So tomorrow, DeVry will replace General Motors. Now didn't General Motors just report a loss of $6 billion for the first quarter? And what's General Motors market cap? $500 million?
So why should General Motors reduce the earnings in the S&P 500 in the first quarter by $6 billion when it only has a $500 million market cap?
In the piece below, I gave a number of 24.6X earnings. That's just an adjusted PE of 12. The $40 in earnings in the S&P at year end, (40 X 24.6=984) versus the $82 of operating earnings of the S&P (82 X 12=984) are equivalent, but not on Wall Street, but it is on real life.
What isn't equivalent is the S&P methodology of computing earnings, while disregarding market cap.
I've made that adjustment, in my piece below, but I can't stand being wonkish, but I did it already in my head.
Now isn't GM getting kicked out of the Dow also? Let's look at that index, and the divisor, but I'll use an example for clarity.
For the sake of simplicity lets compute an index like the Dow with 30 stocks, and an index value of 3000. Each stock is at 100, thus the divisor is 1. (30x100=3,000). Now let's say stock A runs up to 300, and and the other 29 stocks stay at 100. The index is now at 3200. Stock A's increase added 200 points to the index. Now stock A splits 3 for 1 at 300, and goes back to 100. The divisor on the 30 stocks now increases to 1.066 to make up for A's two for 1 split. What happens if stock A now goes to zero from 100? The Index drops 107 points to 3093-the 100 points stock A falls, X the divisor of 1.066. Thus you have created 93 points in your index, even though a company in the index is now worthless!
So think about that tomorrow, when GM gets booted, and when you have those who say the S&P is overvalued.