recession has been often in the news with concerns about economic recovery.  Although the "average person" (see previous post) probably has not yet seen much in the way of recovery, US Corporations never really felt the great recession!  If you are surprised, read on......

To make this assessment, I used a database of 88 US Corporations' Revenue and Earnings per Share (EPS) which were obtained from their SEC filings on a quarterly basis (10Q Filing).  Some companies are from the NASDAQ and some from NYSE, with most sectors being covered.  To see a complete listing of these check out my website and the tab "Examples" http://sustainthegain.com/examples.asp?page_id=mod_companies_list 

In addition to the SEC Filings, most companies also create a Quarterly Earnings Release, where using Index vs Year Ago, they try to explain the most recent results.  I always wondered if any of their conclusions could be supported with sound statistical analysis of this same data.  This curiosity led me to create this database for my statistical analysis of their Revenue and Earnings.  We all know that these results vary from quarter to quarter, but the important question is: "Is the most recent quarter STATISTICALLY DIFFERENT from the preceeding quarters.  If Revenue is up 3% from the same quarter of the previous year, the company leadership will tell you all the great things they have been doing to create this improvement.  Likewise, if Earnings are down 5% from the same quarter a year ago, those same leaders will be happy to explain what misfortune has befallen them beyond their control.  Never have they done the simple task of determining if this 3% up or 5% down is statically relevant, because only then is an explanation needed and meaningful. With this a backdrop, lets get on to the "Great Recession".

Most experts agree that the current Recession began 12/07 or 1/08.  I fit an exponential growth line to the quarterly data of either Revenue or Earnings per Share (EPS) to determine if the result was experiencing "steady" growth.  I also established plus/minus 3 sigma boundaries for this best fit line to determine if any one quarter fell outside these statistical boundaries.   But the most important assessment of these graphs is to find 7 or more quarters in a row above or below the best fit growth line as this determines if there has been a SYSTEMIC change in performance, rather than a single and unsustainable "bump".  To assess if any of these 88 companies were systemically impacted by the current recession, I determined if  7 or more results in a row were below the best fit growth line beginning 12/07 or later.  Since each company has two reported results, Revenue and EPS, there are 176 results that were evaluated.

In the 6 years prior to 12/07, 36.4% of these 176 financial results showed a systemic drop in performance.  Since 12/07, 40.3% of these results showed a drop, which is not statistically different from the 36.4%!!  SO, NO CHANGE IN FINANCIAL PERFORMANCE DURING THE RECESSION.  In fact, 18% of these 88 companies showed systemically better results during the recession!

Let me show you some examples.  First, is Amazon that showed no change in Revenue or EPS performance during the recession.

As you can see, the Compound Annual Growth Rate (CAGR) of 29.0% for Revenue has not changed since 2003.  The variation has increase along with the actual values, but the growth has been consistent.

Likewise for EPS, the CAGR of 29.1% is also unchanged since 2003.  Notice that there was one quarter of Jan 05 that was uniquely high and does require an explanation.  Otherwise the conclusion you reach is that Amazon is well organized to grow 29.1% EPS with no single quarter being better or worse than another since Jan 05.

McDonald's is a case of both Revenue and EPS being systemically hurt during the recession.  To know if the recession caused this systemic change would require additional study, but be assured that in their Quarterly Earnings Release, the recession is front and center in their explanation!

As you can see, the quarters after 12/08 are all running below the previous best fit growth line of 7.5% (the green line).  Although the actual revenue numbers got smaller, the CAGR during the recession is still 6.8% but a systemic drop none the less.

In the case of EPS for McDonald's, the systemic drop occurred 12/08 as with Revenue, and the current CAGR is a healthy 14.9% with slightly less variation than prior to the recession.

Delta Airlines is an interesting example since their results have gotten better during the recession.

Delta Revenue systemically rose on 12/08 and the CAGR increased as well to 9.7%.  Remembering Delta bought Northwest Airlines, the combined Revenue began being reported 5/07, but the statistical, systemic shift did not happen until 12/08, 6 quarters later.  To be clear, the recession did not HURT them!

EPS is not complicated by the merger of financials with Northwest, but you can see that a run of 11 quarters above the historical average (green line) began in 7/07, shortly after the combined financials. However, the last 8 quarters all are above the Upper Limit (blue line) which might indicate that the EPS got stronger 6/08, during the recession.

Looking at this same data by sector, Healthcare and Financials both showed statistically more "help" during the recession than all the other sectors.  To note, Healthcare also show less "hurt" during the recession than the other sectors.  Think of the sectors "helped" by Government stimulus!  Consumer non-cyclical also showed less "hurt" and more "help" during the recession as well without Government support.

Bottom line, the recession has not changed the financial performance of the 88 companies that I track.  The percent of Revenue and EPS results that went down prior to the recession is the same as these results that went down during the recession.  A conclusion you might reach from these data is that Revenue and EPS productivity went up during the recession as unemployment went up.  Can this level of productivity be sustained into the future or will these companies begin to hire again soon?

Were US Businesses Affected by the "Great Recession"?

I have been working on downloading SEC filings of about 85 US Companines and then statistically analyzing these quarterly results to see if during 2008, either their Revenue or Earnings were affected negatively.  I did a similar analysis after the 2001 terrorist attack to see who was negatively impacted.  For example, several of the airlines were already in decline prior to this event, however they wasted no time in blaming poor business performance soley on 9/11!

I have only gotten through the "A's", which is 12 companies (24 business results with Revenue and Earnings).  Of these 15 of the 24 results were unaffected or improved during 2008 with one company having results dropping off in 2007.  However, you can bet that Quarterly Earnings Releases are full of the difficulties confronting them during 2008 and beyond! 

Hope to have the other 70 companies finished soon, so come back in a couple of weeks.

Social Security and Medicare Costs per Person

In my last post May 2nd, I took a look at the payroll tax rates and income cap effects on Medicare and Social Security.  Using much of this same data, I calculated a Social Security and Medicare Payout per Person, taking the "65 and over" population projections from the Census Bureau.  I had become curious when I read that over an average person's lifetime, they would pay into the Medicare System $150,000 but take from this same system over $450,000 for medical care.  This did not feel right to me, so I took out my Social Security Report to find that I and my employer had paid less than half of this amount, and I was in top 5% of wage earners!

Using the 2012 US Budget from the CBO, with history back to 1937, and the CBO budget projections from 2011 to 2016, I modeled the Trust Fund inflows, outflows, surplus/deficit and resulting Trust Fund Balance for the OASI (Social Security) and the HI and SMI Funds combined (Medicare).  I did not do any work with the Survivor Trust Fund as it is not paid out to exclusively to those over 65. I then analyzed all this data using best fit exponential growth lines to determine the Annual Compound Growth Rates, CAGR, for Inflow, Outflow and Per Person Outflow.

Social Security (OASI Trust Fund)

From 1990 to 2009, the OASI inflow grew at 5.3% CAGR.  Prior to this the compound growth was 13.1%.  This recent very low growth of inflow is consistent with the payroll tax rate being locked in 1992 which I discussed in my previous post.  The 2012 budget forecast for inflow is for a CAGR of 5.9%.

From 1990 to 2009, the OASI Outflow grew at only 4.4%.  Prior to this the growth rate was 18.8% and the forecast in the 2012 Budget is for CAGR of 5.8%.  However, I got curious about the growth of the outflow per person as this should be in line more with inflation rather than 4 and 5% numbers in the budget.

As you can see, the per person (over 65) outflow had a CAGR of 3.2% from 1990 to 2009.  Prior to this time, the per person outflow grew at 15.8% and the 2011 to 2016 forecast is for growth of 2.5%.  To note, the CBO Budget for 2011 and 2012 show only an increase of less than 1%  each year.  I bet you have not read this in the news!!

The total outflow can now be modeled past 2016 from the 2010 actual per person outflow inflated 2.5% per year then multiplied by the projected population from the Census Bureau for each year.  Using this modeled forecast, the OASI Trust Fund balance continues to grow past 2050, using an inflow growth of 5.9% which is the current CBO forecast.  Social Security does NOT run out.  The Trust Fund inlflow would have to shrink in growth to below 3.9% (outflow at 2.5%) for Trust Fund to run out in 2050.  In the previous 70+ years, the inlfow growth has never been this low!

Medicare (HI and SMI Trust Fund)

For Medicare, which began in 1966, the compounded growth rate of inflow to the Fund was 7.5% from 1990 to 2009.  Prior to this the CAGR was 16.4% and the CBO Forecast for 2011 to 2016 is 7.6%.  Again the effect of stable Payroll Tax Rates since 1992.

For Medicare outflow (spending), the 1990 to 2009 CAGR is 7.8% but does not fit so well as you can see.  The yellow marked year in the graph above is when outflow growth increase to 9.3%.  Prior to 1990, the CAGR was 16.4%.  The CBO Budget Forecast for 2011 to 2016 is for a compound growth of 6.6%.  Is this the effect of the Medicare Reform passed by Congress to slow the growth in Medicare spending?  But I was again curious about how this outflow spending growth looked when done on a per person over 65 basis.

For the 1990 to 2009 period, the per person CAGR is 6.5% compared to 7.8% when analyzed by total outflow.  Prior to 1990, the per person growth was 13.8% and the CBO 2012 Budget Forecast for 2011 to 2016 is 5.9%.  This is only a slight reduction in the forecast per person growth from the current growth due to the Medicare Reform Act.

Using the same modeling technique as was used for Social Security, taking the 2010 actual Medicare spending per person over 65, and then inflating it at the CBO Forecast rate, you can then calculate a new Total Medicare Spending using the Census Population Forecast.  However, under almost any possible growth rate scenarios, the Medicare Trust Funds run empty in 2017 or 2018.

Finally, I was able to take Mean Income Data per household and with the actual payroll taxes in effect in prior years, and calculate an "average person's" contribution to Social Security and Medicare from Payroll Tax and then from my modeling, how much the same "average person" recieves in benefits.  I made the assumption of a 45 year work life (1965 to 2010) and then a 20 year benefits span (2011 to 2030).  This average person:

Paid In to Social Security (includes employer portion):            $198,000

Takes Out of Social Security:                                               $400,000  (2 times what was paid in)

    

Paid In to Medicare (includes employer portion):                    $44,845

Takes Out of Medicare:                                                      $467,000   (10+ times what was paid in)

If Medicare did not exist, and current seniors had "invested" their paid in amount, they each would be rationing their privately acquired health care with lifetime caps.  Just because the Government was the "investor" or their insurance carrier, does not "free" seniors from the rationing of healthcare due to their limited financial resources.

Had Medicare been managed like Social Security, with a compound annual return 1.6%, seniors would be paid monthly for health care, for a total of about $88,000 over their lifetime and it could be spent however they please.  On the other hand, if Social Security had been managed like Medicare, whenever a senior wanted a new car (new knee) or an all inclusive vacataion (100 days of nursing care), they would get whatever they wanted, without a lifetime cap! 

   

"Democrats Deny Social Security’s Red Ink"- Going Deeper

A February 25th, 2011 article on FactCheck.Org titled "Democrats Deny Social Security's Red Ink is right on target, but I would like to dig a bit deeper into the causes of our current budget and debt problems as well as some solutions.  http://www.factcheck.org/2011/02/democrats-deny-social-securitys-red-ink/

As the article states, Social Security Expenditures exceeded Social Security Tax Receipts only in 2009 but the Medicare Spending exceeded its receipts back in 1975, only a few years after getting started as  the graphs below attest.  (Data is based on Congressional Budget Office, 2012 Budget)

Since 70% or more of the Medicare budget is spent on those over 65 as is Social Security, I decided to combine these two programs into a single number since the younger among us are those funding these programs for our forefathers!  The first thing this brought to mind, was the income cap on Social Security which does not exist for Medicare and their corresponding rates, seen below.

It is very clear that rates have remained unchanged since 1990, which is almost half of the time period covered by this graph from 1966 to 2016!  So, what would have happened had Congress continued to increase the payroll tax rates at the same increments as had been done for the previous 23 years.  In the case of Social Security, it would have been about 0.2% every two years (3.85% to 6.20% in 12 increases over 23 years); for Medicare, it would have been about .09% every two years (.35% to 1.4% in 8 increases over 23 years).  In addition to these changes, I also generated non-capped personal income from the Medicare receipts and tax rates which was then used to create the Social Security receipts from non-capped income.  To note, I ignored the tax rate reductions in 1984 - 1989 and for 2011 as these reductions were made up from the General Fund and it was not clear if this transfer was included in receipts.

All of these data were then graphed with all the different scenarios on the same graph.

Medicare / Social Security Spending is the light blue line with the current budget plan from the CBO as the dark blue line.  With the spending combined, these deficits began in 2002.  But the more obvious problem here is that the all the lines begin to diverge around 1992.  One reason this date is important is that the regular payroll tax rate increases that had been taken for the previous 23 years was DUE in 1992 but was not taken and has not been taken since.

So lets look at the different scenarios that I calculated from the CBO Budget Data (in all these cases, I used only receipts and spending, ignoring the effect of trust fund balance and interest):

1. Remove the income cap from Social Security Payroll Tax.  This scenario is the red line in the graph and indicates that issues could have been delayed until 2008.  This would be considered a tax increase even at constant tax rates, but at least it would be focused on the top 20% of wage earners!
2. Increase the payroll tax rates at the pre-1990 increments but keep Social Security income cap in place.  This is the green line in the graph and shows that there would be a dip in receipts coincident with the recession, but then recovers in 2012 to exceed spending.
3. Same as #2, but with uncapped Social Security income.  This is the purple line on the graph and clearly stays ahead of the spending rates.

It is clear, that the politics changed in 1992, the beginning of the Clinton Administration, but this aversion to raising the payroll tax continued through every administration since.  This is just one more example of inaction by our government in leaving the problem for someone else.  If we are not paying more in taxes to prevent these problems and spending is not cut, we will just pay later with financial messes like the housing collapse, recession and equity market shrinkage.  I guess it is easier to blame the bankers than it is the politicians!

But what if the rates were raised next year?  Could this help at all?  Looking at the CBO estimate years of 2011 to 2016, the total Social Security/Medicare spending is projected to be $8.3 trillion.  The current budget shows the receipts over these same 6 years to be $5.8 trillion, a $2.5 trillion shortfall.  If however the Social Security and Medicare rates were increased to 8.2% and 2.35% respectively and increased every two years at .2% and .09% respectively, keeping the SS income cap, the 6 year total would be $8.3 trillion which is the same as spending so no new contribution to the debt would be seen.  If the SS income cap were removed, the 6 year total would be $10.3 trillion and some help to the debt might be realized.

But alas, taxes will likely not be raised or the cap removed, so we can look forward to changes that will even more painful to the citizens, but less painful to the politicians.

Is There a Relationship Between Oil Price and Gasoline Price in the US?

With all the turmoil in the middle east, there has been a lot of talk about oil price and the resulting rise in Gasoline prices.  I downloaded daily spot prices and got yearly averages from 1986 through 2011 YTD.   The price categories are:

• Cushing, OK WTI Spot Price FOB ($/Barrel)
• Europe Brent Spot Price FOB ($/Barrel)
• New York Harbor Conventional Gasoline Regular Spot Price FOB ($/Gal)
• U.S. Gulf Coast Conventional Gasoline Regular Spot Price FOB ($/Gal)

As you can see in the graph below, Cushing Crude Price remained relatively flat from 1986 to 1999 at which time prices began a steady rise.

The next graph is for Gulf Regular Gasoline Price which follows a similar pattern on the same dates. 

These similar patterns suggest that correlations may help to see if anything has been changing in the relationship between Crude and Gasoline prices.  In the graphs below, the Cushing Crude price and U.S. Gulf Gasoline price are correlated for the period 1986 to 1999 with a resulting very strong correlation of 94% (R square).

In the table below, you will see that the correlations between the Cushing (US) and Brent (Euro) Crude price correlation weakens after 2003 while Gulf and NY Gas prices remain very strong in all three timeframes.  Looking further into the correlation between Cushing Crude Price and either Gulf or NY Gas prices, you find these correlations weaken to around 70 after 2003 (highlighted in red in the table).  This makes me want to look deeper into why the change in relationships after 2003.



	1986 - 1999	2000 - 2002	2003 - 2011
Cushing Crude to Brent Crude	99.0	99.4	95.8
Gulf to NY Regular Gasoline	99.4	99.8	99.8
Cushing Crude to Gulf Gasoline	94.0	96.3	70.1
Cushing Crude to NY Gasoline	99.4	97.7	69.3

Using a best fit exponential growth line to the price data, you can determine the stable and consistent Compound Annual Growth Rate (CAGR).  In the graph below, the best fit growth line for Cushing Crude Price has been found, and this same technique is applied to to the 3 time periods for both Cushing Crude Price and Gulf Gas Price Growth and summarized as CAGR in the table following.

	1986 - 1999	2000 - 2002	2003 - 2011
Cushing Crude Price Growth	0.2%	-7.2%	6.1%
Gulf Regular Gasoline Price Growth	0.2%	-7.2%	10.9%

So what happened in 2003 to cause the Gasoline price in the US to grow at a rate almost twice that of Cushing Crude Price.  California, in 2003 outlawed MTBE which was an additive in US gasoline in improve octane rating.  This step was taken when MTBE was found in groundwater and to be carcinoginic.  This lead to the use of Ethanol in gasoline to increase octane rating and finally the Federal Government's intervention (support) of ethanol production.  This is claimed to help reduce our dependance on foreign oil with a stabilization in gas prices.  However, the result has instead been the doubling of gas price growth relative to oil prices and the corresponding increase in corn prices to produce ethanol which in turn is driving up food prices in the US. 

Annual Deficits and the National Debt

With all the talk about deficits and the debt, I got curious about the relationship between the two.  Currently the US Debt is about $13,528 Billion through 2010 ($14,193 Billion currently).  Thinking this was the sum of the annual deficits, I decided to add up all the annual deficits since 1862, and got only $8,010!  So where did the other $5,518 Billion come from??

Supplemental appropriations began in earnest in about 1950, in response to several natural disasters where the federal government stepped in to support the states who had typically covered the costs of these events.  The federal government was now in the insurance business, spending non-budgeted money in support of the states recovering from these disasters.  Now supplemental appropriations regularly come up outside the regular budget process. Most supplemental appropriations fall into two categories: defense supplementals, needed to fund the costs of military actions, and non-defense supplementals, almost all of which go to the cost of emergency response to national disasters like hurricanes and floods.  Below is a recent graph of the Sum of Deficits along with the Sum of Supplementals from 1950 to 2010.

As you can see, this is becoming a very large contributor to the National Debt and is done outside the normal budget process.  Then I got curious to see how the size of the supplementals compared to the defecit each year.  Below is a graph of the supplementals as a percent of the deficit from 1960 to 2010.  There are some negative numbers in those years when there was a budget surplus. 

In the years from 1975 to 1996, the supplementals were 38% of the deficit.  But in 2002 to 2010, supplementals now are almost equal to the deficit at 95% !  To note, in the years 1997 to 2001 (the white space between the two graph areas), the total deficit was $-536B and the total supplementals were $1,124B, for a net add to the National Debt during these 5 years of $588B.  So much for the "balanced budget" years of Clinton.

Seems to me that we should be hearing some talk about the Federal budget process including ALL of the defense spending, probably requiring a war reserve, and also getting out of the disaster insurance business.  Keeping all this spending as part of the budget process would put more pressure on Congress to fix the big debt creators rather than just pushing them outside the budget.

The Real "Stats" of Professional Sports

Professional sports standings, playoffs and finals are often in the news so I was curious about the real statistics of the stats.  I looked into MLB, NFL, NHL and NBA using the most recently completed season for each sport and their final game.  I was interested to know if the winning teams were statistically better than their league competitors or was the whole season just chance, as in a coin flip!  I am using a 99.7% confidence level for my conclusions or said another way, there is a 3 in a 1000 chance I could be wrong!  Also remember, that in any single game where you win or loose, there is a 50/50 chance that either team will win, UNLESS one of them is uniquely better.

NFL plays a 16 game season.  There was one team that WAS statistically better that all the others, which was New England with a .875 season.  Of interest, there was also a statistically poor team with a .125 record which was Carolina.  All the other teams were statistically equivalent, meaning their wins and loses were just chance. (How else would the bookies make money!).   But alas, the super bowl was played not by the "best" team, but just the lucky ones.

MLB plays a 162 game season, and as is typically the case, no team had a truely winning season.  Philadelphia had the best record at .599, but they were not statistically better than any other team.  There was a statistically poor team with a .352 record which was Pittsburgh.  The World Series was played by two lucky teams and the winner was again a flip of the coin, since winning in 5 games is not statistically meaningful.

NHL plays an 82 game season, and just like MLB, there was not a superior team, statistically speaking.  But, also like MLB, there was a low performer which was Edmonton with a .330 record.  The Stanley Cup was played by two lucky teams with a coin flip winner as a 6 game final is not statistically relevant either.

The NBA plays an 82 game season also, but in this case there is something very different!  There were 4 teams that were statistically unique, 2 in the East and 2 in the West.  They were Cleveland (.744), Orlando (.720), Dallas (.671) and LA Lakers (.695), who went on to the Finals against Boston (.610).  The 7 game series again did not establish a statistical winner.  Also of interest is that there were 7 teams who all had statistically low seasons below .335.  I would assume from these results that the bookies have a more difficult time making as much money as they do in the other sports.

So the adage of "any team on any given day" does seem to ring true, except in basketball!  Watching the games sure is a pretty exciting way to watch a coin flip.