It’s America’s most exclusive club.
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You’ve got to be an A-Lister to get through the door.
Using your salad fork when you should have selected your dessert fork can get you booted.
The Dow Jones Industrial Average (DJIA) is theoretically comprised of the 30 largest and most successful companies in America. It’s the showcase of American business prowess.
If you’re on it, the world is your oyster. If you’re not, you’re munching chopped liver.
Today, two mainstays of this elite guild were given their walking papers.
The editors of the Wall Street Journal – the folks who decide who runs with the in-crowd – dropped General Motors and Citigroup from their registry. They were replaced with Cisco Systems and the Travelers Cos.
Founded in 1896 by Wall Street Journal editor Charles Dow, the list was initially 12 strong. It included industrial concerns only. Of the original dozen that counted U.S. Leather, U.S. Rubber and American Sugar in its circle, only General Electric remains.
Glimpsing History
A brief perusal of all the companies that once encompassed the Dow is a snapshot of American industrial history, and the changes that have ensued over the last century.
Giants of yesteryear like Chevron, Goodyear, Sears and Union Carbide have all been shown the door. Some of the most recent additions have been Bank of America and Kraft Foods, both in 2008. General Motors has been a Dow company since 1925.
With the current inclusion of only 30 stocks, several critics argue that the DJIA is not a very accurate representation of the overall market performance even though it is the most cited and most widely recognized of the stock market indices.
Additionally, the DJIA is criticized for being a price-weighted average, which gives relatively higher-priced stocks more influence over the average than their lower-priced counterparts, but takes no account of the relative size or market capitalization of the components.
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For example, a $1 increase in a lower-priced stock can be negated by a $1 decrease in a much higher priced stock, even though the first stock experienced a larger percentage change. In addition, a $1 move in the smallest component of the DJIA has the same effect as a $1 move in the largest component of the index.
As of March, IBM was the highest priced stock in the index and, as a result, it had the greatest influence on it. Many critics of the Dow recommend the float-adjusted, market-value weighted S&P 500 or even the Dow Jones Wilshire 5000 — the latter of which includes all U.S. securities with readily available prices — as better indicators of the U.S. market.
Their Exit Line
Clearly, G.M. and Citigroup were sent packing because the stock of each has lost more than 90 percent during the past year. General Motors committed the ultimate faux pas by declaring itself bankrupt.
Both companies are a microcosm of the current economic crisis. Their collective fall from grace is a case study in corporate myopia and emblematic of an inability of American businesses to adapt to the changing conditions of the world economy.
Until last year, Citigroup was the world’s largest financial company. It is now being replaced by Travelers, a firm jettisoned in 2002. As a consequence of the federal bail assistance received by G.M. and Citigroup, when the dust clears, both will be largely owned and controlled by the U.S. taxpayer.
In its bankruptcy filing, G.M. reported $82.3 billion in assets and $172.8 billion in debt. The U.S. government will bankroll the transformation of the 100-year-old automaker, a victim of tumbling sales and higher gas prices. The federal government plans to convert much of its $50 billion of loans to a 60 percent stake in the new entity.
Of all the major banks that participated in the TARP bailout, only Citigroup will stumble into the clutches of the U.S. government. According to recent press statements, Citigroup Chief Executive Officer Vikram Pandit now plans to convert $25 billion of government-held preferred shares into a 34 percent voting stake in the company.
Although the immediate financial pain associated with the implosion of these two former icons has been and will continue to be deeply felt, in the greater scheme of American industrial history, neither will likely rank more than a footnote.
Ten years from now, when the economy is in the midst of another financial pickle, the editors of the Journal will once again assemble behind closed doors and decide who’s in and who’s out. Next time, even General Electric could fall prey
to their axe.
As the late Groucho Marx was often fond of saying, “I wouldn’t want to join any club that would have me as member.”
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
