Dow Jones Boots GM, Citibank

By: Daniel Carty
Topics: Stock Market

(AP Photo/Paul Sancya)

Two perennial corporate titans are being replaced on Wall Street's best-known market barometer.

Dow Jones is pushing out newly bankrupt automaker General Motors and financial giant Citigroup from its industrials index in favor of Cisco Systems and Travelers Companies, Inc., respectively.

The move will be effective June 8 and reflects the two companies' turbulent recent history.

General Motors' removal is based on its bankruptcy filing Monday, which "immediately disqualifies a stock regardless of a company's history or its role as a cultural icon," said Robert Thompson, managing editor for the Wall Street Journal and editor-in-chief for Dow Jones, in a statement.

Thompson cited Citigroup's restructuring, which involves a large government stake, in the decision to replace the bank. Thompson indicated the move may have come earlier, if not for the turmoil plaguing the financial markets since the fall. He left the door open for Citigroup to reenter the index after its restructuring.

Travelers' addition is intended to give the financial sector greater representation after the loss of Citi and AIG, which was removed last year. Cisco's presence is a nod to the importance to communications and computer networking in the economy.

Dow Jones said that changes would not cause any "disruption in the level of the index."

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by cbsblogger June 1, 2009 9:04 PM EDT: Contrary to popular belief, the Dow is not a good indicator of the health of the overall market. The "experts" love to cite how great the return rate of the Dow is over the years, when trying to sell people on the stock market. The truth is, Dow companies that under-perform get replaced all the time. This gives a much more optimistic picture of the stock market than it really is.
Posted by incog-nito at 1:29 PM : Jun 1, 2009
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Exactly. The weak companies are replaced by strong companies which causes the Dow to rise as it did today. It is a variable index of a relatively few companies whose makeup has changed throughout the years and the result has distorted the real market gains. It is a promotional and advertising gimmick of Wall Street intended to keep the huddled masses interested.; Reply to this comment


by jackp32 June 1, 2009 4:51 PM EDT: Dumping those 2 has been long overdue.; Reply to this comment


by richhong June 1, 2009 12:42 PM EDT: The Dow Jones Index is up 200+ points today. Because the GM and Citi dogs have been replaced by more "viable" companies???
Posted by WayAround at 8:38 AM : Jun 1, 2009

The replacement is effective NEXT Monday, June 8. The change isn't even in place. Almost nobody trades the DJIA index per se, so a change in the index isn't a reason for the component stocks to be advancing.

And look at GM itself. It is up 15% today.

Today's rally is a continuing case of investors believing that the worst is over. GM's bankruptcy was factored in months ago. Actually having it happen appears to be causing optimism.; Reply to this comment


by kphx June 1, 2009 12:19 PM EDT: Oh you lost all your money on the company that we were touting about. No worries. We got more new companies for you. Invest all your money in these now, if you have anything left. See our index is always good.; Reply to this comment


by WayAround June 1, 2009 11:38 AM EDT: I understand everyone's responses (though I'm not sure you understood the intent of my original message--I'm an old man who has been investing on the markets for 30+ years).

The Dow Jones Index is up 200+ points today. Because the GM and Citi dogs have been replaced by more "viable" companies???; Reply to this comment


by antoniof123 June 1, 2009 11:00 AM EDT: Take 33 unrelated stocks and you will receive appromixtly the average return of the market. You can not continuly beat the return of the market and if the market is down and you have found something that is not (think).

Remember the old rule if it sounds too good to be true it is.; Reply to this comment


by richhong June 1, 2009 10:54 AM EDT: What value does the Dow Jones Index have when its components can be manipulated at any time?
Posted by WayAround at 7:21 AM : Jun 1, 2009

The components have always been substituted at times. If they weren't, the index would be meaningless. The stocks are substituted and the divisor adjusted so that the index itself remains stable. The fact of dying companies is accounted in that the index reflected their death as the stock price dragged the index all the way down. Mathematically, the best thing for the DJIA would be to keep GM in it, because it can only drop another 75 cents per share.

75 years ago, the index included such companies as American Smelting, International Nickel and Nash Motors. What value would the DJIA be if they were still in it?; Reply to this comment


by stinkygeez18 June 1, 2009 10:47 AM EDT: The Dow Jones is computed from the stock prices of 30 of the largest and most widely held public companies in the United States. When a company no longer fits this definition, it is removed. This makes perfect sense and the system clearly has merit. Should companies remain in the average if they no longer exist?; Reply to this comment


by panacam June 1, 2009 10:43 AM EDT: What value does the Dow Jones Index have when its components can be manipulated at any time?
Posted by WayAround at 7:21 AM : Jun 1, 2009

The companies in the DJIA have to be healthy in order to have a qualified average. GM's stock is below $1 which now makes it a "penny stock" , not qualified for DJ averaging. The same is true for Citi. DJ has done this many times over the years, replacing one company for another. as companies disappear or go bust. However, they hold onto their averaging companies for as long as they can otherwise like you said, it will not represent a clear picture of the financial market.; Reply to this comment


by WayAround June 1, 2009 10:21 AM EDT: "Dow Jones Boots GM, Citibank"

Then the index has no merit.

The Dow Jones Index should reflect the current state of affairs in the U.S. equities markets specifically and in the U.S. economy overall. If two components of the index are dying, then the index should show it, NOT sweep these companies under the carpet.

What value does the Dow Jones Index have when its components can be manipulated at any time?; Reply to this comment