Wry & Dry

Wall Street trickery*

W&D has always marvelled at how God created Man from nothing.  Wonderful stuff.  Until, of course, the prototype got tempted in the Garden of Eden – but that’s another story.

And so W&D is impressed with modern financial engineering that also creates something from nothing.  Well, seems to...   

Trickery

Work with W&D on this.  The S&P500 is the most widely used benchmark of the performance of American companies, being, more or less, the performance of the 500 largest companies listed in stock exchanges in America.  And these companies make up about three quarters of the market capitalisation of all US companies.  

So, when analysts compile data about the S&P500, the outcomes are closely watched. 

When the total revenues of S&P500 companies rise or fall, the data is important.  It tells a story of the state of the US economy – and to a lesser extent of the global economy.  In the first quarter of 2016 S&P500 companies' revenues fell 1.6% from the corresponding period last year.

But, really, it’s not that good.  Or, in Trump-speak, it’s as bad as hell.

The reason is that if two companies in the S&P500 merge, their revenues are merged.  and the number of companies in the index goes down from 500 to 499.  So another company is added to the 500.   And its revenues are now added to the S&P500's revenues, but without any net effect on the economy.

So far in 2016, 12 companies have been added to the S&P500, eight to replace companies acquired by other companies within the 500; and four to replace those demoted because of falling market capitalisation.

The 12 added companies brought in $16.5 billion of revenues in the quarter.   The four that left took out $10.4 billion.  Leaving a net $6.1 billion of added revenues in the S&P500 without anything extra being sold.  Nothing changed in the economy.

So, when W&D hears that the S&P500’s revenues have risen, his response will be of two words. 

*  W&D thanks Wolf Richter of wolfstreet.com for the inspiration and data for this story.