Mercury Rising 鳯女

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Archive for July 14th, 2010

Factoid of the day

Posted by Charles II on July 14, 2010

The illusion of the ever-rising market. David Rosenberg, Gluskin Sheff (free subscription):

Just cleaning the failures out of the system and erasing them from the S&P 500, from WaMu, to Wachovia, to Bear Stearns, to Lehman, to Fannie and Freddie, and replacing them with companies that survived, was responsible for nearly 40% of the rally in the market off the 2009 lows. Think about that, if those firms who went under were still in the index, according to some help from a strategy friend at an aforementioned bank, the S&P 500 would be trading closer to 900 today than 1,100.

This is an interesting point. We think of stock market indices as representing the value of the companies in the market. As long as the composition of the index changes only rarely, that’s a reasonable representation. The unending line upward of the markets looks like a sure bet, as long as the investor only keeps faith in the miracle of the market.

But that is to some degree an illusion. Sometimes companies simply go bankrupt or are permanently damaged. Wealth is destroyed. Yet the index is simply adjusted to bring in companies that are healthy. It’s the gambler’s disease: counting up every dime of one’s winnings, while ignoring the losses. But is the problem as large as Rosenberg thinks?

Statistically, readjusting the index probably (almost) valid. The S&P is 500 companies in a much bigger pond [1]. If one patch of the pond becomes impossible to sample, one should be able to re-sample elsewhere. By the time companies are removed from the index, most of their value is gone.

By Rosenberg’s calculation, the procedure introduces no more than a 20% error in the index value. By my calculation, it’s much smaller. Here’s why: When Rosenberg says that the re-jiggering of the index represents 40% of the rally, he’s saying it represents roughly 173 points on the S&P. At today’s valuation, that’s roughly $2T. That number is not plausible, since it would represent at least 10% of the pre-crash value of the entire market. The total market cap of all companies removed from the S&P from 11/06-12/1/08 was on the order of $76B; those removed after the crash began is perhaps half of that. Fannie and Freddie represented less than $2B in combined market cap. I don’t have precise figures, but as a SWAG, Fannie and Freddie had lost at least 80% and perhaps 90% of their value prior to removal from the S&P. So, my guess is that the error introduced by re-jiggering is on the order of $50B/$13T, or about 4% of present market cap. That represents 44 points, or about 10% of the rally.

Were much larger companies removed from the index after 12/1/08? There were adjustments, no question. In December, 2008, Merrill Lynch was acquired by Bank of America (and therefore did not vanish from the index, but was included in Bank of America’s performance; Wachovia was similarly taken over by Wells). So in both of those cases, the weightings of the two were lessened, but did not vanish. Others, however, may have actually been removed. I have skimmed the S&P announcements of adjustments, but have made no calculations.


[1] Total market cap prior to the crash was on the order of $50T. The S&P 500 presently have a market cap of about $13T. If, say, 5% of those companies were removed from the index, that represents, by SWAG, $650B. By contrast, the value of the S&P fell by more than 50%, or very roughly $6.5T. The drop in market cap due to the crash is much larger than the drop in value of 5% of the companies.


Posted in stock market | 2 Comments »

Guess What? Most American Jews Reject Neoconism And Likudniks

Posted by Phoenix Woman on July 14, 2010

As Glenn Greenwald points out in his piece on how Marc Thiessen is lying about American Jews.

The question is, will anyone in the mainstream press now call Thiessen on his lies?

Posted in neocons, Republicans, Republicans acting badly, Republicans as cancer, rightwing moral cripples | 1 Comment »

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