The last time I did a detailed calculation of the level of intangible value in the S&P 500 was in the dark days of March 2009. I did not realize it at the time, but my analysis was done the bottom of the market (8 March 2009 was the low point). So it is high time I looked at the composition of market value again.
Here is the latest data (figures as at January 8 2010):
- Aggregate market capitalization of the S&P 500: $10.7 trillion
- Aggregate book value of the S&P 500: $4.8 trillion
- Aggregate tangible book value of the S&P 500: $2.1 trillion
A couple of points are worth noting:
- Tangible book value represents only 20% of market value (2.1/10.7)
- Declared intangible assets now represent a larger proportion of book value than tangible assets ($2.7 trillion vs $2.1 trillion)
- The aggregate value of balance sheet assets (both tangible and intangbile) accounts for less than 45% of market value (4.8/10.7)
So the big question is “what explains the other 55% of market value?”
There are two ways to close the gap between the balance sheet and market value:
- Restate balance sheet assets to show their market value rather than their book value (currently assets are shown at the lower of historic cost or net realizable value) – otherwise known as “marking to market”
- Include resources that are clearly responsible for generating value for companies but that do not meet the accounting definition of an asset (“a resource controlled by the enterprise”) and so are not eligible to appear on the balance sheet
The answer to the 55% question is a mix of the two. I will develop this argument further in subsequent blog posts.
