Should Ford replace GM in the Dow?

Hi Paul,

I know this comment doesn’t go to this question, but it is the only way I see to make one to you.

I don’t have a facebook account. I don’t want a facebook account, and I will not be getting a facebook account. Comments from your newest story, in fact, do not appear, at least to me, at the bottom of your page.

I know I am but one reader and it doesn’t matter. But I just want to say that the main reason I read your column is to read and post comments. Without that, I probably wont read much. But its been fun.

Yes. GM was once a fine company but now it has went down hill with very poor mangement and decision makers in its product line which began with Roger Smith in 1980.
Ford is moving ahead and shows leadership among the auto companies of the world.

Can America become a “nation of shopkeepers” and still remain great? I don’t think so. But I also don’t think America is YET in that dire of a strait.

http://en.wikipedia.org/wiki/Nation_of_shopkeepers
http://dictionary.reference.com/browse/strait

(Dire Straits, so named because of the band’s poor financial situation) http://en.wikipedia.org/wiki/Dire_straits

Paul’s essay raises some interesting questions.

I cannot agree with those commentators whose observations suggest that auto companies are not relevant, or that other American manufacturers are no longer relevant. I think that manufacturing and the DJII are both still very relevant and critical for our standard of living.
http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average

Maybe though, the correct question is not whether the DOW should have GM or Ford or any other SINGLE auto manufacturing company in its industrial index.

Maybe the appropriate question is: should the DOW have a CLUSTER of auto companies as ONE SINGLE entry in this ‘industrial’ index of 30 ‘companies’?

I would like to see the same idea considered for other manufacturing categories. Maybe it is appropriate for other single-type-business companies (like today’s DOW pharmaceutical component companies MERCK, PFIZER, and Johnson & Johnson) to also be replaced by a pharma-clustering sub-index inside the overall DOW.

That way, there would be less pressure for any single company to be removed, since it would only be one relatively small part of this new 30-cluster DOW Index. Each ‘cluster’ could be one general subcategory of manufacturing enterprises. Almost like what makes up an ETF, an Exchange Traded Fund.

While 30 companies can continue to represent the DOW, it is more difficult IMO to defend such an approach, in these topsy-turvy times. Please let me explain why this might be so.

The benefit of 30 sub-indexes instead of 30 companies is that more companies can be represented. As well, each sub-index could be ‘weighted’ — that is, each could, at least partially, represent their overall importance, capital-wise, in the index.

That way, the underlying enterprises in their collective, could also best represent their relative importance, to America’s overall economy.

Of course, the WSJ could just invent another index and not call it the DOW. Call it DOW-C for DOW-Clustered. OK, maybe that sounds too much like dozy. Maybe S-DOW for Super-DOW is preferable.

There is an inherent problem with a stock index average that simply drops a company when it goes broke and replaces it with one that is still viable.

Such an index (say with Ford replacing GM) simply does not represent the same thing as it was representing PRIOR to the dropping of GM, especially if GM goes out of business.

When brokers show me a chart of the DOW or of the NASDAQ and show me how much money I would have made in the “long run” I know that I have to take what they say with a grain of salt.

I know that companies that have disappeared are not in the index where once before they were. I think there are only two companies in the DJII (GE and GM) that were there in 1929.

I know that unless I buy the index on my own, or via a Mutual Fund or ETF, my portfolio cannot possibly reflect the overall performance over the long run of the DJII.

I also know that the American economy is not really represented by that index.

When people lose their wealth in their GM bonds, I guarantee you, they can confirm this sad fact — that removing GM from the index and making the index “more representative of the American economy” is somewhat a falsehood. Failure too is part of reality’s mix.

http://www.nytimes.com/1997/03/13/business/dow-average-to-replace-4-stocks-to-better-reflect-the-us-economy.html

The reason of course is that such an index is not the SAME animal as it was prior to removing GM — that is, the real world did not change in a comparable way to the way the index did.

The index is what we could refer to as a Survivors’ Index. Dead Companies don’t count. But in the real world they do.

The index with the new surviving companies can go to new highs. If a 1-dollar GM-like company were still in that index, that index might not go to those new highs.

What of it, you might ask. Well, just that people have a tendency to believe the broker who claims that this index represents the real world over that period of time for which it is being shown to them.

That is simply not true. The ‘dead companies’ are not in the new index. Therefore the index cannot represent the performance of the OVERALL economy.

It is a little like saying are we in a secular bear market with an overriding (current) bull mini-market? Or are we in a real secular bull market?

Well, if you choose the DJII’s ‘performance’ to answer that question, the inherent bias will be there for you to give the second statement as your answer. (Especially if the failing companies are always being removed from the index you use for drawing your conclusions.)

But if you look around at all the GM-s you might wonder what relevance the DJII has insofar as anyone using it as a reference for answering that question — especially as to a proxy for the rest of the overall ‘real’ economy.

At least this is especially true in the short run. In the long run, if we are lucky, and technological advances continue to be made by humankind, then it may not matter.

Humankind may have the ingenuity to always continue to add to its wealth and standard of living (though I do not share in this rosy view, personally). In such a rosy case, the indexes and reality will continue to move up and ahead.

In that case it would not much matter if a few ‘creatively-destroyed’ companies were removed from the index and if surviving companies took their place.

But the more pertinent fact for responding to Paul’s question is that if we keep changing the composition of the indexes we use for measuring reality — especially in today’s ‘down’ times — since these indexes are just our proxies for economic and social ‘reality’ — we may one day have a real rude awakening as Mr. Real Reality comes by knocking at our door.

As George Bush Sr. might say, “It really behooves us to be prudent” and so it would also behoove us to take the rosy-colored eyeglasses off.

The other thing to do to make sure the index that we choose to use to measure our socio-economic reality prudently is to discount that index with an appropriate inflation deflator. That way, we will have a better view on what real improvement in living standards the economy has delivered to us.

So it is. And so it was.

We will be better placed to make meaningful decisions about correct future courses of action. We will not be as inclined to make bad investment decisions. Nor will we be as inclined to draw incorrect conclusions regarding our life’s proper path.

A new average should be created to reflect our current economy. It should include a Madoff style Ponzi scheme, a couple of marketeering/advertising agencies, Amway, a couple of motivational gurus, Wal Fart, a bond rating agency, some fake estate hucksters, AIG, Walt Disney Productions, Donald Trump, the Mafia and MS-13. Oh and consultants especially outsourcing consultants.

Who cares really? A stock prices is only worth what someone thinks it’s worth. Isn’t GM now Government Motors? I wish they would accept their stock in place of my tax dollars, what a deal!

It doesn’t matter what stock will replace GM. The DJIA will still remain useful for a technical/psychological read on the market. Why — because psychological and political reasons will influence its replacement.

…The bigger story is what will happen to GM bondholders.

No to Ford being in the Dow. Dont kid yourself if you think they are that much healthier. While GM has much history in the Dow, it does have much more extensive and global operations that Ford. And many successful operations I might add in China and Brazil. While there is no doubt big problems for GM in the U.S., I would rather see a much healther entity such as Toyota placed on the Dow before Ford.

If Dows concern is to preserve Transportation sector in DJIA, a suitable choice would be a company from Mass Transportation segment.

That is the only way DJIA can preserve its value and relevance in years to come. Mass Transportation is the future that Americans will embrace, whether they love it or not.

Ford and Toyota and the rest of automobile sector can serve the communists interests to their hearts content for all we care.

Wonder what would happen to the Dow if the Wall Street Journal ended up going out of business with the rest of the newspaper industry? An how would that affect the markets? Just mental floss.

I say take them all off the Dow, and let them earn their way back on it!

Leave GM in the Dow.
It can be a helpful reminder that the value of a stock is not its market price, but the long run earnings which come from producing a valuable product. What a quaint idea.

Sybil, the Dow Jones Industrial Average doesn’t really represent anything, to be honest. It’s a number generated by adding the price per share of 30 stocks seleceted by the editors of the Wall Street Journal and dividing by a number that is something like 0.000345 (it has been adjusted many times for splits and companies entering/leacing the DJIA). I think it started off as a straight average of prices. Since it’s not weighted by size of the company a $0.10 drop in share price of GM (smallest company in the average)counts just as much as a $0.10 drop in share price of ExxonMobil (the largest).

The S&P 500 is a much better gauge of overall market performance – it takes the 500 largest companies and generates a weighted average of their share price based upon market capitalization.

I guess it depends on just what the DOW represents.

I’ll tell you, I can’t figure it out anymore. Nothing real it seems. It (so I am led to understand) does not generally indicate the over all performance of US stocks, it does not represent the performance of the economy at large. In fact, it doesn’t seem to even represent the health or profitability of the companies listed in it.

So I don’t think it matters who they put in it or why they do it. It isn’t just a sham any more. It is only a mere shadow of the sham(e) it once was. Heck, it hardly qualifies as a joke anymore.

Who cares? What strikes me as ominous is that GM has to come to an agreement with auto workers and creditors. Creditors do not want to face the commissars but the unions will probably prefer the deal that the government will hand over to them in contravention of banckruptcy, securities, and contract law. So it seems that GM has no way out. There is certainly a lot of nostalgic attatchment with the company and its longtime Dow status. So much of what made this country great is being destroyed. Welcome to the chicken—- new world.

GM aka ‘Government Motors’ has to go from the Dow. If we are going to try to stay kapitalist, we should not have government companies in the stock market indexes (Russia and China).

F is a good choice to replace GM. Once F completes the shedding of retiree health care to MediCare and employee health care to the new national program, it will be competitive with the Japanese and Europeans(who offer neither of these benefits to US employees). They still need to finish winding down their pension plan (neither the Japanese nor Europeans offer these to US employees), moving it over to 401k or IRA or something equivalent, getting the program off of Ford’s books and back.

If it’s not Ford, we should look at a different industrial company, maybe one of the major truck manufacturers:
PACCAR [PCAR] $11.8 B Market Cap
NAVISTAR [NAV] $2.8 B Market Cap

The makeup of the DOW is entirely subjective. A bunch of journalists sit around and decide who is in and who is out. We can speculate on what the implicit requiremwnts are for inclusion of the DOW. A likely requirement is that a company has to be a going concern. Another is that a large number of investors care what the share price of a company is. GM may not meet either of these requirements right now. On the other hand Ford seems to meet them and probably will for some time. When demand for new cars comes back Ford, with its new found reputation for quality and emphahsis on smaller cars could be well positioned to capture a bigger share of the market.

Paul, I know you said that readers should not glibly dismiss the DOW as irrelavant, but I can’t help but remind people of its rooots and limitations. It was deviseed long before computers as a quick and dirty way to estimate the movement in the market, specifically the New York Stock Exchange. It is so mired in tradtion that it has not been changed to do a better job as new technologies came along. It was never designed to be a measure of the economy and it certainly does a poor job of doing so. Just look at the recent run up even as other indicators show things getting worse.

Does the DOW “need” an auto component? Since there are no rules it doesn’t need anything. Would it be a better measure of the stock market with an auto component? The answer to that would require detailed analysis of historical data. I doubt very much sucha nalysis will be done before the decision to dump GM and maybe add Ford is made.

One of the automakers should be in the Dow because the company is a huge customer of iron/steel, aluminum, glass, plastic .. and products other companies manufacture
for the auto industry.

And if Chevron and Exxon Mobil are on the list, so should be an auto manufacturer, after all, the automobile is their biggest customer.

If Boeing and Caterpillar are on the list, so should be an auto manufacturer. People spend more time in automobiles than they spend in airplanes, and how many people have their own backhoes, bulldozers, or graders?

If not Ford, how about Tonka (Hasbro HAS) or Matchbox (MAT). Oops, Mattel makes everything in China now. And sells through Wal-Mart.

The DOW needs autos to represent that business sector. Chrysler is owned by the unions and GM will be owned by the Federal Government before long, so the only US auto company left of any size is Ford. Is there any choice??

No They Should NOT add/Replace GM with Ford on the DOW…
Reason: The Bankruptcy of GM / Chrysler will have Negative impacts to Ford…and its stock value…IN turn…this will bring the DOW valuation down lower…Which in turn will not be a very good confidence booster for the overall stock market and overall economy.

It would be very much appreciated by investors worldwide that the ‘Dow’ actually had some relation to economic reality, not sentimentality.

The only reason any car company belongs in the DJIA at this point is if they are required by law to have a car company or a newspaper company…

I think it’s time to remove representation from an archaic industry (and the US automobile industry is very quickly becoming mostly irrelevant, despite what the politicians are saying) and replace them with a company that is representative of the way things are going – Google.

While we’re at it, let’s drop Citi and replace it with Amazon – the leader in e-commerce being far more relevant to the index than a struggling company with a failed business model in an already over-represented sector

No auto company in the Dow!!! Has the U.S. fallen so far? We can’t be a service company only nation, I feel we need to have the auto industry represented or we may as well just sell off the rest of our manufacturing to some foreign entity and give up.