Dow: The New Look

Tom: Well, two Dow components broke records…that sounds good but hold on. We are talking about General Motors and Citi. GM had a market cap under a billion dollars while Citi traded under a dollar per share. Sandra Smith joins me now, Sandra, is the Dow getting ready to give these companies the boot?

Sandra: The expectation in the market now is yes. Citigroup’s time and General Motors’s time as members of the Dow 30 is extremely limited. It’s important to know Dow Jones is owned by the same parent company as this network. We’re not privy to any changes that will happen in the Dow Industrials. The market saying Citigroup, now trading even today, Tom, trading below a dollar a share. General Motors less than a billion dollars. Changes for the Dow coming up. The expectations are for a couple others to move in. Some of the big names being talked about which would replace the financials that might move out of that, Citigroup, and possibly even Bank of America trading below $4 a share. Some are advocating Goldman potentially taking a spot as those companies move into the Dow 30…Possibly Google with its $100 billion market cap.

Tom: Then you start getting more tech heavy. And there’s already Intel and Microsoft in there?

Sandra: Yeah, Microsoft’s in there. The big question here is that where we’re going now though? What industry? Do we need a Google to be represented in the Dow? We did a sort of, you know, lightweight survey on the noon show, the web show. It turns out people are big fans of seeing Visa go in there, one of the five stocks we presented and Google was number two.”

This conversation between Tom Sullivan and Sandra Smith on Fox Business Netwrk discusses what is looking more inevitable by the day: that there is a need to retool the Dow Jones Industrial list. These 30 stocks are often regarded as a key index to gauge the market as a whole, but with certain components under extreme pressure, there will likely need to be some adjustments made. Stocks that fall under $1 threshold, as Citi (C) has recently, are often in danger of delisting from their exchange. With so many stocks falling into this category recently, those rules have temporarily been relaxed. However, the Dow 30 are supposed to be some of the strongest companies in America and having a Dow component in serious danger of becoming a “penny stock” is not something that helps its reputation.

Furthermore, General Motors (GM) market cap is less than 20% of Citi’s as they are right around the $1 billion mark. Their share price is below $2, again not an impressive stock for to be among the 30 heaviest hitters of American stocks. It is clear that these two stocks no longer meet the criteria that the Dow 30 strives for, to encompass the 30 largest and most widely held companies in America. The criticism is about more than just market caps and stock prices, these stocks have been hammered so hard that they no longer have the ability to have much effect on the Dow anymore, even if a substantial recovery were to take place. As Bespoke Investment Group pointed out recently, IBM (IBM) has about as much weight in the Dow as the bottom 9 components combined. This lopsided index is hardly giving the appropriate picture of the U.S. economy.

The stocks that are speculated to take their place are interesting as well, because these companies are certainly major players, but they are newcomers on the scene as far as the historic Dow is concerned. Visa (V) would help to retain the financial influence on the Dow, but the stock in not quite even a year old as a publicly traded stock. However, Google (GOOG) which has a longer history as a publicly traded company than Visa, was first incorporated way back in 1998. It was just last September that AIG (AIG) was replaced in the Dow by Kraft Foods (KFT). The odds are becoming better each day–as these two companies struggle–that in the very near future, this will not be your father’s Dow.

The New Look Dow Jones Industrials

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