If the number of large capitalization stocks is dropping due to a falling stock market, what can be done? Change the definition of "large cap." That is exactly what S&P is doing.

According to MarketWatch, "For large-cap stocks, reflected by the S&P 500, the value was cut to $3 billion from $4 billion. The S&P set the $4 billion mark on September 25." That makes for two revisions in three months. If the market keeps falling, perhaps that number could drop to $2 billion.

Why move the goal posts? Perhaps because some S&P indexes are based on the definition of large cap. Perhaps it makes people who invest in large cap stocks feel better.

Changing the definition may actually hurt some investors. There are still plenty of companies that have market caps above $4 billion or even $5 billion. There is a sense that the stocks in these firms are "safer" than other equities. A company that has been dragged below the $3 billion threshold may be a company with a stock that has dropped faster than the market in general or it may be a company that has a falling cash balance. A firm with $1 billion of cash on its balance sheet is more likely to have a market cap of over $3 billion than a company that has $200 million. Being a large cap stock actually means something, even if it is only by having balance sheet that is likely to be healthier than many others.

The S&P action will probably confuse some investors in an already confusing market. What is a large cap stock? Whatever S&P says it is.

Douglas A. McIntyre is an editor at 24/7 Wall St.

What is a large cap stock? S&P changes the guidelines originally appeared on BloggingStocks on Mon, 22 Dec 2008 12:29:00 EST. Please see our terms for use of feeds.

CNNMoney reports that McGraw-Hill Co.'s (NYSE: MHP) Standard & Poor's (S&P) forecasts the possibility of a $1 trillion bailout of Federal National Mortgage (NYSE: FNM) and Federal Home Loan Mortgage (NYSE: FRE) -- government sponsored purchasers of pools of loans which package them into securities. Specifically, S&P forecasts that a bailout of these two -- known as Fannie Mae and Freddie Mac -- would cost -- in a worst case scenario -- between $420 billion and $1.1 trillion of taxpayer's money. This would represent several times the $250 billion Savings & Loan bailout by the first President Bush.

It's a bit ironic for S&P to be issuing this report. After all, it was among the ratings agencies that contributed to the problem in the first place. As I posted last August, the ratings agencies competed for enormous fees from investment banks to put their AAA ratings on issues of mortgage-backed securities (MBS). Those AAA ratings caused naive MBS buyers to skip the kind of detailed analysis of their purchases that might have stopped the flow of dumb money into the MBS bubble that is now putting Fannie and Freddie at risk.

How did S&P arrive at this scary conclusion? Both companies are forecast to report more losses this year due to declining home prices and rising mortgage defaults. And according to Yale professor, Robert Schiller, "The real fundamental problem is real estate prices have been falling and they might fall substantially more. The Office of Federal Housing Enterprise Oversight (OFHEO) and Fannie and Freddie never considered the possibility of a massive real estate correction."

Continue reading Is a trillion bailout of Fannie/Freddie imminent?

Is a trillion bailout of Fannie/Freddie imminent? originally appeared on BloggingStocks on Tue, 22 Apr 2008 09:57:00 EST. Please see our terms for use of feeds.

SEC requested to ramp up ratings regulation originally appeared on BloggingStocks on Wed, 16 Apr 2008 08:50:00 EST. Please see our terms for use of feeds.

I'm looking at my screen and I rub my eyes. Could it be? On the left-hand column I read a headline, "Slowing Economy Spurs Bond Rally." Over there in the side bar is the cute box that shows the Dow Jones Industrial Average and the S&P 500. The chart spikes peppily. "11610.55" is the bright number next to DJIA. "1330.60" reads the S&P 500 -- its five-year high. [Update: at market close, the S&P 500 had hit a brand-new five-year high of 1336.34, with the DJIA at its 2006 high and second-highest close ever, 16669.39.] The world is full of bright, happy green that seems to belie the sad economic data, the slow in advertising, the doom for American autos.

Could it be true?

It seems as if it is. One one side we have the DJIA and the S&P 500. The Dow's all-time high is 11,750 (140 90-ish points away), while the all-time closing high is only 11,722 (that's 111.45 52.61 points away from right now, if you're counting along with me). The S&P is raring to go, as well, creeping ever so slowly up towards its all-time high of 1,552 (although it's still 222 215 points away, 16.6% 16.1%). Strikingly, the current level is higher than the index has been for five-and-a-half years.

And yet, still, economy slumps, slows, dips, weakens. Why are consumers so confident, why are investors eagerly buying up stocks, while the rest of the indicators seem to warn them away? I've searched my brain for a creative answer, and can't discover one. What do you think?

Dow, S&P near all-time highs while economy slumps. Why? originally appeared on BloggingStocks on Tue, 26 Sep 2006 17:37:00 EST. Please see our terms for use of feeds.