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2HRS2GO: Dow index still behind the times

Conventional wisdom says The Wall Street Journal's editors made the Dow Jones Industrial Average relevant again.

Non-NYSE stocks included in the oh-so-venerable blue chip index? By DJIA standards, it ranks with Christopher Columbus landing in the New World. And just as in 1492, today's "discovery" isn't really a new finding at all; there are already people living here.

Have an opinion on this?

Unlike the trip of Columbus, today's announcement won't lead to changes for most of the world. The only ones immediately affected are people using Dogs of the Dow investment criteria; those folks might want to reconsider that dividend-based strategem, since three stocks leaving -- Sears Roebuck (NYSE: S), Chevron (NYSE: CHV), Goodyear Tire & Rubber (NYSE: GT) -- are among the DJIA's top 10 dividend yields. Even worse, three newcomers -- Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT) and Home Depot (NYSE: HD) -- pay few or no dividends at all.

(Then again, Doggy Style hasn't been very enjoyable lately -- Dogs of the Dow underperformed the S&P and DJIA the last two years and continues to trail them this year, mainly because of weakness from Phillip Morris (NYSE: MO), Eastman Kodak (NYSE: K), the aforementioned Goodyear, and to a lesser extent, Exxon (NYSE: XON))

From the rest of us, especially those who read tech-oriented sites like ZDII, the Dow now deserves at least some attention, though still not as much as the Nasdaq Composite Index or the S&P 500. At least the Dow sort of reflects the U.S. economy, with four IT stocks and two communications giants out of 30 total members.

Yet startling as it may be to actually see the DJIA's keepers shake the dust from their routines, it doesn't go far enough. When the changes take effect on All Saints Day, the Dow will merely reflect the U.S. economy as of 1991, not 1999.

That's just one opinion, but so is the Dow. "It's always been a subjective judgement," says John A. Prestbo, editor of Dow Jones Indexes and markets editor of the Journal. "In the end, it's the view of one person, the managing editor of The Wall Street Journal."

The "one person" at the moment happens to be Paul E. Steiger, who leads Wall Street's paper of record. Given his job, he's probably as informed as anyone when it comes to captains of industry, but his representative selections lack a few major names.

Not that I dispute most of the choices currently in the Dow; clearly, each is a leader in its market. But 30 stocks seems too few to accurately represent today's economy.

The Dow has expanded its roster in the past, Prestbo notes; a dozen stocks started the index, which expanded to 20 and then 30. But adding more technology stocks runs the risk of Dow redundancy, Prestbo says.

"We already have IBM and Hewlett-Packard," he points out. "Even if we expanded the number (of Dow stocks), we would be leaving somebody out somewhere."

Perhaps, but it's hard to see why some were left out this time, given the available candidates.

There's no reason why SBC Communications (NYSE: SBC) should get in over MCI Worldcom (Nasdaq: WCOM), which handles more data traffic than SBC and AT&T (NYSE: T) combined. If Walt Disney (NYSE: DIS) deserves to represent media and entertainment, Time Warner (NYSE: TW) makes an even better case, with not only comparable broadcast, film and music production capabilities, but a cable system and publishing empire to boot.

On the technology end, Cisco (Nasdaq: CSCO) arguably is as important as Intel or Microsoft in today's IT industry; it's definitely more vital when it comes to the Internet, as is Corning (NYSE: GLW), the leading maker of optic fiber that makes up all networks being built today. Think about it: if Intel, Microsoft and their products disappeared right now, you'd still have the Internet, albeit a smaller one. But if everything associated with Cisco and Corning vanish, the commercial Internet as we know it is gone.

Classifying Cisco as "hardware" with IBM and HP (a company that could be dropped from the Dow anyway, especially in light of the recent spin-off that reduced it in size) is simplistic, akin to grouping Caterpillar and General Motors because both companies make things with wheels. For that matter, lumping anyone with IBM is questionable, because Big Blue operates in so many technology niches.

Some analysts also believe America Online (NYSE: AOL) belongs in the Dow, but Steiger and Prestbo are right on that one: AOL's success is too recent. The Dow stands as a rock of stability; AOL hasn't even been a consistently profitable company for five years. "It might be a growing sector, but it's an immature one, in my view," Prestbo says. "It has to mature both in technology and economic contribution before it becomes worthy of inclusion."

Give it another five years and it might.

In any case, you might not have to wait too long before more IT companies join the Dow. Though I doubt technology corporations generate the majority of the U.S. gross domestic product yet, they will soon if the current pace keeps up.

Incidentally, calling the Bureau of Economic Analysis for the U.S. Department of Commerce underscored the futility of trying to get information from government. Suffice to say that although the agency does break down total corporate profit and gross domestic product by industry, neither "technology" nor any heading that might fit under that umbrella (save "electronic equipment") are listed as U.S. industries in the BEA's current system. On the bright side, a friendly gent at the BEA said a new classification method has been developed that includes "technology" as a class. The agency plans to adopt those rankings -- in 2002.

Maybe then the Journal's braintrust will complete the Dow's move into the modern era.

Other issues:

  • Pivotal
  • (Nasdaq: PVTL) The market smiled when it heard Pivotal's customer relationship management software will be part of the application hosting service offered by Microsoft and Cisco. Not sure how much revenue actually comes out of this deal, though.

  • Acxiom
  • (Nasdaq: ACXM) Wow, the data warehousing company's disappointing results are out for barely four hours and already the shareholder lawsuits are flying through the door.

    Ok, not really, since the lawsuits have been piling up since questions about Acxiom's financial reports arose in the summer. But I remain unconvinced civil litigation is the correct venue; if something illegal did happen -- and nothing is proven --that's what the Securities and Exchange Commission is for. These Lawsuit, Lawsuit and Lawsuit firms do nothing except lure shareholders who see sudden plunges in their stocks.

    Earth to investors: if you want a safer investment, put your money in T-bills or even better, under your pillow. Then again, those folks would probably forget to take the money out before changing the sheets, lose it all in the wash, then sue the laundromat. 22GO>