This page has been archived and commenting is disabled.
Dow Green For The Year? Thank 2 Companies Out Of 30
While we just noted the insanity of chaotic market shifts in the face of the broad market's lackluster performance, Nic Colas, of ConvergeX Group, goes one step further. Dismantling the 592 point rally in the archaic (yet seemingly so important to mom and pop) Dow, Nic shows that the majority of this move was simply thanks to just two stocks (IBM and MCD). The 5.1% outperformance of the Dow, in the face of the S&P's blank, is the seventh year of the last twelve (we suppose thanks to the lower financial exposure) but the weighting scheme seems to be so rife for 'help' - especially with blue-chip names so easy to defend for every long-only manager in the world, that it seems we should all thank Mr. Buffett for another good year on the Dow. On a less tin-foil-hat basis, Nic points out that confidence in the business models of the Dow names may have something to do with the remarkably sanguine perspective the sell side has on the earnings predictability of the companies in the index.
He Ain’t Heavy, He’s My Stock Index
Summary: The Dow is up 592 points on the year, and just two stocks represent more half that entire gain – IBM (173 points) and McDonald’s (122 points). That’s a function of the way the Dow Jones Industrial Average is constructed - weighted by stock price rather than market cap - as well as the strong performance of these two stocks (MCD up 28%, IBM up 24% YTD). The rest of the names that contributed to the Dow’s 5.1% return this year-to-date are: Chevron (75 pts), ExxonMobil (50 pts), Boeing (42 pts), Home Depot (36 pts), Kraft (30 pts), Wal-Mart (29 pts), Pfizer (23 pts) and Coca-Cola (23 pts). This is a useful snapshot of what kinds of stocks worked in 2011 – exporters, energy and consumer names, for example. And also consider that the Dow stands to trounce the S&P 500 this year by as much as 500 basis points, largely due to its lower weighting in financials.
Modern indexing is a multi-billion dollar industry that largely owes its existence to one man – Charles Dow, of “Dow Jones” fame. It was he who created one of the first modern stock market indices, tracking the transport stocks. This was in the 1890s, when “Transport” pretty much meant “Railroads.” After that he moved onto the broader market, predominantly industrial stocks, and the Dow Jones Industrial Average was born. The fact that index provider Dow also published a newspaper – what would become The Wall Street Journal – certainly helped popularize the approach of using an index as a proxy for market health and direction.
The funny thing about the Dow is that it is weighted by stock price – the higher the price of stock the more influence it has on the index. The origin of this methodology was Charles Dow’s approach to index creation: take all the companies you want in the index, add up their stock prices, and divide by the number of companies you are tracking. It is only marginally more complex now, as stock splits and dividends get included in the calculation. The basic process is unchanged from the 1890s.
And even if you snicker at this archaic approach versus more modern “Capitalization weighted” indices such as the S&P 500, the results this year are noticeably better. A few points on this:
- The Dow closed yesterday with a 5.1% year-to-date gain, far ahead of the S&P 500 which isn’t even in the black yet (-0.3%).
- The Dow has beaten the S&P 500 in seven of the past 12 years (see above graph). Importantly, it outperforms in every down year (2000, 2001, 2002, and 2008) since the bursting of the dot-com bubble in 2000.
- The source of the Dow’s 592 point gain this year is most due to 2 names: IBM and McDonalds, which together have added 295 points this year, or half of the index’s advance.
- The other 10 names of the 30 that represent the entire move in the Dow are Chevron (75 pts), ExxonMobil (50 pts), Boeing (42 pts), Home Depot (36 pts), Kraft (30 pts), Wal-Mart (29 pts), Pfizer (23 pts) and Coca-Cola (23 pts).
- The other 20 names in the Dow essentially cancel each other out. It may be the Dow 30, but only ten really mattered this year.
The reasons for the Dow’s outperformance are not hard to find. The financial sector has been a tough place to be in 2011, and the S&P 500 currently has a 12% weighting in a group that is down 18% on the year. The financials names in the Dow – JP Morgan, Bank of America, Traveler’s and GE – are down an average of 8%, and their collective weighting is 7.2% of the index. And there is also in the intangible of having a handful of super-cap names, each of which is an acknowledged and long-time leader in its industry, to support the names in the Dow. No, that hasn’t quite worked out for some of the financial names – BA is down an astounding 59% year to date – but at least its weighting in the index declines with the stock price. IBM at an 11% weight (and $182 stock price) dwarfs BAC’s weighting in the Dow at 0.33% (with its $5.47 stock price).
This confidence in the business models of the Dow names may have something to do with the remarkably sanguine perspective the sell side has on the earnings predictability of the companies in the index.
The above table shows that the most pessimistic analyst in terms of earnings expectations for the 30 companies of the Dow and how that estimate varies from the consensus. Not much, as it turns out – about 9% in terms of 2012 expectations. We’ve added some other names to this list (Apple, Google, and Oracle) to give a bit of a wider perspective. But with one exception – AT&T (likely due to the recently abandoned merger) the most pessimistic analyst is very close indeed to the average expected future earnings as defined by the consensus.
»
- 8643 reads
- Printer-friendly version
- Send to friend
- advertisements -
Yep...these days, 2&20 gets you the brilliance of buying the golden arches over and over, every day, for one full year.
What a deal.
MCD share price...all time high. Quality of MCD's food...all time low.
'MCD share price...all time high. Quality of MCD's food...all time low.'
We've been through this before... "food"
Painting the Dow green, any which way they (ie PPT - I know, I know...conspiracy talk), is the easiest way to project an image of stability of financial markets to the sheeple (most of whom have exposure to any equities through their sad 401(k)s), at a time when the U.S. equity indexes are about where they were in 1998, and have racked up 50% to 60% in losses (real terms, adjusted for inflation*) since 1992, since the Dow only has 30 ticker symbols to manipulate.
The Japanese Nikkei shows the way of the future of U.S. equity markets (from 39000 in 1989 to 8900 today NOMINALLY), as the great takeover of consumption will fall under central planners' thumbs in the U.S. while private sector deleveraging picks up speed.
*Those inflation adjusted losses do not even include that which the sell-side con artists of Wall Street and their minions in Academia (hello, Jeremy Siegel) do not talk about, which is survivorship bias, whereby equities that performed so terribly or went belly up (as in GM) get tossed out of the indexes, and the lipstick is put on the pig as the indexes get rejiggered without reflecting the loss in values that all such companies racked up for investors. The way equity indexes are tracked and reported, and the manner by which their aggregate values are denominated, is an open fraud.
80% of a McDonnald's meal is bread and grease. So nice markup there.
In related news, Ringling Bros. have acquired The Kraken for 2012 shows.
Release the Kraken
http://www.youtube.com/watch?v=syGCpLxVENk
I just helped their revenues... should I go all in on the stock now?
Meh.
IBM taking the jobs overseas and MCD feeding the unemployed, obese, docile sheep.
And don't forget that cloud over IBM.
IBM is a master at working the numbers. I saw on a blog that IBM mandated contractors to take lots of unpaid time off in Nov and Dec. So ya gotta wonder if all is soooo well at IBM, why are they telling workers to stay home at end of quarter.
IBM looks like it wants to shit the bed badly with that terminal wedge look and feel to the chart.. on a side note all silver hoarders need to get hedged for a month or so with that absolute disaster of a pattern being traced out in the chart. I can almost taste $24.75. If that happens the coil spring will be loaded for +$100 as almost every ounce known to exist on earth should be snapped up.
The Dow is a piece of crap in judging market performance.
Much better as a tool of propaganda.
HD, KFT, KO, XOM all on track to make new highs in 2012.
TZA now at world record lows.
Sorry bears......
All those stocks you mention aren't in TZA, but don't forget MO & PM!
Thanx ZH for the info and all of you have a very Merry Christmas!!!
You too buddy! Feliz Navidad!
Like today's economic news. All economic numbers are lower than expected except one industry: aircraft. And much of that is for overseas sales. Personal Income and Spending Less Than Expected; Durable Goods Orders Up 3.8%
http://confoundedinterest.wordpress.com
One trick pony centrally planned economy!
S & P 500 making huge gains in foreign currencies.
http://stockcharts.com/freecharts/candleglance.html?$spx:FXE,$spx:FXY,$spx:FXC,$spx:FXS,$spx:FXA,$spx:FXM,$spx:FXB,$spx:FXF|D
The bigger the problems in Europe, that means more investors will flee into the safety of U.S. stocks.
The general recent trend has been for the dollar and stocks to rise, both on a relative safety basis rather than fundamentals.
With 2012 S&P earnings expected to erode to the $90 range, equities will need a lower dollar and continued foreign safety concerns to keep the U.S. market moving up past this year-end rally.
Then again, the Fed can buy european debt at any time to drop the dollar and spike the market, pretty much at will.
Still, beginning with the first earnings announcement of AA, the market is going to face the bottom line reality of a shrinking GDP. Investors like the strong balance sheets of many U.S. companies, but there's a reason that cash is being held rather than put to work.
MCD has gone from $10 to $100 since 2003.
http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosetti...
A ten-bagger.
Everyone said these restaurant companies would go broke with "hyperinflation" in commodities.
Instead, the exact opposite has happened.
Commodity prices have crashed and the resilient consumer can buy $0.99 McDoubles all day long and MCD still makes an obscene profit.
....the harder it will fall...
Russell 2K lagging WAY behind today. Strange.
Here is a note for Tyler and the rest of the muni-bond bashers on ZH:
Municipal Bond ETFs Turn in Solid Year
By Tom Lydon
ETF Trends: Tue, Dec 20, 2011
http://finance.yahoo.com/news/municipal-bond-etfs-turn-solid-120351408.h...
BTW, Meredith Whitney missed re. her dire prediction for municipal defaults in 2011 by a country mile.
Warren buffet bought IBM just so America could have a+ve dow
In a price weighted index, MCD & IBM get exponentially heavier the higher their prices go. Stock splits reset the weights. This is why GOOG or AAPL will never be a Dow stock.
Just another dead cat bounce. Economic collapse is inevitable.
the DJIA looks a much better bet for 2012 than the S&P or the Russell!
http://kelpie-capital.com/2011/12/22/2012-outlook-predictions/