« Readings 02/25/09 | Main | Obama: Why Do the Markets Hate Me So? »

Latest Stories

• Obama: Why Do the Markets Hate me So?
• Jeremy Siegel Reinvents S&P 500 -- Declares it Cheap
• Readings 02/25/09
• An Hour with Morgan Stanley's John Mack
• Blast From the Stock Market Past

February 25, 2009

Jeremy Siegel Reinvents S&P 500 -- Declares it Cheap

A WSJ OpEd by Jeremy "stocks for the long run" Siegel today is a little nutty. In essence he argues that the S&P 500 is cheap(er) if you weight earnings by market capitalization, instead of simply including them in the quarterly totals without regard to the percentage of S&P market capitalization made up by the company.

This is a permabull program for  emphasizing good times and de-emphasizing bad times. It is always tilting toward making things appear cheap after the fact when stocks have declined/advanced (ex post), rather than being an accurate measure of the overall health of the companies in the index as constituted (ex ante).

To be marginally more charitable, at the very least Siegel should have recalculated the series over history to show what his new cap-weighted earnings multiple would look like. Trotting out a single adjusted figure with no context of what cheap now means in S&P 2.0 Siegel-world is meaningless.

Here is Siegel:

As the fourth-quarter earnings season draws to a close, there are an estimated 80 companies in the S&P 500 with 2008 losses totaling about $240 billion. Under S&P's methodology, these firms are subtracting more than $27 per share from index earnings although they represent only 6.4% of weight in the index. S&P's unweighted methodology produces a dismal estimate of $39.73 for aggregate earnings last year.

If one applies market weights to each firm's earnings using the same procedure that S&P employs to compute returns, the results yield a more accurate view of the current profit picture. Market weights produce a reported earnings estimate of $71.10 for 2008 -- nearly 80% higher than the unweighted procedure. The reason for this stark difference is that the firms with huge losses generally have extremely low market values and hence have a much smaller impact on the total earnings in the index.

Feel free to explain why Siegel's right, of course. I think he's mad.

Sphere It   |   Digg it   |   Bookmark it   |   Stumble it   |   Facebook it