These Stocks Are Strong Candidates For Being Eliminated From The Dow

Here is an interesting little bit of trivia for you: Based on their prices on Thursday morning, if the 5 “single-digit midgets” in the Dow (^DJI) - Alcoa (AA), Bank of America (BAC), Citigroup (C), General Electric (GE) and General Motors (GM) - were to all go to zero today, the direct impact on the Dow Jones Average would only be 157 points.

That is because it is a price weighted index, so at this point the fate of Citigroup, at just $1.04 per share, is pretty much irrelevant to the course of the Blue Chip Average. The S&P 500 (^GSPC) is generally considered a more accurate reflection of the state of the market, since it is a market-cap-based average.

In the S&P 500, General Electric is still important (although nothing like it used to be) since it has a market cap of almost $75 billion. The others are rapidly becoming insignificant there as well. The total market cap of the other 4 is under $29 billion, and over $17 billion of that is in Bank of America.

Of course, if these firms were to disappear, there would be impacts on other firms as well as on market confidence. A good case could be made that all of them - with the possible exception of Alcoa - are systemically important, hence the massive aid that all but Alcoa have been getting form the government. Yes, GE has been sucking on the Federal teat too, in the form of Treasury and Fed backstops to its debt and commercial paper.

The Dow is supposed to represent the cream of U.S. business. I strongly suspect that all but GE are strong candidates for being eliminated from the average. Short term, that will put the stocks under more pressure.

Although there is not a lot of money that is indexed to the Dow, membership in the club is a psychological positive to most investors. Longer term, though, it would be a signal to consider getting back into the names. Historically, the index committee at Dow Jones has a lousy record as a stock picker.

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