Posts filed under “Index/ETFs”
Bianco: The Dow is Distorted
January 21, 2009 James A. Bianco, CEO of Bianco Research, LLC
Comment – The Dow Jones Industrial Average (DJIA) is a price weighted index. The divisor for the DJIA is 7.964782. That means that every $1 a DJIA stock loses, the index loses 7.96 points, regardless of the company’s market capitalization.
Dow Jones, the keeper of the DJIA, has an unwritten rule that any DJIA stock that gets below $10 gets tossed out. As of last night’s close (January 20), The DJIA had the following stocks less than $10…
Citi (C) = $2.80
GM (GM) = $3.50
B of A (BAC) = $5.10
Alcoa (AA) = $8.35
If all four of these stocks went to zero on today’s open, the DJIA would lose only 157.3 points.
The financials in the DJIA are…
Citi (C) = $2.80
B of A (BAC) = $5.10
Amex (AXP) = 15.60
JP Morgan (JPM) = $18.09
If every financial stock in the DJIA went to zero on today’s open, it would only lose 331.25 points, less than it lost yesterday (332.13 points).
If you want to add GE into the financial sector, a debatable proposition, then:
GE (GE) = $12.93
If the four financial stocks above and GE opened at zero today, the DJIA would only lose 434.24 points.
The reason the DJIA is outperforming on the downside is the index committee is not doing it job and replacing sub-$10 stocks and the financials are so beaten up that they cannot push the index much lower.
So what is driving the index? The highest priced stocks:
IBM (IBM) = $81.98
Exxon (XOM) = $76.29
Chevron (CHV) = $68.31
P&G (PG) = $57.34
McDonalds (MCD) = $57.07
J&J (JNJ) = $56.75
3M (MMM) = $53.92
Wal-Mart (WMT) = $50.56
For instance if all the sub-$10 stocks listed above, all the financials listed above and GE opened at zero, the DJIA loses 528.63 points. To repeat if C, BAC, GM, AA, JPM, AXP and GE all open at zero, the DJIA loses 528.63 points.
If IBM opens at zero, it loses 652.95 points. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE and Alcoa combined.
The DJIA is not normal as the Index committee is not doing their job during this crisis, possibly because of the political fallout of kicking out a Citi or GM. As a result, this index is now severely distorted as it has a tiny weighting in financials and autos.
We thank Jim Bianco for giving us permission to share his firm’s research with our readers.
James Bianco, Chief Executive Officer, Bianco Research, LLC
The major commodities indices are being rebalanced, and I am forced once again to question their timing. Recall the last major rebalance: At the time, I had been challenged by Larry Kudlow to find a smoking gun for the sudden 2006 collapse of Oil prices a month or two before the mid-term election. That challenge…Read More
Here is the money paragraph: The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level. As previously announced, over the next few quarters…Read More
Mark McHugh is a financial professional and former associate of a large investment firm.
He provides fee-based financial planning and tax preparation services in the Philadelphia area.
Editor’s Warning: Although Mark McHugh shares a surname with a respected contributor to The Big Picture Café, we’d like to state for the record, that Mark doesn’t know Jack.
Are You getting ETF’d?
Objective: UltraShort Blah-Blah ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Blah-Blah Index.
Remember when you first heard about these leveraged ETF’s? That little part of your brain that actually wants you to survive started flailing its’ arms saying, Hold on there, Chief…. Double the gains?…How does this work?…How much fees and expenses?…Can this possibly work?…Remember? And you said, “Shut-up brain, I know what I’m doing.” Double your pleasure, double your fun, double your risk of cardiac arrest while just sitting in front of a computer. Now look at you, after a handful of “Plaxico” incidents, trying to externalize the whole thing.
Real men don’t read prospectuses, I always say. So when the eggheads at ProShares (and others) offered to warp time and space just for me, I was excited. Now, thanks to the recent performance of the SRS (ProShares Ultra-short Real Estate) and URE (ultra-long), I believe I’ve discovered a wormhole to a whole new dimension of excitement.
Take this past Monday, for instance:
While not able to understand to understand the Theory of Relativity, I can multiply by 2 (and subtract). Is a couple percent off target anything to be concerned about? The difference amounts to about $0.13 for URE holders and about $4.35 for SRS longs. I’d multiply that by the number of shares outstanding, but the only data I can find (MSN) says there are 8m shares of SRS outstanding (it traded over 15m today). And Yahoo says the expense ratio is 0.95% (sometimes the jokes just write themselves).
Doug Short overlays the 4 major bear markets of the past centruy onto one chart. Its a comparison of today’s S&P 500, the Dow post 1929, the Nikkei post 1989, and the NASDAQ after the tech bubble: > Chart via Doug Short Here’s another link that allows you to see the comparison by degrees. Very…Read More
Dow is at 7997.28; S&P500 is at 806.58. Our cash position is back to 75%, we are still 25% long (including inverse funds). On this break, we could see (technically) a low of 681 on the SPX, Dow 7,100, and Nasdaq 1070. (There are deeper levels, but its too ugly to write now). Last week,…Read More
As the market has sold off since January, exchange-traded fund volumes have outpaced those of the underlying indexes, suggesting that ETFs are increasingly becoming the hedging and speculative mechanisms of choice in the U.S. equity market. Since the year began, volume in the PowerShares QQQ (QQQQ) ETF relative to the Nasdaq-100 index has jumped from…Read More