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Doubting the Dow

I finally found something I’ve been meaning to look up for some time: The current weighting of the DJIA! This became imperative today when I was shocked that the press blamed $18Bn GM for hurting the $3T index with its 6% drop.

Well, I checked it out and I am now more convinced than ever that the Dow is the most useless, overused tool on the planet!

Aside from the fact that it contains just 30 out of 8,500 stocks traded on the major exchanges and aside from the fact that it contains some of the world’s dullest companies, I now see that there is absolutely no logic to the weighting!!!

The Dow is “price weighted,” meaning that weightings are determined based on the selling price of each stock, not the value of the company. This leads to some totally ridiculous outcomes:

GM, which makes up .6% of the Dow’s market cap, has a 2.1% weighting. That means that GM disproportionately affects the Dow by a factor of 350%.

GE, my favorite market indicator, with a $373Bn market cap, makes up just 2.4% of the Dow’s daily move.

XOM ($400Bn) at 4.5% could lose $12Bn in value (-$2) and that loss would not be reflected if GM gains just $2 (+$1Bn). How does this accurately reflect the economy? I’ve said on numerous occasions that GE should be replaced by TM but this whole weighting system is insane!

PFE ($203Bn) counts for just 1.9% of the index while BA ($66Bn) counts for 5.6%.

WMT ($201Bn), who sells $360Bn worth of stuff annually, is given a 3.2% spot, not even double AA’s ($24Bn) 1.9%, who might hit $28Bn in sales if things go well.

Sharing top weighting with BA is another blast from the past – IBM ($126Bn), with a 5.6% spot. I love IBM and I think they’re a great value but they were at $83 in January and $90 in Jan ’05 and $90 in Jan ’04 and $80 in Jan ’03… what exactly are we trying to measure here?

Number three in the weightings is MMM ($57Bn), with 5.1%, 150% more than T ($123Bn) at just 2.1%. AT&T made $1.8Bn last quarter, more then 3M made in its best 2 years…

Another insult to the tech sector is INTC’s ($118Bn) 1.4% weighting as well as the unbelievable 1.8% (less than GM) given to MSFT ($277Bn). Microsoft would have to add $22Bn, more than GM’s entire market cap, to make up for GM’s 6% loss today.

In addition to all this misleading data, you can’t even trust the number you see in the morning!

According to Wikipedia:

Another issue with the Dow is that not all 30 components open at the same time in the morning. Only a few components open at the start and the posted opening price of the Dow is determined by the price of those few components that open first and the previous day’s closing price of the remaining components that haven’t opened yet; therefore, the posted opening price on the Dow will always be close to the previous day’s closing price (which can be observed by looking at Dow price history) and will never accurately reflect the true opening prices of all its components.”

So stop watching the Dow!!! I know, it’s impossible because the press treats it like it’s the entire market, but it is a flawed and nearly meaningless indicator of what is really going on in our economy.


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