Since its the Friday before a 3 day weekend, let me share with you the goofiest email I have received this month, from somewhere in the Netherlands. The full email (which is all over the Internet in its original language) is reproduced below, immediately following my response.

 

My response:

That is hilarious. I presume you are joking.

The editors of Dow Jones (WSJ, Barrons etc.) manage the Dow Index — not the US president, who has nothing to do with how its calculated (its based on component prices, not market caps). The Dow today consists of 30 stocks, not 12. The WSJ/Dow Jones is now owned by Rupert Murdoch — who also owns Fox News — and last i checked, has not deferred any of his editorial choices to the President. There are some people here who even think that Murdoch does not care for either President Obama or his political party. (Perhaps Google can give you some color on this).

Indeed, anyone with access to Google can figure out how the Dow is composed. Do you know the author of this piece? Has he recently suffered a severe blunt head trauma? That is the only thing I can think of that would explain what he wrote . . .

 

Reader Update:

You are two steps behind. Most of the Dow Indexes were sold to the CME who in turn has sold them to S&P.  The sale to the CME was a while ago.  The sale to S&P is recent.

 

 

Original Email:

Obama: “Truth, from fiction to reality”

Dow Jones Index to 58 points

After intensive consultation with his advisors, President Obama has decided to modify the formula used for calculating the Dow Jones Index. On January 1, 2013 the Dow Divisor will be changed to 30. The result of this change will be that the Dow Jones Index drops from the current 13,124 points to about 58 points. The underlying value of the 30 component stocks of course remains unchanged. With this modification to the formula Obama aims to make the large Dow fluctuations of recent decennia a thing of the past, and hopes that this will bring stability to the stock market. Banks, major investors and pension funds welcome this change in the Dow Jones Index formula.

To understand Obama’s proposal we must go back in Dow Jones history. The Dow was first published in 1896. The Dow was calculated by dividing the sum of the 12 component company stocks by 12:

Dow-index_1896 = (x1 + x2+ ……….+x12) / 12
In 1916 the Dow was enlarged to 20 companies; 4 were removed and 12 added:

Dow-index_1916 = (x1 + x2+ ……….+x20) / 20

The shares of a number of companies were split in 1927, and for those shares a weighting factor was introduced in the calculation. The formula is now as follows
(x1 = American Can is multiplied by 6, x2 = General Electric by 4 etc. )

Dow-index_1927 = (6.x1 + 4.x2+ ……….+x20) / 20

On 1 October 1928 the Dow was further enlarged to 30 stocks. Because everything had to be calculated by hand, the index calculation was simplified. The Dow Divisor was introduced. The index was calculated by dividing the sum of the share values by the Dow Divisor. In order to give the index an uninterrupted graph the Dow Divisor was given the value 16.67.

Dow-index_Oct_1928 = (x1 + x2+ ……….+x30) / Dow Divisor
Dow-index_Oct_1928 = (x1 + x2+ ……….+x30) / 16.67

Since then the Dow Divisor has acquired a new value every time there has been a change in the component stocks, with a consequent change in the formula used to calculate the index. This is because at the moment of change the results of two formulas based on two different share baskets must give the same result. When stocks are split the Dow Divisor is changed for the same reason.

In autumn 1928 and spring 1929 there were 8 stock splits, causing the Dow Divisor to drop to 10.47.

Dow-index_Sep_1929 = (x1 + x2+ ……….+x30) / 10.47

After the stock market crash of 1929, 18 companies were replaced in the Dow and the Dow Divisor got the value 15.1.

Table: Changes in the Dow, stock splits and Dow Divisor

The table above makes it clear that the Dow Jones formula has been changed many times and that the Dow Divisor in the period 1980-2010 has actually become a Dow Multiplier, due to the large number of stock splits in that period. Where in the past the sum of the share values was divided by the number of shares, nowadays the sum of the share values multiplied by 7.5. Dividing by 0.132 is after all the same as multiplying by 7.5. (1 / 0,132 = 7,5). This partly explains the behaviour of the Dow graph since 1980.

Figure: the Dow Jones since 1896

The proposed change on 1 January 2013 restores the formula to what it originally was: the sum of the share values divided by the number of component shares.

Dow-index_Jan_2013 = (x1 + x2+ ……….+x30) / 30

The aggregate current value of the 30 component stocks is 1736 dollars. By changing the Dow Divisor from 0,132319125 to 30 (a factor 227 larger) the index will, at current values, change from 13124 to 58 points (a factor 227 smaller).

The emotional factor in the current formula, the nervousness or euphoria of investors resulting from large fluctuations in the Dow, will be greatly reduced by this change (227 times) and so rationality should gain the upper hand in investor’s decisions.

Obama’s proposed change must still be approved by House and Senate. Both Republicans and Democrats have told Obama they support his proposal. Politicians, irrespective of political colour, desire stability in the stock markets. For the investor however it will take some getting used to: the Dow Jones at 58 points.

Category: Index/ETFs, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “Wacky Email of the Month: Obama to Rejigger DJIA”

  1. VennData says:

    This is what Koch’s and Adleson’s tens of millions are paying for: colored, large-font, unattributed LIEmails created and sent the RNC HQ basement.

    Thank you for your contribution to the garbage in the world, right wingers, Agnotology 101 courses of the future will feature you.

  2. Moe says:

    Clint?…is that you?

  3. kangarouge says:

    why waste our time posting this?

  4. VennData says:

    Moe,
    ROFL

  5. Tim says:

    definitely blunt head trauma

  6. philipat says:

    Was this first posted on April 1st by any chance?

  7. Petey Wheatstraw says:

    I heard Obama was going to mandate moving all decimals two digits to the left, and requiring all trades to be executed on French writing paper with a fountain pen.

    That Frenchman.

    Dow 130.90

  8. whskyjack says:

    Hey thanks for sharing, that stuff doesn’t show up in my email any more(not that I want it too) I tend to be a little short with silliness on both the right and the left, so they avoid me as I’m no fun. Some of the emails did worry me , as I shared a significant amount of DNA with the ones passing them around
    So are my pet theories just as loonie………. Nah

    Jack

  9. vachon says:

    That’s ok. At 96 degrees and 3000% humidity (welcome to Florida), I stopped to put gas in the car to get to work this afternoon. On the pump someone had taped a hand scrawled note comparing 2009 gas prices to what I was paying now, $3.69, and bashing Obama for it.

    Like I need this when even my underwear is sweating.

  10. RW says:

    I’m going to be generous and assume it’s intentionally satirical: a rather gross abuse of concepts and history intended to poke some fun.

    In case it’s not then improvement over more vulgar stereotypes and dog whistles still can’t fix the stupid underneath because stupid rises up like a greasy ink stain through every coat of paint or language and there is no cure for stupid.

    Have a great weekend y’alls: Stay out of the heat (unless you’re grill’n) and don’t run for office or out of ice.

  11. Old Rob says:

    Poor choice of words!

  12. Joe Friday says:

    vachon,

    That’s ok. At 96 degrees and 3000% humidity (welcome to Florida), I stopped to put gas in the car to get to work this afternoon. On the pump someone had taped a hand scrawled note comparing 2009 gas prices to what I was paying now, $3.69, and bashing Obama for it.

    A few months before Obama was inaugurated, gas was over $4 a gallon across most of the country.

    Just as with the Janesville auto plant that closed before Obama was inaugurated, the economic downturn that began years before Obama was inaugurated, the high unemployment that began years before Obama was inaugurated, the economic recession that officially began more than a year before Obama was inaugurated, and the trillion-dollar federal deficits that began years before Obama was inaugurated, if the American RightWing doesn’t lie and blame the black guy in the White House, they would be forced to explain why they want to return to the very same policies that produced such an economic disaster.

  13. end game says:

    I have a Republican client who forwards these emails to me. There are two to five a day, some intentional to fire up the base, some to inflame the ignorant, and some jokes, but vile ones. It has been an unrelenting steam of smear jobs and caustic diatribes for three years now. But he’s to big to fire, so I keep getting them.

  14. AnnaLee says:

    Did the PPP approve this change to the Dow?

  15. AnnaLee says:

    Make that PPT.

  16. formerlawyer says:

    @AnnaLee Says:

    Don’t you mean the Tri-Lateral Commission?

  17. Detroit Dan says:

    The Dow change is the kind of thing that Clint’s invisible Obama does…