Shall TSLA be added to S&P500? (out of main)

[Fact Checking]

Question:

How did you come up with the > 0.9 probability? Study of past S&P 500 inclusion event and the companies ER (+ve EPS by summing last 4 quarter EPS)?

Yes, the S&P 500 inclusion rules are unambiguously defined by S&P committee, the most important of which is that the sum of the GAAP income of last 4 quarters must be positive, and the last quarter must show profit.

If Tesla's Q1'19 is profitable, then Tesla will very likely meet all the criteria and will be included in the S&P 500.

​

 

[lklundin]

Here's my reading of the S&P 500 inclusion rules and schedules (subject to a chance of me being wrong):

Tesla will be added to the S&P 500 in four months, at end of May, on the next scheduled quarterly meeting of the S&P committee after the early May Q1 ER results of Tesla are announced.

The index inclusion would be announced at around around June 3 (Monday), after trading closes. But the event will be priced in after the Q1 ER.

TSLA will be added to the S&P 500 with the scheduled June rebalancing of the S&P 500 index: beginning on 2019/6/14 and fully in effect by 2019/6/24.

Current probability of this happening: higher than 90%.

The early April production and deliveries report is going to increase this probability to 99%.

In my understanding, the S&P500 index is administrated by a commercial entity, basically a rating agency.

Considering past experience with TSLA in the US financial markets, I think there is some risk that TSLA's inclusion in the S&P500 index will be subject to some additional, undisclosed requirements that will in effect delay its inclusion.

Or can we really assume that the process of inclusion is completely objectuive?

 

[mongo]

Yes, the S&P 500 inclusion rules are unambiguously defined by S&P committee, the most important of which is that the sum of the GAAP income of last 4 quarters must be positive, and the last quarter must show profit.

If Tesla's Q1'19 is profitable, then Tesla will very likely meet all the criteria and will be included in the S&P 500.

​

(Unless you forgot the sarcasm tag)

NO NO NO NO NO
Dang it @Fact Checking , I expect better from you.
The rules are 'should' be profitable in the last quarter and 'should' be profitable over the sum of the last four.
Now I'm second guessing whether your scheduled meeting times were correct (since I've never come across timing like that). Edit: timings are on page 25 for the 1,500 (500, 400 mid, 600 small) :

S&P 1500 Composite Indices. Changes to index composition are made on an as-needed basis. There is no scheduled reconstitution. Rather, changes in response to corporate actions and market developments can be made at any time. Constituent changes are typically announced one to five days before they are scheduled to be implemented. Announcements are available to the public via our Web site, www.spdji.com, before or at the same time they are available to clients or the affected companies

.

I suppose it hasn't been posted yet in this year's thread, but most Google links, including Investopedia, are WRONG!

https://us.spindices.com/documents/methodologies/methodology-sp-us-indices.pdf



Check (I think it was) Twitter, it wasn't 4 quarters profitable. Edit: ignore this, it was 4 quarter sum profitable, but not all four quarters were profitable. Different logic case.

 

[mongo]

Here's my reading of the S&P 500 inclusion rules and schedules (subject to a chance of me being wrong):

Tesla will be added to the S&P 500 in four months, at end of May, on the next scheduled quarterly meeting of the S&P committee after the early May Q1 ER results of Tesla are announced.

The index inclusion would be announced at around around June 3 (Monday), after trading closes. But the event will be priced in after the Q1 ER.

TSLA will be added to the S&P 500 with the scheduled June rebalancing of the S&P 500 index: beginning on 2019/6/14 and fully in effect by 2019/6/24.

Current probability of this happening: higher than 90%.

The early April production and deliveries report is going to increase this probability to 99%.

Direct reply (since I've reedited my previous post way too many times and many have already read old versions)
S&P 500 rebalancing is not scheduled.

S&P 1500 Composite Indices. Changes to index composition are made on an as-needed basis. There is no scheduled reconstitution. Rather, changes in response to corporate actions and market developments can be made at any time. Constituent changes are typically announced one to five days before they are scheduled to be implemented. Announcements are available to the public via our Web site, www.spdji.com, before or at the same time they are available to clients or the affected companies

See page 25:
https://us.spindices.com/documents/methodologies/methodology-sp-us-indices.pdf

The 1,500 is the S&P 500, S&P MidCap 400, and S&P Small Cap 600.

 

[Fact Checking]

Check (I think it was) Twitter, it wasn't 4 quarters profitable.

Twitter wasn't profitable in all 4 consecutive quarters but the sum and the final quarter was.

We seem to be making the same argument AFAICS - exactly what are you disagreeing about? I'm genuinely curious, I think there must be a misunderstanding.

Edit: this post by @Ellec is what I'm relying on:

TSLA Market Action: 2018 Investor Roundtable​

 

[mongo]

Twitter wasn't profitable in all 4 consecutive quarters but the sum and the final quarter was.

We seem to be making the same argument AFAICS - exactly what are you disagreeing about? I'm genuinely curious, I think there must be a misunderstanding.

Ah, you're right that TWTR was proof that all 4 need not be profitable, my bad.

What I'm reacting to is this:

Yes, the S&P 500 inclusion rules are unambiguously defined by S&P committee, the most important of which is that the sum of the GAAP income of last 4 quarters must be positive, and the last quarter must show profit.

That is incorrect.
So either I missed a negation somewhere, or this stupid virus I'm home with for the third day is messing with my logic center...
(Plus the inclusion timing is not correct per my reading)

 

[Fact Checking]

S&P 500 rebalancing is not scheduled.

Edit: @mongo is right - I was confusing re-balancing dates with inclusion dates. Index inclusion dates are up to the discretion of the S&P committee and are not predictable. If we take the Twitter example then they met the eligibility criteria with Q1'2018 ER announced late April, and the S&P 500 inclusion was announced on June 4th, effective June 7th. But there's no guarantee that the same schedule would be followed for Tesla.

I was pasting those dates from the (proposed) 2019 index rebalancing schedule by the S&P committee:

https://us.spindices.com/documents/...y-index-rebalancing-schedule-consultation.pdf.

https://us.spindices.com/documents/...ancing-calendar-2018.xlsx?force_download=true
​

There's also this trading calendar by the NASDAQ:

https://www.nasdaq.net/PublicPages/assets/MyMID/Trade_Calendar_2019.pdf​

Note the yellow rectangles for March 15, June 21, September 20 and December 20, all marked: "S&P Indexes Rebalance S&P 500, S&P 400, and S&P 600"

Are those all wrong, or should be interpreted differently?

(Note: since these events are only 4 months away, I think they are very relevant to $TSLA investor discussions and price action.)

 

[mongo]

I was pasting those dates from the (proposed) 2019 index rebalancing schedule by the SP committee:

https://us.spindices.com/documents/...y-index-rebalancing-schedule-consultation.pdf.

https://us.spindices.com/documents/...ancing-calendar-2018.xlsx?force_download=true
​

There's also this trading calendar by the NASDAQ:

https://www.nasdaq.net/PublicPages/assets/MyMID/Trade_Calendar_2019.pdf​

Note the yellow rectangles for March 15, June 21, September 20 and December 20, all marked: "S&P Indexes Rebalance S&P 500, S&P 400, and S&P 600"

Are those all wrong, or should be interpreted differently?

Those links are all for rebalancing (shifting percentage of each stock in the 400, 500, and 600), they are not related to inclusion/ removal from the 1,500.
See the two different sections from page 25:

 

[Fact Checking]

Ah, you're right that TWTR was proof that all 4 need not be profitable, my bad.

What I'm reacting to is this:

Yes, the S&P 500 inclusion rules are unambiguously defined by S&P committee, the most important of which is that the sum of the GAAP income of last 4 quarters must be positive, and the last quarter must show profit.

That is incorrect.
So either I missed a negation somewhere, or this stupid virus I'm home with for the third day is messing with my logic center...

I see, so I think the 'should' in the S&P committees is in the 'standards specification' sense - i.e. a required property, a 'must':

should
verb

1. used to indicate obligation, duty, or correctness, [...]​

It's not in the probability sense. The S&P 500 committee's actions seem to confirm that: I don't think there's any recent precedent of them deviating from those rules?

 

[Dynastar]

The best part of SP500 inclusion is I won't have to read any more discussions about how you get added to the index (for about the 500th time).

 

[Fact Checking]

Those links are all for rebalancing (shifting percentage of each stock in the 400, 500, and 600), they are not related to inclusion/ removal from the 1,500.

So inclusion is basically discretionary, whenever the S&P committee decides that a company has met inclusion criteria?

Good to know, and thanks for the correction!

Twitter is the closest analog: they posted their Q1 2018 results close to when Tesla posted their results - and the S&P committee announced inclusion on June 4th after the close of markets, effective June 7th:

"Twitter About to Be Even More Ubiquitous With S&P 500 Add"​

Agreed?

Is there any precedent of unusually long delay for inclusion, or unusually fast inclusion? I.e. how good is the Twitter precedent in your opinion?

 

[mongo]

I see, so I think the 'should' in the S&P committees is in the 'standards specification' sense - i.e. a required property, a 'must':

should
verb

1. used to indicate obligation, duty, or correctness, [...]​

It's not in the probability sense. The S&P 500 committee's actions seem to confirm that: I don't think there's any recent precedent of them deviating from those rules?

(For comedic effect)
Oh no!
You did not just go into a 'standards language' argument with a programmer who worked in automotive!!
That would require 'shall' not 'should' (I prefer 'may' to better denote possibility, but not requirement) .

If they meant shall, not should, their spec is poor, and ambiguous....

http://asq.org/standards-shall-should
Iso:
Using the correct terms – Shall, Will, Should

 

[mongo]

So inclusion is basically discretionary, whenever the S&P committee decides that a company has met inclusion criteria?

Good to know, and thanks for the correction!

Twitter is the closest analog: they posted their Q1 2018 results close to when Tesla posted their results - and the S&P committee announced inclusion on June 4th after the close of markets, effective June 7th:

"Twitter About to Be Even More Ubiquitous With S&P 500 Add"​

Agreed?

Is there any precedent of unusually long delay for inclusion, or unusually fast inclusion? I.e. how good is the Twitter precedent in your opinion?

Their circus, their elephants?

I have zero, zilch, nada, no, none, zip, nill, null real world knowledge of inclusion timing, I just run programs...

(Crawling back in cave now....)
@Dynastar: I have one job

 

[Fact Checking]

(For comedic effect)
Oh no!
You did not just go into a 'standards language' argument with a programmer who worked in automotive!!

LOL.

So I mis-remembered the shall/should difference, and maintain that in this financial document the 'should' denotes 'shall':

That would require 'shall' not 'should' (I prefer 'may' to better denote possibility, but not requirement) .

I still maintain my point that the 'should' implies obligation - is there any precedent of the S&P committee departing from key eligibility criteria in recent inclusion decisions?

 

[mongo]

LOL.

So I mis-remembered the shall/should difference, and maintain that in this financial document the 'should' denotes 'shall':



I still maintain my point that the 'should' implies obligation - is there any precedent of the S&P committee departing from key eligibility criteria in recent inclusion decisions?

Should does indeed imply a guideline (but not a requirement).
Like I said, I have no historical data, but I also think it's rare to have large market cap companies with a rapid swing from the loss to profit side of things. I also don't know why they would add a stock after a bad quarter. They wrote themselves flexibility, but it's up to them whether they use it.

I do believe there is a hole in the 500 currently, so they may be willing to use the discretion to fill it now rather than in another 3 months. What they would not want is to be the situation of being forced to delist a recent addition (that is purely discretionary though).

 

[jbcarioca]

LOL.

So I mis-remembered the shall/should difference, and maintain that in this financial document the 'should' denotes 'shall':



I still maintain my point that the 'should' implies obligation - is there any precedent of the S&P committee departing from key eligibility criteria in recent inclusion decisions?

Anybody who's developed commercial loan agreement covenants, for example, is acutely aware of teh critical difference between 'should' and 'shall'. The former connotes general intent, but not absolute obligation. e.g. "the subsidiary should maintain acid test ratio above xxx". The latter indicates legal obligation to perform. "the subsidiary shall maintain an acid test ration of xxx". In the former case the parent can so, "so sorry, conditions changed". In the latter they'll be forced to pay up or face losing legal action.

Anyway, we need to remember that the 'rules' for inclusion/exclusion regarding any market index are subject to change without any recourse, so long as the change is disclosed to users of the product. That especially will apply to timing of any given change. We're worrying over a gnat. TSLA will be in if Q1 is profitable enough to make the four quarters profitable. If not, not. Close but not be much- they're in; close but not quite positive for Q1 or the four- they're not yet in.

Is that not the realistic expectation?

 

[mongo]

Anybody who's developed commercial loan agreement covenants, for example, is acutely aware of teh critical difference between 'should' and 'shall'. The former connotes general intent, but not absolute obligation. e.g. "the subsidiary should maintain acid test ratio above xxx". The latter indicates legal obligation to perform. "the subsidiary shall maintain an acid test ration of xxx". In the former case the parent can so, "so sorry, conditions changed". In the latter they'll be forced to pay up or face losing legal action.

Anyway, we need to remember that the 'rules' for inclusion/exclusion regarding any market index are subject to change without any recourse, so long as the change is disclosed to users of the product. That especially will apply to timing of any given change. We're worrying over a gnat. TSLA will be in if Q1 is profitable enough to make the four quarters profitable. If not, not. Close but not be much- they're in; close but not quite positive for Q1 or the four- they're not yet in.

Is that not the realistic expectation?

For a rising stock (expected to continue that way), would it not be in the S&P's best interest to add as soon as feasible to get their index the most gains?
3 quarters each profitable plus sum of 4 quarters less negative than most recent quarter and a hole to fill seems like a go for it...
(Two really good quarters might too).

 

[Fact Checking]

That especially will apply to timing of any given change. We're worrying over a gnat. TSLA will be in if Q1 is profitable enough to make the four quarters profitable. If not, not. Close but not be much- they're in; close but not quite positive for Q1 or the four- they're not yet in.

Is that not the realistic expectation?

That expectations is what I suggested as well.

The 'should' can also be seen as a legalistic chicken word that allows them to depart from their own guidance in case some firm's results are really borderline and they feel uneasy about including it.

I don't think Tesla's results will be borderline.

Note that it's not just about Q1, but technically, if Tesla posts +$1.25b of profit in Q4 they could be eligible straight away. (I hope @mongo agrees.)

That's a low probability event though: it requires a ZEV windfall (which seems unlikely given the limited size of the ZEV credits markets), and probably requires recognition of a lot of deferred revenue as well, which they were historically recognizing in much smaller amounts.

 

[Fact Checking]

3 quarters each profitable plus sum of 4 quarters less negative than most recent quarter and a hole to fill seems like a go for it...

I don't think there's much doubt that Q4 will be profitable and Q1 will probably be more profitable than Q3.

Q2'18 had a net loss of -$718m, Q3'18 was +$312m. I have no doubt that Q4+Q1 is going to generate more profit than +$406m.

I don't think the S&P committee will depart from their posted rules if Tesla misses the eligibility criteria: Tesla is important to us, but to the S&P committee it's just one company out of thousands - and even in the S&P 500 context it's one company out of 500.

 

[mongo]

I don't think there's much doubt that Q4 will be profitable and Q1 will probably be more profitable than Q3.

Q2'18 had a net loss of -$718m, Q3'18 was +$312m. I have no doubt that Q4+Q1 is going to generate more profit than +$406m.

I don't think the S&P committee will depart from their posted rules if Tesla misses the eligibility criteria: Tesla is important to us, but to the S&P committee it's just one company out of thousands - and even in the S&P 500 context it's one company out of 500.

Indeed! I was still carrying Q1 '18 in my total .

EDIT: (I was also thinking if 2018 together was less negative than Q4 is positive, so if Q4 is > $613 million, that might encourage early inclusion)

Note that it's not just about Q1, but technically, if Tesla posts +$1.25b of profit in Q4 they could be eligible straight away. (I hope @mongo agrees.)

Sure.
Although, **technically**, they can add TSLA anyway (specs/wording are/is dangerous, that why real estate agents hate engineers. "That's not what it says", "but that's what they mean", "but that's not what's written"..

Is it market time yet???