Dow Jones Boots GM, Citibank
(AP Photo/Paul Sancya)
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."
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.
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.
The Dow Jones Index is up 200+ points today. Because the GM and Citi dogs have been replaced by more "viable" companies???
Remember the old rule if it sounds too good to be true it is.
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?
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.
- by WayAround June 1, 2009 10:21 AM EDT
- "Dow Jones Boots GM, Citibank"
- Reply to this comment
See all 11 CommentsThen 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?