How Many Hours of Work Does it Take to Buy...

The reason that economists adjust nominal data to "real" numbers is that they are trying to create a better picture of general welfare after adjusting for inflation.  If an economy produces $100 worth of widgets one year and $150 worth of widgets the next, the dollar increase doesn't tell you much if the price of a widget also rose from $100 to $150.  In that case the economy has still produced one widget in the year, so welfare has not changed and theoretically real GDP should be flat.

At a fundamental level, "real" economic numbers are an attempt to measure output against time.  In the previous example, the data was adjusted to have a more clear picture of the number of widgets produced per year.  For humanity, time is really the only scarce resource there is.  Therefore, the number of hours worked that it takes a person to buy an item is the true measure of welfare.

Today's employment report showed that average hourly earnings fell slightly to $23.58.  Below are charts of the number of hours that it has taken to purchase a home, a barrel of oil, an ounce of gold and "an S&P 500," at the prevailing hourly wage of the era.  In general a downward slope would mean that societal welfare is increasing because it would take fewer hours to buy the same good.

Financial Sector Volatility

Even though the S&P 500 was down by a little under 2% last month, and tech (as measured by XLK) was down 6.3%, financials (XLF) were up 1.8%.  For beleaguered financial investors, it's been a long time since XLF didn't lead the market to the downside.  The performance of XLF is hopefully an extremely positive sign for the markets and economy going forward.  Even a $1B lawsuit against Bank of America couldn't bring the sector down in October.

Recently volatility in the sector has all but dried up.  Below is a chart of the percent difference between the weekly high and low value of XLF going back to 2003.  During the crisis this figure was as high as 45%, but last week it was only 1.9%.

Can Sandy Boost GDP?

There seems to be some debate about how much Sandy will affect the economy.  Some think that it will provide a real boost to GDP; others are skeptical.  While it's not possible to know for certain how much will be spent specifically to rebuild from Sandy, loss estimates can help us back into an estimate of how much of a boost the storm could provide to economic activity.  If you assume that the amount of money spent to repair damages is exactly equal to the amount of economic losses, then it's pretty easy to calculate how much that would boost GDP.

Right now the estimate from insurance catastrophe modeling firm Eqecat is that Sandy caused $10-$20B worth of economic damage.  Unfortunately $20B is a small number relative to $15T in GDP--it's only 0.13%.  Even if you assume that the spending will be double or triple the losses, the amount as a percentage of GDP is relatively small.

Source: Arithmetic

Star Wars Franchise Total Worldwide Gross

Disney agreed to buy Lucasfilm for $4B yesterday, which is quite a sum for a company with effectively one franchise, or at least would be if that franchise wasn't one of the most beloved movie series of all time.

Over the course of its lifetime the Star Wars movies have grossed $4.5B worldwide not adjusted for inflation.  Disney released some other numbers to help analyze the transaction:  consumer products licensing revenue for Lucasfilm is expected to be $215m in 2012, and in 2005, the last year a film was released, EBIT was $550m.  That implies about 5-8 films to make back the purchase price (depending on how much you assume they make in a non-film year).  At 1 film every 2-3 years call it a 10-15 year payback period.

Source: Box Office Mojo

NYSE Closures Due to Weather Since 1885

Today's weather related closure of the NYSE is an extremely rare event.  In fact, in 127 years the market has only been closed for the whole day due to weather 6 times, and three of those times were on Saturdays (the exchanges were open on Saturdays up until 1952).  There has only been one time, in 1888, that weather caused a multi-day closure.  For reference, there have been roughly 30,000 trading days since 1885, which makes today a black swan of its own--a four sigma event.

Below is a list of all the times that the NYSE has ever been closed or partially closed due to weather.

A list of every day that the NYSE has ever been closed can be found here.  (a lot of history in that list).

Will Sandy Affect Economic Data?

With Sandy shutting down much of the east coast today, it's likely that there will be some effect on economic data, but it's tough to say how much until the storm actually hits.  Typically initial jobless claims can be one of the more sensitive indicators to week to week variance.  In 2005 Katrina caused a clear spike in the national numbers, although I don't think anyone expects Sandy to cause anything close to the damage that Katrina did.

4 Wk Moving Average

A Weekend of Abnormal Weather

While you all on the east coast will be bracing yourselves for a snow-hurricane this weekend, we in Los Angeles will be "enjoying" 90 degree weather.  It's true that LA is often warm year round, but it's not usually this warm.  We are in the midst of a Santa Ana wind cycle, when warm winds blow through the city spiking temperatures with a dry heat in the middle of Fall and Winter.

When I was in high school, I took an English exam on a Joan Didion essay about Santa Ana winds, which has always stuck with me for some reason.  In the piece, Didion writes that the winds make people do crazy things en-mass.

As market participants, none of us should be a stranger to watching people do crazy things en-mass.  It's been my experience that sometimes the best explanation for crazy behavior is simply that there's something in the air.  I'll let Didion handle the rest:

There is something uneasy in the Los Angeles air this afternoon, some unnatural stillness, some tension. What it means is that tonight a Santa Ana will begin to blow, a hot wind from the northeast whining down through the Cajon and San Gorgonio Passes, blowing up sand storms out along Route 66, drying the hills and the nerves to flash point. For a few days now we will see smoke back in the canyons, and hear sirens in the night. I have neither heard nor read that a Santa Ana is due, but I know it, and almost everyone I have seen today knows it too. We know it because we feel it. The baby frets. The maid sulks. I rekindle a waning argument with the telephone company, then cut my losses and lie down, given over to whatever it is in the air. To live with the Santa Ana is to accept, consciously or unconsciously, a deeply mechanistic view of human behavior.

I recall being told, when I first moved to Los Angeles and was living on an isolated beach, that the Indians would throw themselves into the sea when the bad wind blew. I could see why. The Pacific turned ominously glossy during a Santa Ana period, and one woke in the night troubled not only by the peacocks screaming in the olive trees but by the eerie absence of surf. The heart was surreal. The sky had a yellow cast, the kind of light sometimes called “earthquake weather.” My only neighbor would not come out of her house for days, and there were no lights at night, and her husband roamed the place with a machete. One day he would tell me that he had heard a trespasser, the next a rattlesnake.

“On nights like that,” Raymond Chandler once wrote about the Santa Ana, “every booze party ends in a fight. Meek little wives feel the edge of the carving knife and study their husbands’ necks. Anything can happen.” That was the kind of wind it was. I did not know then that there was any basis for the effect it had on all of us, but it turns out to be another of those cases in which science bears out folk wisdom. The Santa Ana, which is named for one of the canyons it rushes through, is a foehn wind, like the foehn of Austria and Switzerland and the hamsin of Israel. There are a number of persistent malevolent winds, perhaps the best known of which are the mistral of France and the Mediterranean sirocco, but a foehn wind has distinct characteristics: it occurs on the leeward slope of a mountain range and, although the air begins as a cold mass, it is warmed as it comes down the mountain and appears finally as a hot dry wind. Whenever and wherever foehn blows, doctors hear about headaches and nausea and allergies, about “nervousness,” about “depression.” In Los Angeles some teachers do not attempt to conduct formal classes during a Santa Ana, because the children become unmanageable. In Switzerland the suicide rate goes up during the foehn, and in the courts of some Swiss cantons the wind is considered a mitigating circumstance for crime. Surgeons are said to watch the wind, because blood does not clot normally during a foehn. A few years ago an Israeli physicist discovered that not only during such winds, but for the ten or twelve hours which precede them, the air carries an unusually high ratio of positive to negative ions. No one seems to know exactly why that should be; some talk about friction and others suggest solar disturbances. In any case the positive ions are there, and what an excess of positive ions does, in the simplest terms, is make people unhappy. One cannot get much more mechanistic than that.