Stock Preacher

The revival of markets for bonds backed by auto and credit card debts is expected to be underscored today when the US Federal Reserve reveals details of its latest loans to investors in asset-backed securities. The Fed offers cheap funding every month to investors in such bonds under its term asset-backed securities loan facility (Talf), an emergency measure meant to support the markets through which hundreds of billions of dollars in consumer loans are financed. This month, Fed funding will be available for investors considering buying US$12B in eligible asset-backed securities sold by the likes of American Express, Bank of America, General Electric, Nissan and Ford. Read more

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General Electric is looking to sell its security business, which makes alarms, surveillance systems and other safety products, and hopes to attract bids in the range of US$2Bfor the unit. The US conglomerate has received preliminary indications of interest from rival manufacturers looking at the unit, and is now working towards securing another round of more definitive bids. The move to sell part or all of GE Security – one of more than a dozen business units at the manufacturing conglomerate – represents a step in GE’s effort to exit lines of business that are not key to its operations. GE Security builds fire, safety and security systems and other products for homes, offices and the government. The selling process is being managed by JPMorgan has drawn interest from GE’s rivals in the security sector such as United Technologies, Tyco and Germany’s Robert Bosch GmBH. Security assets have historically lured private equity buyers, but a combination of the difficult financing environment and an expressed interest by GE in selling the assets to a strategic buyer could hamper any buyout effort. GE, known for making products ranging from light bulbs to washing machines, has particularly suffered lately from its exposure to the financial services industry, but it is not the only manufacturing conglomerate looking to shed non-core assets.

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General Electric cut its quarterly dividend for the first time since 1938, marking a reversal of the conglomerate’s repeated defense of the pay-out and an admission that the severity of the financial crisis defies its expectations. GE plans to slash the quarterly dividend to 10 cents a share from 31 cents, beginning in the second half of this year. The move, which will save the company US$9B annually, ends months of speculation about the pay-out’s fate and could serve to assuage investors’ concerns for its finance arm, GE Capital.

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Yesterday the DJIA had the biggest pointgainer in 112 yrs and the fifth largest percentage gainer in its storied history after several weeks of forced and panic selling.

Many of you have e-mailed me letting me know that you are tracking the DJIA as never before, and have asked to give a brief overview of the Dow Jones Industrial Average, what it is made of, what it indicates, etc. It is clear that many folks do not know the basics, so here you go, as follows;

The DJIA index is made of 30 of the biggest U.S. companies and is set up as a calculated measure of stock market performance. Today it is the world’s most famous and watched stock market index.

The Dow, as it has come to be known (there is also Dow Transports, Dow Utilities and Dow Theory), is the oldest continuing U.S. market index; it measures the combined stock values of 30 Big U.S. companies known as the “Blue Chips.”

We do not find any Transports or Utilities in the Dow Industrials, but it is interesting to note that in 1999 the industrial’s only tradition was broken when Intel (INTC) and Microsoft (MSFT) were added. This marked the first time that a NASDAQ (non-NYSE) traded stock became a member of the DJIA.

Started on May 26, 1896 by financial reporter Charles Dow, at its inception It started with 12 companies, including now-defunct companies like U.S. Leather Co. and Tennessee Coal, Iron and Railroad Co and and was priced at $40.94  It is interesting to note that the only original component still around is General Electric Company (GE).

Today the Dow Industrials has expanded to 30 components and reflects the U.S. economy’s move from big industrial companies to  include big financial companies like Citigroup Inc., technology bellwether IBM Corp. and drug manufacturer Pfizer Inc. (Financials, Technology and Drugs: healthcare).

The Dow Industrial index today is made up of these big US companies: 3M, Alcoa, American Express, AT&T, Bank of America, Boeing, Caterpillar, Chevron, Citigroup, Coca-Cola, DuPont, ExxonMobil, General Electric, General Motors, Hewlett-Packard, Home Depot, Intel, IBM, Johnson & Johnson, JPMorgan Chase, Kraft Foods, McDonald’s, Merck, Microsoft, Pfizer, Procter & Gamble, United Technologies, Verizon Communications, Wal-Mart and Walt Disney.

In the beginning the DJIA was simple: Charles Dow, when he complied the index back in 1896, originally took the price of one share of each company’s stock, added the numbers up and divided by the number of companies.

Thus the average when the index launched was $40.94: these pale compared to today’s 1000 pt surge to close at 9,387.61, or its record closing high of 14,165.43 on Oct. 9, 2007 just a year ago.

The way the DJIA is calculated today by the Dow Jones & Co. is by a mathematical formula to adjust for things like stock splits, i.e., when a company doubles the number of stocks its shareholders have, splitting the price of each in half, or new companies being added or removed.

The formula is a way to keep the index consistent over time and to make sure today’s value can be compared in a meaningful way to what it was in years past.

This is done mathematically by changing the “divisor”, a number that is divided into the total of the 30 stock prices. That divisor today is 0.122820114.

Next, the index utilized what is termed a “price-weighted average,” meaning expensive stocks have more weight (influence) over the number than lower-priced issues. This is done because the index is based purely on the US Dollar value of the stocks in the index, i.e., a high-priced share goes up/down (move) 20% is a larger dollar increase than a cheaper share’s 20% move.

For example: when we note the drop in the price of General Motors last week, we also know that it did not have a huge effect on the Dow because the automaker’s stock is already low. The stock fell $2.15, or 31 percent, on Thursday but only lowered the Dow by 17.1 points. Therefore, GM’s drag was small on day when the index plunged 679 points.

Some of you have asked me if the DJIA is a good measure of how the US companies are doing in the market, overall.

The answer is that some folks on Wall Street downplay the importance of the average because it is not as broad a measure as the Standard & Poor’s 500 index, which measures the performance of 500 NYSE companies stocks.

But once again, the Dow is the patriarch of all U.S. market indexes, and it presents an simplified snapshot of how the market is performing up or down.

Most analysts that I know believe it is a very good tool when combined with the other market indicators, including the S&P 500 and the NAS composite, an index of shares on the tech-heavy NASDAQ stock market. You will often see these indexes go up and down together percentage wise as you saw today.

Dow
9,387.61                       +936.42                     +11.08%
Nasdaq
1,844.25                       +194.74                     +11.81%
S&P 500
1,003.35                       +104.13                     +11.58%

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