Is it the S&P 500, the S&P 498, or the S&P 381?

As expected, Standard and Poor's announced Tuesday that Fannie Mae (FNM) and Freddie Mac (FRE) would be removed from the S&P 500 effective September 10th after the close.  In their place, Salesforce.com (CRM) and Fastenal (FAST) will be added after the close on September 12th.  Besides the fact that the additions will not take place until two days after the two stocks being removed will be taken out (Will it be the S&P 498 for two days?), there are other inconsistencies with the reasoning surrounding the removals.

In its press release, Standard and Poor's said that both FNM and FRE were being removed because they no longer fulfilled the $5 billion market cap requirement for inclusion in the index.  With market caps of $1.04 billion for FNM and $0.57 billion for FRE, that's all well and good. 

However, there are currently three other stocks in the S&P 500 that have lower market caps than FNM.  They are CIEN ($1.05 bln), DDS ($1.00 bln), and MTG ($0.93 bln).  Why are they still in the index?  Is S&P expecting them to go up 500% in the coming days? 

In fact, if S&P were to strictly enforce its $5 billion threshold for inclusion in the S&P 500, there would be 119 companies that are currently in the index that would have to be booted -- making it the S&P 381.

Comments

[Did U Think...:]

Very interesting point. The indices are selectively enforcing their own arbitrary rules. I think the entire finanical sector of the US is one big Ponzi scheme which struts around putting on aires. Its only real claim to fame is that it has a better PR organization than other pump and dump schemes.

2008 Sep 11 12:55 AM

[Ricard:]

Well, I think Frannie were removed because they no longer have a viable path to return to the 5 billion mark. Also, there are restrictions on share price, which resulted in the reverse splits of CIEN and JDSU.

The rules may seem arbitrary, but that is part of the process of using one's judgement. If it was some sort of algorithm, you would see more swaps of the index components, enough so to make it meaningless as a barometer.

2008 Sep 11 02:42 AM