Murdoch distorting the Dow Jones index

[TonyGosling]

Rupert's Dow out of whack
Michael Pascoe - January 23, 2009

In the middle of the worst economic crisis since World War 2, the eyes of the financial world each day turn to check the Dow - and it's absolute rubbish.

That's not a comment on the fall of US stock prices, but the actual Dow Jones Industrial Average owned and operated by Rupert Murdoch's News Corp.

It's always been a poor indicator of the American stock market - the Dow measures just 30 stocks subjectively chosen by the Wall Street Journal's editors - but now the plunging bear market and News Corp inaction has rendered it practically meaningless.

Actually, it's worse than that: the Dow is now misleading, providing an artificially rosier picture of Wall Street than the sad reality.

Severely distorted

The world's most-watched index is comprehensively trashed by one James A. Bianco of Bianco Research. According to Bianco, News Corp's Index committee is not doing its job during the crisis ''possibly because of the political fallout of kicking out a Citi or GM''. As a result, the index is severely distorted.

The Dow's fundamental flaw is that it is a very simple price-weighted index that has no relationship to market capitalisation. As Bianco explains it, for every $1 that a DJIA stock loses, the index loses 7.96 points regardless of the company's market cap.

A lower primary school maths student of average ability would see that it matters a great deal more if a $10 stock falls by $1 than if a $100 stocks falls by $1 - but it's all the same to the Dow Jones Industrial Average.

To keep the index vaguely meaningful, Bianco says there was an unwritten rule that any DJIA stock that fell below $US10 a share would be replaced, but there are now four of the 30 stocks below that level and several others close to it - and the Index committee seems to have stopped doing its job.

The massive distortion that has corrupted the Dow is such that huge percentage falls by key stocks now barely move the index.

Using the closing figures from January 20, Bianco gives the example that if the four financial stocks in the Dow (Citi, Bank of America, Amex, and JP Morgan) all fell to zero on January 21, the Dow would only drop 331 points - less than it actually fell on January 20.

It is a serious allegation that such an important index has become degraded to the point of meaninglessness by political considerations. Gee, who would have thought that about a unit of the Murdoch empire?

Michael Pascoe is a BusinessDay contributing editor.
http://business.smh.com.au/business/ruperts-dow-out-of-whack-20090123- 7o9v.html

see also

James Bianco: The Dow is Distorted
http://www.ritholtz.com/blog/2009/01/bianco-the-dow-is-distorted/

Financial Crisis TARP Bailouts and Dow Jones Index Manipulation
http://www.marketoracle.co.uk/Article8450.html