This is not going to be a pleasant topic, but by now we are all probably more than used to unpleasant economic topics. The Dow Jones Industrial Average may follow its trend of booting some ‘former’ key components. The DJIA is unlike other index since it is a price-weighted index, so it tends to follow actual stock prices rather than market cap-weighted index levels like the S&P. So, we have three components that are now technically at risk. These are listed by price lowest to highest.
General Motors Corporation (NYSE: GM) is by far the most at-risk. Witha $3.00 price, that is the lowest DJIA component price now. As you sawin the S&P downgrade of Ford (NYSE: F), there are concerns it may go out of business.
Citigroup, Inc. (NYSE: C) is next in line. Last week it seemed fine,but now the doubt and selling has taken the financial supermarket downto under $5.00. We think this has gone way too far, but there areliterally ZERO rewards for defending any companies at all right now.
Alcoa, Inc. (NYSE: AA) may be next in line, but it also has seen such adramatic drop that you wonder how long that will last for a majorindustrial. With a 13% drop again today, what is the use in defendingit? None.
If you think that bringing this up this is financial blasphemy, thisjust happened with American International Group (NYSE: AIG) and we speculated the same on them with a list of possible replacements. The DJIAalso makes changes and it might not just send every company to the showers based upon price alone. We feel like the index needs topreserve some integrity and allow the market to sort some of this out,but it is unfair to expect an index to stick with companies which maynot exist.
It looks on the surface like the S&P 500 has some dilemmas of itsown. Based upon market caps and prices, something to the tune ofalmost 100 companies might not qualify. The good news is that theremight not be enough replacements for them to get the boot.
The good news is that this causes no major problems with the companies. At least not anything besides yet more nasty PR for the companies to deal with.
Jon C. Ogg
November 20, 2008