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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: James F. Hopkins who wrote (22097)	7/22/1998 9:02:00 PM
From: Vitas	Read Replies (1) \| Respond to of 94695

Jim, they are reading your posts and not giving you proper credit! by Worden Brothers . . . Tuesday, July 21, 1998 TIPS & HINTS (Tuesday, July 21, 1998, 4:00 P.M., ET) The Standard & Poor's 500 is weighted according to market capitalization. If, for example, a stock has a market cap twice the size that of another, it is weighted twice as heavily in calculating the average. Obviously, the rationale for this technique is that larger companies should be given more influence than smaller companies. It makes sense. However, statistics are prone to go awry and mislead, no matter how sensible the basis. Suspecting that stocks with high market caps may be leading the S&P around by the nose, we used the power of Version 4 to do a little detective work. We sorted the 500 components by market cap. We then created a separate list of all those whose market cap ranked in the 99th percentile among all stocks. There were 58 of them. We sorted these by their PE ratios and found the median PE to be 25.7. We then created a separate list of the 58 components with the smallest market caps. The median PE for these turned out to be 15.45. This little experiment, of course, showed us that the stocks at the upper end of the 500 - the ones with the greatest influence on the average - are selling at much higher PEs than those at the bottom end. This is true, incidentally, even though those at the bottom end are themselves high cap stocks, averaging in the 86th percentile among all stocks. But those at the top, in the 99th percentile, have the power to move the average. Here is what we find particularly peculiar, though. The upper ranks of the S&P 500 are studded with companies that are not really very large. That is, in terms of annual revenue many of them don't rank nearly so high. The reason that they exert so much influence in the S&P 500 average is that they sell at high PEs. Market cap is the number of shares outstanding times the price. Since the price is inflated, so is the market cap. A company like Microsoft is nowhere near the size of General Electric, but in market cap MSFT ranks a close second to GE. MSFT, you see, sports a PE over 70, twice that of GE. Stocks such as Cisco (PE 113), Dell Computer (PE 81), Worldcom (PE 300+) and Lucent (PE 181+) wag the S&P 500, not because they are truly the highest capitalized, but because they are truly absurdly priced. And the more absurdly priced they become, the more power they wield. They, in fact, become the market. p.s. has anybody got the close for the Russell 2000 for the last three days handy? does anybody know the TC2000 symbol for the Hang Seng? Vitas