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The All-Time-High In The Dow Jones Industrial Average Is A Hoax

Tyler Durden's picture




 

Authored by Wim Grommen ( @DowDivisor30 ), via The Burning Platform blog,

The Dow Jones Industrial Average (DJIA) Index is the only stock market index that covers both the second and the third industrial revolution. Calculating share indexes such as the Dow Jones Industrial Average and showing this index in a historical graph is a useful way to show which phase the industrial revolution is in. Changes in the DJIA shares basket, changes in the formula and stock splits during the take-off phase and acceleration phase of industrial revolutions are perfect transition-indicators. The similarities of these indicators during the last two revolutions are fascinating, but also a reason for concern. In fact the graph of the DJIA is a classic example of fictional truth, a hoax.

Transitions

Every production phase, civilization or other human invention goes through a so called transformation process. Transitions are social transformation processes that cover at least one generation. In this article I will use one such transition to demonstrate the position of our present civilization and its possible effect on stock exchange rates.

A transition has the following characteristics:

  • it involves a structural change of civilization or a complex subsystem of our civilization
  • it shows technological, economical, ecological, socio cultural and institutional changes at different levels that influence and enhance each other
  • it is the result of slow changes (changes in supplies) and fast dynamics (flows)

A transition process is not fixed from the start because during the transition processes will adapt to the new situation. A transition is not dogmatic.

Four transition phases

In general transitions can be seen to go through the S curve and we can distinguish four phases (see fig. 1):

  • a pre development phase of a dynamic balance in which the present status does not visibly change
  • a take off phase in which the process of change starts because of changes in the system
  • an acceleration phase in which visible structural changes take place through an accumulation of socio cultural, economical, ecological and institutional changes influencing each other; in this phase we see collective learning processes, diffusion and processes of embedding
  • a stabilization phase in which the speed of sociological change slows down and a new dynamic balance is achieved through learning

A product life cycle also goes through an S curve. In that case there is a fifth phase:

  • the degeneration phase in which cost rises because of over capacity and the producer will finally withdraw from the market.


Figure 1. The S curve of a transition
Four phases in a transition best visualized by means of an S curve:
Pre-development, Take-off, Acceleration, Stabilization.

When we look back into the past we see three transitions, also called industrial revolutions, taking place with far-reaching effect :

  1. The first industrial revolution (1780 until circa 1850); the steam engine
  2. The second industrial revolution (1870 until circa 1930); electricity, oil and the car
  3. The third industrial revolution (1950 until ….); computer and microprocessor

Dow Jones Industrial Average (DJIA)

The Dow Index was first published in 1896 when it consisted of just 12 constituents and was a simple price average index in which the sum total value of the shares of the 12 constituents were simply divided by 12. As such those shares with the highest prices had the greatest influence on the movements of the index as a whole. In 1916 the Dow 12 became the Dow 20 with four companies being removed from the original twelve and twelve new companies being added. In October, 1928 the Dow 20 became the Dow 30 but the calculation of the index was changed to be the sum of the value of the shares of the 30 constituents divided by what is known as the Dow Divisor.

While the inclusion of the Dow Divisor may have seemed totally straightforward it was – and still is – anything but! Why so? Because every time the number of, or specific constituent, companies change in the index any comparison of the new index value with the old index value is impossible to make with any validity whatsoever. It is like comparing the taste of a cocktail of fruits when the number of different fruits and their distinctive flavours – keep changing. Let me explain the aforementioned as it relates to the Dow.

The False Appreciation of the Dow Explained

On the other hand, companies in the take-off or acceleration phase are added to the index. This greatly increases the chances that the index will always continue to advance rather than decline. In fact, the manner in which the Dow index is maintained actually creates a kind of pyramid scheme! All goes well as long as companies are added that are in their take-off or acceleration phase in place of companies in their stabilization or degeneration phase.

On October 1st, 1928, when the Dow was enlarged to 30 constituents, the calculation formula for the index was changed to take into account the fact that the shares of companies in the Index split on occasion. It was determined that, to allow the value of the Index to remain constant, the sum total of the share values of the 30 constituent companies would be divided by 16.67 ( called the Dow Divisor) as opposed to the previous 30.

On October 1st, 1928 the sum value of the shares of the 30 constituents of the Dow 30 was $3,984 which was then divided by 16.67 rather than 30 thereby generating an index value of 239 (3984 divided by 16.67) instead of 132.8 (3984 divided by 30) representing an increase of 80% overnight!! This action had the affect of putting dramatically more importance on the absolute dollar changes of those shares with the greatest price changes. But it didn’t stop there!

On September, 1929 the Dow divisor was adjusted yet again. This time it was reduced even further down to 10.47 as a way of better accounting for the change in the deletion and addition of constituents back in October, 1928 which, in effect, increased the October 1st, 1928 index value to 380.5 from the original 132.8 for a paper increase of 186.5%!!! From September, 1929 onwards (at least for a while) this “adjustment” had the affect – and I repeat myself – of putting even that much more importance on the absolute dollar changes of those shares with the greatest changes.

How the Dow Divisor Contributed to the Crash of ‘29

From the above analyses/explanation it is evident that the dramatic “adjustments” to the Dow Divisor (coupled with the addition/deletion of constituent companies according to which transition phase they were in) were major contributors to the dramatic increase in the Dow from 1920 until October 1929 and the following dramatic decrease in the Dow 30 from then until 1932 notwithstanding the economic conditions of the time as well.

Dow Jones Industrial Index is a Hoax

In many graphs the y-axis is a fixed unit, such as kg, meter, liter or euro. In the graphs showing the stock exchange values, this also seems to be the case because the unit shows a number of points. However, this is far from true! An index point is not a fixed unit in time and does not have any historical significance. An index is calculated on the basis of a set of shares. Every index has its own formula and the formula gives the number of points of the index. Unfortunately many people attach a lot of value to these graphs which are, however, very deceptive.

An index is calculated on the basis of a set of shares. Every index has its own formula and the formula results in the number of points of the index. However, this set of shares changes regularly. For a new period the value is based on a different set of shares. It is very strange that these different sets of shares are represented as the same unit. In less than ten years twelve of the thirty companies (i.e. 40%) in the Dow Jones were replaced. Over a period of sixteen years, twenty companies were replaced, a figure of 67%. This meant that over a very short period we were left comparing a basket of today’s apples with a basket of yesterday’s pears.

Even more disturbing is the fact that with every change in the set of shares used to calculate the number of points, the formula also changes. This is done because the index, which is the result of two different sets of shares at the moment the set is changed, must be the same for both sets at that point in time. The index graphs must be continuous lines. For example, the Dow Jones is calculated by adding the shares and dividing the result by a number. Because of changes in the set of shares and the splitting of shares the divider changes continuously. At the moment the divider is 0.15571590501117 but in 1985 this number was higher than 1. An index point in two periods of time is therefore calculated in different ways:

Dow1985 = (x1 + x2 +..+x30) / 1

Dow2014 = (x1 + x2 +.. + x30) / 0.15571590501117

In the 1990s many shares were split. To make sure the result of the calculation remained the same both the number of shares and the divider changed. An increase in share value of 1 dollar of the set of shares in 2014 results is 6.4 times more points than in 1985. The fact that in the 1990s many shares were split is probably the cause of the exponential growth of the Dow Jones index. At the moment the Dow is at 16,437 points. If we used the 1985 formula it would be at 2,559 points.

The most remarkable characteristic is of course the constantly changing set of shares. Generally speaking, the companies that are removed from the set are in a stabilization or degeneration phase. Companies in a take off phase or acceleration phase are added to the set. This greatly increases the chance that the index will rise rather than go down. This is obvious, especially when this is done during the acceleration phase of a transition. From 1980 onward 7 ICT companies (3M, AT&T, Cisco, HP, IBM, Intel, Microsoft), the engines of the latest revolution and 5 financial institutions, which always play an important role in every transition, were added to the Dow Jones.

Changes in the Dow, stock splits, and the value of the Dow Divisor after the market crash of 1929

Figure 2 Exchange rates of Dow Jones during the latest two industrial revolutions. During the last few years the rate increases have accelerated enormously.

Overview from 1997 : 20 winners in – 20 losers out, a figure of 67%

September 23, 2013: Hewlett – Packard Co., Bank of America Inc. and Alcoa Inc. will replaced by Goldman Sachs Group Inc., Nike Inc. and Visa Inc.?Alcoa has dropped from $40 in 2007 to $8.08. Hewlett- Packard Co. has dropped from $50 in 2010 to $22.36.

 

Bank of America has dropped from $50 in 2007 to $14.48.?But Goldman Sachs Group Inc., Nike Inc. and Visa Inc. have risen 25%, 27% and 18% respectively in 2013.

 

September 20, 2012: UnitedHealth Group Inc. (UNH) replaces Kraft Foods Inc.?Kraft Foods Inc. was split into two companies and was therefore deemed less representative so no longer suitable for the Dow. The share value of UnitedHealth Group Inc. had risen for two years before inclusion in the Dow by 53%.

 

June 8, 2009: Cisco and Travelers replaced Citigroup and General Motors.? Citigroup and General Motors have received billions of dollars of U.S. government money to survive and were not representative of the Dow.

 

September 22, 2008: Kraft Foods Inc. replaced American International Group. ?American International Group was replaced after the decision of the government to take a 79.9% stake in the insurance giant. AIG was narrowly saved from destruction by an emergency loan from the Fed.

 

February 19, 2008: Bank of America Corp. and Chevron Corp. replaced Altria Group Inc. and Honeywell International.?Altria was split into two companies and was deemed no longer suitable for the Dow.? Honeywell was removed from the Dow because the role of industrial companies in the U.S. stock market in the recent years had declined and Honeywell had the smallest sales and profits among the participants in the Dow.

 

April 8, 2004: Verizon Communications Inc., American International Group Inc. and Pfizer Inc. replace AT & T Corp., Eastman Kodak Co. and International Paper.?AIG shares had increased over 387% in the previous decade and Pfizer had an increase of more than 675& behind it. Shares of AT & T and Kodak, on the other hand, had decreases of more than 40% in the past decade and were therefore removed from the Dow.

 

November 1, 1999: Microsoft Corporation, Intel Corporation, SBC Communications and Home Depot Incorporated replaced Chevron Corporation, Goodyear Tire & Rubber Company, Union Carbide Corporation and Sears Roebuck.

 

March 17, 1997: Travelers Group, Hewlett-Packard Company, Johnson & Johnson and Wal-Mart Stores Incorporated replaced Westinghouse Electric Corporation, Texaco Incorporated, Bethlehem Steel Corporation and Woolworth Corporation.

Real truth and fictional truth

Is the number of points that the Dow Jones now gives us a truth or a fictional truth? ?If a fictional truth then the number of points now says absolutely nothing about the state that the economy or society is in when compared to the past. In that case a better guide would be to look at the number of people in society that use food stamps today – That is the real truth

Wim Grommen is a guest contributor to http://www.FinancialArticleSummariesToday.com, “A site/sight for sore eyes and inquisitive minds”, and www.munKNEE.com, “It’s all about MONEY” of which Lorimer Wilson is editor.

 

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Sat, 05/10/2014 - 19:50 | 4746969 So Close
So Close's picture

So you are saying it is rigged?

Sat, 05/10/2014 - 19:52 | 4746976 clooney_art
clooney_art's picture

Yup, it's rigged but people keep getting richer. Rich get richer. There is no stopping this hoax.

Sat, 05/10/2014 - 20:40 | 4747047 max2205
max2205's picture

Dont listen to these guys....just buy the new highs

Sun, 05/11/2014 - 09:34 | 4747878 Battleaxe
Battleaxe's picture

Yeah, don't listen to the naysayers. Without the DOW how would we know that the economy is so good when it appears so bad first-hand?

Sat, 05/10/2014 - 21:09 | 4747132 SAT 800
SAT 800's picture

This is an excellent example of "rigged". Psychological manipulation of people by a fraudulent and on going deliberate over-valuation of an "accepted index". Obviously, it should not be an accepted index; but to the delight of the manufacturers of mass opinon; it is.

Sat, 05/10/2014 - 21:54 | 4747264 Kirk2NCC1701
Kirk2NCC1701's picture

It's "rigged" insofar you got the "400 Club":  The Club of the year's richest 400 Families in the US. 

Being 401 doesn't cut it.  There tends to be a lot of "frothiness" (year to year change) in the 300-400 range, not so much in the sub-300 range.  The Top 40 are tight as ticks, in spite of occasional and PR-driven pretenses to the contrary.

Sun, 05/11/2014 - 03:25 | 4747641 myne
myne's picture

Time for ZH to do an "all ordinaries" index for the USA.

Or is there already one?

Sun, 05/11/2014 - 07:06 | 4747725 DavidC
DavidC's picture

In this instance, not rigged, but certainly manipulated.

DavidC

Sat, 05/10/2014 - 19:56 | 4746986 FredFlintstone
FredFlintstone's picture

So right after US industry cratered in the 1970's (and never recovered), the Industrial average took off to the moon?

Sat, 05/10/2014 - 21:05 | 4747117 NoDebt
NoDebt's picture

It's not an industrial average at all.  Hasn't been for a long time.  It's chock-full of tech and finance (including our beloved Golman Sachs).  Probably half the companies have NOTHING to do with manufacturing physical products.

The word "Industrial" is still in the name because.... well, tradition, basically.

Sat, 05/10/2014 - 21:11 | 4747134 SAT 800
SAT 800's picture

Not tradition; psychology. Human beings know instinctively that manufacturing involves value added; the name "Industrial" is treasured by the professional psychologists who advise the opinion manufacturers.

Sat, 05/10/2014 - 21:40 | 4747222 old naughty
old naughty's picture

"...took off to the moon"

why stop there?

Sun, 05/11/2014 - 14:31 | 4748466 Sokhmate
Sokhmate's picture

Cuz we only landed on the moon. Keeping with Fictional Troof an' all.

Sat, 05/10/2014 - 22:01 | 4747285 NoDebt
NoDebt's picture

Never thought about it that way, but yeah, you could be right about that.

Sun, 05/11/2014 - 09:43 | 4747888 sessinpo
sessinpo's picture

NoDebt        It's not an industrial average at all.  Hasn't been for a long time.  It's chock-full of tech and finance (including our beloved Golman Sachs).  Probably half the companies have NOTHING to do with manufacturing physical products.

The word "Industrial" is still in the name because.... well, tradition, basically.

---

Which definition of industrial are you using?

1. of, pertaining to, of the nature of, or resulting from industry: industrial production; industrial waste.
2. having many and highly developed industries: an industrial nation.  
3. engaged in an industry or industries: industrial workers.
4. of or pertaining to the workers in industries: industrial training.
5. used in industry: industrial diamonds: industrial fabrics.
Wrong. One can be industrial without being manufacturing physical products. The most basic term I think they use is the companies that are most active or prominent at the time. Thus the index changes as the economy changes from say agriculture to manufacturing and then to information. Those changes to the index to create an upward bias, which is what they want. It looks better and encourages trading (for better or worse.)
Sat, 05/10/2014 - 19:59 | 4746992 fonzannoon
fonzannoon's picture

I bet the fed would love to use food stamps as the index. They could stop worrying about rigging it because it is going parabolic on it's own.

Sat, 05/10/2014 - 20:05 | 4746998 Newsboy
Newsboy's picture

Shrinking denominator...

Diabolical!

 

Sat, 05/10/2014 - 20:18 | 4747004 cowdiddly
cowdiddly's picture

Not to mention their is only one company that is on it that is still industrial. Caterpiller, and its screwed with the price supression of mining metals. speaks volumes. Time to export some more of those likes and twitters.

And they still sell the idea that this is where to rotate your money when you want to seek safety or in a slowdown. Looks like a bunch of Nasdaq has beens in tech bubble to me.

Sun, 05/11/2014 - 09:48 | 4747905 sessinpo
sessinpo's picture

cowdiddly     Not to mention their is only one company that is on it that is still industrial. Caterpiller, and its screwed with the price supression of mining metals. speaks volumes. Time to export some more of those likes and twitters.

----

So if you are out mowing your yard, cleaning up your house, washing your car, doing repairs and maintenance on all you own, while your neighbors let their stuff decay to shit. Do you not realize you can be described as being more industrial? What are you producing? My point is there is more then one definition of industrial that so far 99% of the post on here miss.

Sat, 05/10/2014 - 20:10 | 4747005 Caviar Emptor
Caviar Emptor's picture

Tim Geithner regrets: In new book, says U.S. should have done more to save Lehman Brothers and help homeowners. http://t.co/qji1VEbxn1

Sat, 05/10/2014 - 20:39 | 4747045 I Write Code
I Write Code's picture

As if while in office he ever expressed a thought of his own, or that anyone would have listened to him if he did.  Of course that's exactly why he was selected.  That and his being Jewish, Obama loves putting Jews in any position involving finance. 

Sat, 05/10/2014 - 20:46 | 4747063 Fred Hayek
Fred Hayek's picture

So, I guess that book will be on sale at Liesthatmakemesoundbetter.com

Sat, 05/10/2014 - 20:39 | 4747044 Unknown Poster
Unknown Poster's picture

The fantasy stock team keeps changing, I can accept that. Times change. I've got grey hair and used to drive truck. In 2009-10 I had some CDs mature and felt the new yields were a ripoff, so I called a representative of the wall street casino. They gave me the speil about stocks going up 7-8% annually, on average. Apparently that wasn't totally true. Not to mention a buck doesn't buy much anymore.

Sat, 05/10/2014 - 21:14 | 4747142 SAT 800
SAT 800's picture

If you've been in the market since 2010; you've done okay; now all you have to do is get out. Right Now. Out; 100% out. then you will have done alright over the last four years and you can go into Silver which will be very good in the next four years.

Sat, 05/10/2014 - 21:43 | 4747231 Unknown Poster
Unknown Poster's picture

I didn't know shit when i jumped in, but after I started I figured I should learn something about it. I found ZH shortly after and been reading it ever since. Most of it is over my head, but I try.

My PMs used to be exclusively brass and lead, but I've diversified.

Sat, 05/10/2014 - 22:39 | 4747369 SAT 800
SAT 800's picture

Good for you; I had no way of knowing. I respect anyone who is learning and doing new things.

Sun, 05/11/2014 - 09:16 | 4747844 quasimodo
quasimodo's picture

I heard the same thing about silver four years ago, and unless you bought low and sold sub 50, it's all pops and buzzes from here pal

Sun, 05/11/2014 - 01:01 | 4747579 StychoKiller
StychoKiller's picture

Do some searches on "Single Premium Deferred Annuity" and "Tax Lien Certificates"

Sat, 05/10/2014 - 20:40 | 4747048 kchrisc
kchrisc's picture

The Dow Jones Winston Smith Average.

Sat, 05/10/2014 - 20:42 | 4747053 I Write Code
I Write Code's picture

It's a silly article, or at least it just berates the obvious.

I still like the Dow as an index. 

Mon, 05/12/2014 - 14:46 | 4751644 cooky puss
cooky puss's picture

And what about that as an index?

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2...

That's the US population on foodstamp, 45.6 million as of the end of 2011.

Bear in mind Goldman Sachs is cashing in on that:

http://www.youtube.com/watch?v=3lA016FzmYg

Have a nice day sir.

Sat, 05/10/2014 - 20:46 | 4747062 IronShield
IronShield's picture

Yeah, and as long as we see articles like this, the market continues up.

How's that saying go?  Oh yeah, "the market can be irrational far longer than you can remain solvent."

Sat, 05/10/2014 - 22:58 | 4747409 mvsjcl
mvsjcl's picture

Market? Doesn't exist. A real market is the last thing the manipulators want.

Sun, 05/11/2014 - 03:04 | 4747633 intric8
intric8's picture

The occasional flash crash also serves its purpose of alienating muppets from full participiation in the game.

Another thing i notice is that its like the market doesnt even need sheeple cash to drive equity prices up anymore. Something seems screwy about what drives price dynamics these days. No?

Sat, 05/10/2014 - 21:01 | 4747098 slightlyskeptical
slightlyskeptical's picture

This article is retarded. The index changes and shares outstanding must be accounted for.  If Apple starts at $500 splits 4 times for an equivelant value of $31.25. Then Apple should only get $31.25 towards the index?

DDM, the Dow 30 ETf,  is at all time highs, unless of course you don't want to count reinvested dividends. Just about all mutual funds are at all time highs or have been in the last few months before the momo crash and small growth (related) crash.

 "If we used the 1985 formula it would be at 2,559 points."

No if we used the 1985 formula all the stock prices in the calculation would be higher by about 5-6 times.

The sad thing is that people will read this and believe it. Stupid motherfuckers. Hate the system but don't don't let the hate change the facts.

Edited to add (and to be mean): maybe a position over at Ultracoin would be a better fit than building a name on a completely fraudulent set of facts.

Sat, 05/10/2014 - 21:04 | 4747114 Citizen Keynes
Citizen Keynes's picture

You were on the right track with your first sentence.

 

Outstanding shares are NOT accounted for in the dow, why do you think a $700 Apple is not in it?

Sat, 05/10/2014 - 21:15 | 4747144 slightlyskeptical
slightlyskeptical's picture

No the divisor accounts for the outstanding shares otherwise there would be no need for a divisor. Which all makes it much more of a market cap based index than this article would want you to believe. The proof is in the money invested long term in the market. Values have never been higher. Are you saying that my brokerage statements, account values and fund prices are all just an illusion as well?

I really thought there would be more critical thinking on this website.

Sat, 05/10/2014 - 21:35 | 4747199 Citizen Keynes
Citizen Keynes's picture

Only The Dow is fiction. The individual stock prices are fact, and should be adjusted for number of shares outstnding. The Dow does not. And some brokerages only use the FREE FLOAT of shares outstanding to calculate Indexes, not TOTAL SHS OUT. 

 

This is not an argument, its an awakening, check it out yourself.  

Sat, 05/10/2014 - 22:52 | 4747392 SmackDaddy
SmackDaddy's picture

you sum kinda abstract talkin nu yawk faggot. my dick will be real when youre choking on it.

Sat, 05/10/2014 - 21:00 | 4747102 NoDebt
NoDebt's picture

The problem with the DJIA has nothing to do with the divisor number.  It's completely irrelevant.  It's just used to keep the number from changing every time there is a stock split or a change in which companies are included in it.  In the modern era of index funds and ETFs, it would be unworkable.

The real problems with it are:

1.  It's price-weighted index (companies with higher share prices have a larger effect on the number, without respect to their market capitalization size) and....

2.  It's an actively managed index.  Who decides which companies are kept in the magic circle of 30 and which ones are put out to pasture?  Anyone, Bueller?  Bueller?  (S&P Dow Jones Indicies, owned by McGraw Hill Financial)

No index is perfect.  How about the NASDAQ?  It's weighted by market capitalization.  Which means Apple tosses it around like a rag doll.

As "statistically irrelevant" as the Dow is, it still tracks like .95 correlation with the S&P 500.  So go figure.

Sat, 05/10/2014 - 21:07 | 4747120 Citizen Keynes
Citizen Keynes's picture

It is also adjusted for dividends.  Paid and GONE those dividends, yet the divisor calculates TODAY's average.

 

COMPLETE HOAX.

Sat, 05/10/2014 - 21:10 | 4747133 NoDebt
NoDebt's picture

It is not adjusted for dividends.  Just share price.

Sat, 05/10/2014 - 21:24 | 4747139 Citizen Keynes
Citizen Keynes's picture

See WSJ http://wsj.com/mdc/public/page/2_3022-djiahourly.html they publish the weekly divisor. But that's the least of it. If each Dow stock went up $1 the index would rise by 192 pts. Calculate that for the S&P 500.

The point is, they didn't have CALCULATORS when the Dow was devised, let alone computerz that could calculate capitalizations for 500 stocks.

DOW = DINOSAUR

 

I'm kinda agreeing w/you, sorta.

Sat, 05/10/2014 - 21:56 | 4747271 NoDebt
NoDebt's picture

Link doesn't work.

For all it's shortcomings, it still tracks very closely with other more statisticially sophisticated averages.  

Sat, 05/10/2014 - 23:03 | 4747425 mvsjcl
mvsjcl's picture

Which doesn't legitimize it, but rather calls into questions all the other "statisticially sophisticated averages."

Sat, 05/10/2014 - 21:26 | 4747103 Citizen Keynes
Citizen Keynes's picture

Absolutely BRILLIANT!  The DOW Industrial Index IS a hoax, and for more mathematical reasons than the author listed. Interesting is his 1929 construct theory, yet he does not say anything about the period following. 

IF you were to list the 12 Companies comprising the Dow in 1929, and then compared that list to the 1945 list (when the Dow finally made a new high), you would see that most of the 1945 list was different from 1929.

Many companies from 1929 their stocks went to $0.00 because they went BK, kaput, out of business. Yet The Dow replaced the defunct stocks with new names, and a phoenix was born.

There is so much wrong with the 1-share computation vs. total capitalization of S&P500, I don't know where to start. If The dow weren't able to replace busted stocks, it would be at a fraction of where it is today.

PS- Putting Microsoft and Cisco in at their tops is hardly proof of being able to identify a "takeoff or acceleration" style stock. And letting BAC and AA stay in until they make their lows is equally ridiculous.

 

Great Post! I can't wait to read all the comments.

 

 

Sat, 05/10/2014 - 21:39 | 4747217 TN Jed
TN Jed's picture

That's my biggest gripe with Dow:Gold ratio talkers. What exactly are they comparing? It's like someone retelling a joke and forgetting the punchline.

Sat, 05/10/2014 - 22:45 | 4747382 SAT 800
SAT 800's picture

Exactly; it's completely absurd to discuss the history of the DOW-JONES prices. I refuse to look at charts like that; understanding as you do is a good ways towards understanding how manipulated our opinions are intended to be.

Sat, 05/10/2014 - 21:50 | 4747252 IronShield
IronShield's picture

Mom, is that you?

Sat, 05/10/2014 - 21:02 | 4747109 More_sellers_th...
More_sellers_than_buyers's picture

Enough... hey barry, your wife is hanging a sign. bring back our girls.  Let me tell you waht dickface. If i was president >>>id have the full force of American might shoved up these Boku fukwads ass.  I would never admit to it publicly... I would le the word go out.... Free the girls, and put the rest of the fuckers on a plane to crimea. Really fucker???? the most powerfull country on the face of the planet since rome and your wife says hashtsag bring our girls back? fuck you you limp piece of shit

 

Sat, 05/10/2014 - 21:07 | 4747123 More_sellers_th...
More_sellers_than_buyers's picture

All do respect

Sat, 05/10/2014 - 21:09 | 4747131 NoDebt
NoDebt's picture

Barry's still trying to figure out why the good people of Boca Raton would do such a thing.  He's DEEP in though over this situation.  DEEP.

Sat, 05/10/2014 - 21:49 | 4747230 DanDaley
DanDaley's picture

I think the term is "focused like a laser".

 

Let's remember that Hillary kept them off the terrorist list.  Barry and wifey don't want to acknowledge that this is a mohammedan thingie.

Sat, 05/10/2014 - 21:59 | 4747279 NoDebt
NoDebt's picture

Indeed.  Just like he's been focused like a laser on jobs (another of his meaningless phrases and empty promises) since early 2010, when he first uttered it.

Sat, 05/10/2014 - 21:15 | 4747146 Mitochondriac
Mitochondriac's picture

That worked so well in Vietnam, Iraq and Afghanistan.

Sat, 05/10/2014 - 21:21 | 4747160 More_sellers_th...
More_sellers_than_buyers's picture

are you telling me we cant wipe out boku harem in 10 minutes...???? What the fuck have i been paying all my tax dollars for tomahwak cruise misseles for?   I believe in one warning/// and then fuck you

 

Sat, 05/10/2014 - 22:47 | 4747387 SAT 800
SAT 800's picture

Always fire a warning shot; right in the head. The conversation can come later.

Sat, 05/10/2014 - 21:52 | 4747258 IronShield
IronShield's picture

Armchair Rambo.  You and your kids first.  And take your wife wif ya.

Sat, 05/10/2014 - 21:24 | 4747171 More_sellers_th...
More_sellers_than_buyers's picture

the world is an awfull place outside of our egg.  Hit them hard.  Those girls are better off if they make it.   If they dont... Im not god, but it will be a terrible life

Sat, 05/10/2014 - 21:47 | 4747229 Citizen Keynes
Citizen Keynes's picture

Note to author WIN:

Taking MO (and it's dividends) and its progeny out of the Dow was a tragedy.

MO + PM + MLDZ + KRFT = (your answer here).

IGNORE THE DOW.

IGNORE THE DOW. The number is irrelevant.

Its pointless to argue.

Rupert Murdoch bought it, he's the sucker.

Sat, 05/10/2014 - 22:44 | 4747379 disabledvet
disabledvet's picture

The bulk of the DJIA average after the 1930's is a fraud since it simply doesn't take into account inflation.

"This time does indeed appear to be different" however.

Ukraine is looking more and more like "cracking the Oyster" by the day...an (un)Civil War fer sure...but on the other hand revealing to me at least very much the probability of a generalized deflation spreading from Western Europe to the USA.

Indeed I think a good argument can be made that the lack of any direct and forceful action in "the Borderlands" is presenting Western Economies with a very dangerous and unique danger of Dramatis Defaultae...something that appears to be on some type of "continuum" I might add.

Simply put Russia might be on the verge of collapse based upon not only Russian actions (ongoing) in the East...but Western responses to it (very aggressive.)

If the result is a "Russian as Haiti" I think the impetus for the West to respond "pre-emptorily" is quite high as those nukes have to be secured.

What Russia would do under such a scenario is anyone's guess...but historically speaking "outright collapse" is far from unique.

And no...China will not be a help here. When last I checked the bulk of their investing had been in Western Europe actually....which makes a "tripling down" vis a vis Russia appear financially cataclysmic to me.

No...this very much has a Credit Anstalt feel to it to me...where the USA may have dodged a bullet in 2008...only to be hit by a gale from the East that simply put...other than "Forward" ironically enough"...there can be no other policy response.

I say again "it will come as a shock to the American People when they discover we are well on the path of a full scale invasion of Russia"...and quite possibly North Africa as well.

As for the "mystery of the equity bid" I think the fact that not just one but possibly two truly gargantuan conflicts may be well underway and that both of these..."conflicts"....are happening at the level of a policy response and not with the engagement of the American people...I think goes a long way towards explaining why we keep getting a bid here.

Simply put "this is the ultimate in inside information."

It is possible that the President himself does not understand this actually and that all of us are now at the mercy of events that while "comprehensible" are prima facie beyond anyone's control.

Sat, 05/10/2014 - 22:54 | 4747399 novictim
novictim's picture

Reminder: QE has resulted in >$4Trillion to the banks as bailout of gambles-gone-bust.

So the stock market gains are a hoax.  It is all based on US tax payer debt.

Maenwhile, Oboomboom has told us that Dodd-Frank was "Real Reform" and his little Treasury Sec. Timmy Geitner agreed.  

Yet Dodd-Frank is not reform.  It does not draw a line between normal banking functions and outright speculation/gambling. So US tax payers remain on the hook to socialize the losses while gains are privatized.

And there is no one on the RIGHT or the LEFT willing to call BULLSHIT.  

That is how fucked we are.

Sun, 05/11/2014 - 00:48 | 4747565 Freewheelin Franklin
Freewheelin Franklin's picture

The only way to reform the banking system is to remove the moral hazard. And we all know, that ain't happening any time soon. 

Sat, 05/10/2014 - 23:12 | 4747443 medium giraffe
medium giraffe's picture

No. Really?

 

Sun, 05/11/2014 - 09:45 | 4747490 evernewecon
evernewecon's picture

 

 

 

Nice column.

Hedonics is silly.

Increased content in a newer car?

But if fighting for real estate

on the freeway with a chair falling

out of a trunk Al Bundy's wieniemobile

(Plymouth Duster/Dodge Dart) would

utterly cream today's car, whose

paneling is said to be arched to

keep it from being too easily

distorted or even from flapping.

 

(Today many Americans would

happily settle for this, an extension

of the reality measurable from when

it only took a single wage earner to

raise a family in a house and send 

a couple kids to college.

 

http://www.ritholtz.com/blog/2004/04/fun-with-hedonics-or-how-i-learned-...

 

He makes the suggestion someone

might say higher content in 

GMO's.  I'm guessing Ritholtz

today would say hedonics there

should reflect lower value

content, with an up-adjustment

to inflation (the benefit going

to the privatizer.)

 

http://www.motherjones.com/tom-philpott/2014/04/europe-just-banned-apple...

 

http://news.ph.msn.com/top-stories/france-definitively-bans-gm-corn-3

 

Paying more to get less is the

essence of privatization, but all

manner of poor priorities, missed

opportunities, and inappropriate

risk come from it too.

 

Just imagine the case with losing

net neutrality.

 

This goes out the window.

"Smart public transport will only work if the network data is truly open"

http://www.dw.de/smart-public-transport-will-only-work-if-the-network-da...

 

The Instant Net Neutrality

Ends, Billions

Of Man-Hours Of Work 

Will Be Devalued.

 

(I think it's this that's the 

clearest tip-off that pyramidal

economics, selling protected

monopoly, is the chief culprit.)

 

Here're Ritholtz/Jurow on

real estate indices.

 

 

http://pages.citebite.com/o2c0d2e1j0mlb

 

http://pages.citebite.com/d1i8e3n1t3rpv

 

 

Don't forget the chained CPI.

http://www.aarp.org/politics-society/advocacy/info-02-2013/the-chained-c...

 

The real austerity trick there is the compounding

of the COLA adjustment.

Sun, 05/11/2014 - 00:46 | 4747560 Freewheelin Franklin
Freewheelin Franklin's picture

Well, at least it ain't being fueled with debt based consumption. Then, we'd really be in trouble. 

 

/sarc

 

Sun, 05/11/2014 - 10:26 | 4747911 evernewecon
evernewecon's picture

 

 

 

 (Edited in, allowed within limits

obviously aimed at maintaining

integrity:)

 

I think it's this that's the 

clearest tip-off that pyramidal

economics, selling protected

monopoly/oligopoly, is the chief culprit.

 

This is why those who sold the 

mortgage bubble faced a shakedown,

their parents retirement income was

taken to 0 (in essence bail-in'd so as

to bail out the banks,) the health

oligopoly has statutory profit margins

based on abilities to pay with

absence of risk privatized, and why

the fate of the Gulf is defined by profits

for drillers, death and destruction for you,

with even the families enjoying royalty

income, in Texas, not needing war, 

destroying the Gulf, de-constructing

the Arctic, or coal.

GMO's are privatization of

sustenance.

 

 

 

Sun, 05/11/2014 - 01:43 | 4747614 the grateful un...
the grateful unemployed's picture

i want to know when are the gold miners going to get into the DOW (psssst soooon) buy gold mining stocks bitchez

Sun, 05/11/2014 - 05:03 | 4747677 pcrs
pcrs's picture

Just like any fund manager would

Sun, 05/11/2014 - 07:19 | 4747743 OC Sure
OC Sure's picture

 

 

 

Industrial stocks represent  real things  priced in the US dollar.

As the value of the currency goes down the cost of real things goes up.

The same principle that drives the  price of bubble gum and houses higher applies to stocks too. 

Sun, 05/11/2014 - 08:44 | 4747806 SweetDoug
SweetDoug's picture

'

'

'

'I'm sending this up to my 83 year old Mud'da, who's been out of the market for years, because she doesn't trust the data, the people in it, and hates those HFT algos.

 

I'm sure this will do nothing to change her mind.

 

And it's why the rest of the grey hairs, (Dow Average Volume is 100 million and did about 75 on Friday) are all out, too.

 

•?•
V-V

Sun, 05/11/2014 - 13:44 | 4748330 withglee
withglee's picture

As long as the Medium of Exchange (MOE) is mismanaged (i.e. INFLATION of the MOE should be guaranteed to be zero), all of this indexing is pointless.  But even with a stable base on which to report values, the technique is fundamentally flawed.

1) When anything in the DOW changes, there must not be a "step" in value. You change the basket. Then you do something to make the value reported today equal to the value you reported yesterday.

2) When you adjust to eliminate the step you have at least three options, which can be taken together: (A) Change the bias (e.g. subtract or add some number); (B) Change the gain (e.g. the size of the divisor); (C) Change both.

If the assumption is that the new basket represents the market in exactly the same way as the previous basket, the "gains" must be identical, before and after. For some previous period, the slope of a straight line fitted to the normalized previous basket must be identical to the slope of such a line found for the new basket over the same period. This is obtained by changing the "gain" on the new basket. You then just bias of the new basket to the same level as the previous basket and move on.

Obviously, with just a divisor this can't be done.

What can we expect from dolts who think 2% is the right amount of INFLATION for the MOE when zero is the obvious correct value  ... such value achievable and guaranteeable ... but not measurable?

Sun, 05/11/2014 - 18:14 | 4749000 AdvancingTime
AdvancingTime's picture

An interesting book that I picked up at a garage sale years ago gives an eye opening tour through the twist and turns of math abuse and innumeracy. The book "200% of nothing" by A. K. Dewney goes into how percentage pumping and irrational ratios can be used to make and reinforce a point that has little validity. 

Sadly this practice has become far to common in modern society. Aided by super fast modern methods of communication facts are seldom checked, "if you saw it on the internet" it has to be true. The article below delves deeper into some of the ways they shift data to lie and mislead us.

http://brucewilds.blogspot.com/2013/09/200-of-nothing.html

Do NOT follow this link or you will be banned from the site!