Down with the IBM Industrial Average Long Live the NCIA

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Down with the IBM Industrial Average Long Live the NCIA

Down with the IBM Industrial Average Long Live the NCIA

Company

Price

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YTD Return

Dow Weight

Ratio to Equal Weight

Ticker

Mkt Cap ($B)

Weight MC

Ratio to Dow Weight

AA Alcoa Inc

 8.63

-0.23%

0.51%

 0.15

AA

 9.21

0.23%

2.20

AXP American Express Co

56.42

19.61%

3.35%

 1.00

AXP

63.96

1.62%

2.07

BA Boeing Co

70.36

-4.08%

4.17%

 1.25

BA

52.90

1.34%

3.12

BAC Bank of America Corp

 8.15

46.58%

0.48%

 0.14

BAC

87.83

2.22%

0.22

CAT Caterpillar Inc

87.63

-3.28%

5.20%

 1.56

CAT

57.25

1.45%

3.59

CSCO Cisco Systems Inc

19.12

5.78%

1.13%

 0.34

CSCO

 101.97

2.58%

0.44

CVX Chevron Corp

 111.29

4.60%

6.60%

 1.98

CVX

 218.37

5.52%

1.20

DD E. I. du Pont de Nemours and Co

50.24

9.74%

2.98%

 0.89

DD

46.74

1.18%

2.52

DIS Walt Disney Co

49.17

31.12%

2.92%

 0.87

DIS

88.22

2.23%

1.31

GE General Electric Co

20.64

15.24%

1.22%

 0.37

GE

 217.93

5.51%

0.22

HD Home Depot Inc

56.55

34.51%

3.35%

 1.01

HD

84.88

2.14%

1.56

HPQ Hewlett-Packard Co

17.64

-31.54%

1.05%

 0.31

HPQ

34.77

0.88%

1.19

IBM International Business Machines Co…

 195.70

6.43%

11.61%

 3.48

IBM

 223.64

5.65%

2.05

INTC Intel Corp

25.04

3.26%

1.48%

 0.45

INTC

 125.28

3.17%

0.47

JNJ Johnson & Johnson

67.74

3.29%

4.02%

 1.21

JNJ

 186.76

4.72%

0.85

JPM JPMorgan Chase and Co

37.23

11.97%

2.21%

 0.66

JPM

 141.43

3.57%

0.62

KFT Kraft Foods Inc

41.28

10.48%

2.45%

 0.73

KFT

73.25

1.85%

1.32

KO The Coca-Cola Co

38.11

8.93%

2.26%

 0.68

KO

 171.57

4.34%

0.52

MCD McDonald’s Corp

88.25

-12.04%

5.23%

 1.57

MCD

88.99

2.25%

2.33

MMM 3M Co

91.98

12.54%

5.45%

 1.64

MMM

63.59

1.61%

3.39

MRK Merck & Co Inc

42.80

13.53%

2.54%

 0.76

MRK

 130.35

3.29%

0.77

MSFT Microsoft Corp

30.26

16.54%

1.79%

 0.54

MSFT

 253.64

6.41%

0.28

PFE Pfizer Inc

23.74

9.70%

1.41%

 0.42

PFE

 177.33

4.48%

0.31

PG Procter & Gamble Co

66.68

-0.04%

3.95%

 1.19

PG

 183.65

4.64%

0.85

T AT&T Inc

36.56

20.90%

2.17%

 0.65

T

 210.91

5.33%

0.41

TRV Travelers Companies Inc

64.80

9.51%

3.84%

 1.15

TRV

24.97

0.63%

6.09

UTX United Technologies Corp

79.20

8.36%

4.70%

 1.41

UTX

72.21

1.82%

2.57

VZ Verizon Communications Inc

42.25

5.31%

2.51%

 0.75

VZ

 120.37

3.04%

0.82

WMT Wal-Mart Stores Inc

71.56

19.75%

4.24%

 1.27

WMT

 242.16

6.12%

0.69

XOM Exxon Mobil Corp

87.31

3.01%

5.18%

 1.55

XOM

 403.02

10.18%

0.51

Total

 1,686.33

 3,957.15

High

47%

 3.48

10.18%

6.09

Low

-32%

 0.14

0.23%

0.22

Ratio

24.01

43.76

 27.97

As I was considering the Dow Jones Industrial Average (INDEXDJX:.DJI), I considered how much influence International Business Machines Corp (NYSE:IBM) has relative to an equal-weighted index.  It has 3.48 times more influence that the average.  Then I considered the lack of influence of  Bank of America Corp (NYSE:BAC), whose influence is 86% less than the average.  It may be up 47% YTD, but it budges the index but little despite its large market cap.

Such is life in a price weighted index that was designed to work around 1900. Add up the prices, divide by a number, and there is the index.

Even an equal weighted index would be more realistic.  But what if we created a market cap (actually float) weighted ow Jones Industrial Average (INDEXDJX:.DJI), like the S&P 500?

At this point, Exxon Mobil Corporation (NYSE:XOM) would be the heavy hitter, and small Alcoa Inc. (NYSE:AA) the baby.  Prediction: Alcoa Inc. (NYSE:AA) and The The Travelers Companies, Inc. (NYSE:TRV) will leave the Dow, to be replaced by  Oracle Corporation (NASDAQ:ORCL) and Berkshire Hathaway “B” shares.

Wait! QUALCOMM, Inc. (NASDAQ:QCOM)?! Why not Apple Inc. (NASDAQ:AAPL) or Google Inc (NASDAQ:GOOG)?  Their share prices are too high, and the DJIA is too messed up already.  If Bank of America Corp (NYSE:BAC) wanted to help the Dow, they would do a 1-10 reverse split, as should Alcoa Inc. (NYSE:AA), should they stay in the Dow.

The DJIA is a historical accident that has more then outlived its 15 minutes of fame.  It does not represent the market as a whole.  The best that Dow Jones News Corp could do is remake it as a megacap market cap weighted index.  Then it might have real punch and validity.  Call it the News Corp (NASDAQ:NWSA) (NASDAQ:NWS) Industrial Average [NCIA].  What might that index look like?

company ticker

mktcap

Percentage

Apple Inc. AAPL

607,542

11.02%

Exxon Mobil Corporation XOM

408,049

7.40%

Microsoft Corporation MSFT

259,047

4.70%

Wal-Mart Stores, Inc. WMT

243,581

4.42%

International Business Machine IBM

229,949

4.17%

General Electric Company GE

221,736

4.02%

Google Inc GOOG

221,447

4.02%

Chevron Corporation CVX

221,055

4.01%

AT&T Inc. T

214,434

3.89%

Berkshire Hathaway Inc. BRK.A

212,869

3.86%

Johnson & Johnson JNJ

186,927

3.39%

Procter & Gamble Company, The PG

184,536

3.35%

Wells Fargo & Company WFC

179,753

3.26%

Coca-Cola Company, The KO

177,961

3.23%

Pfizer Inc. PFE

177,699

3.22%

Philip Morris International In PM

157,413

2.86%

Oracle Corporation ORCL

157,217

2.85%

JPMorgan Chase & Co. JPM

140,478

2.55%

Merck & Co., Inc. MRK

131,998

2.39%

Intel Corporation INTC

131,729

2.39%

Verizon Communications Inc. VZ

125,522

2.28%

PepsiCo, Inc. PEP

114,215

2.07%

Amazon.com, Inc. AMZN

109,025

1.98%

QUALCOMM, Inc. QCOM

107,805

1.96%

Visa Inc V

104,389

1.89%

Abbott Laboratories ABT

103,451

1.88%

Cisco Systems, Inc. CSCO

102,102

1.85%

Schlumberger Limited. SLB

99,235

1.80%

Walt Disney Company, The DIS

90,539

1.64%

Comcast Corporation CMCSA

90,482

1.64%

Grand Total

5,512,183

What are the new companies? Comcast Corporation (NASDAQ:CMCSA) (NASDAQ:CMCSK), Schlumberger Limited. (NYSE:SLB),  Abbott Laboratories (NYSE:ABT), Visa Inc (NYSE:V), QUALCOMM, Inc. (NASDAQ:QCOM), Amazon.com, Inc. (NASDAQ:AMZN), PepsiCo, Inc. (NYSE:PEP), Oracle Corporation (NASDAQ:ORCL), Philip Morris International Inc. (NYSE:PM), Wells Fargo & Company (NYSE:WFC), Berkshire Hathaway Inc. (NYSE:BRK.B) (NYSE:BRK.A),  Google Inc (NASDAQ:GOOG), and Apple Inc. (NASDAQ:AAPL).

Who leaves? Alcoa Inc. (NYSE:AA), The Travelers Companies, Inc. (NYSE:TRV), United Technologies Corporation (NYSE:UTX), 3M Co (NYSE:MMM), McDonald’s Corporation (NYSE:MCD), Kraft Foods Inc (NASDAQ:KFT), Hewlett-Packard Company (NYSE:HPQ), The Home Depot, Inc. (NYSE:HD), E I Du Pont De Nemours And Co (NYSE:DD), Caterpillar, Bank of America Corp (NYSE:BAC), The Boeing Company (NYSE:BA) and American Express Company (NYSE:BAC).

Now, that said, give the folks at News Corp (INDEXDJX:.DJI) some credit.  They created a flawed Behemoth index, but it is the only widely quoted Behemoth index, and my adjustment of it only improves the market capitalization by ~40%.  That said, capitalization-weighting makes it a much more rational index, and so I call upon Dow Jones News Corp (NASDAQ:NWSA) (NASDAQ:NWS) to make the changes that the sentimental at Dow Jones never would, and turn the DJIA into the NCI.  Not an average, but a real Behemoth index that measures the performance of the largest companies of the US, which comprise ~30% of the total market capitalization.

There is the challenge, and taking it on will benefit investors for the next 100 years.  Are you man enough to take it on, News Corp?

Full disclosure: Long CSCO, CVX, HPQ, INTC, TRV, WMT, ORCL

By David Merkel, CFA of alephblog

Updated on

David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.
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