Dow Jones Industrial Average Changes: GM (GM), Citigroup (C), Replaced by Cisco (CSCO), Travelers (TRV)

Submitted By Trader Mark
As most readers will notice, I rarely if ever talk about the Dow Jones Industrial Average (DJIA).... there are a few reasons - mostly it is only 30 stocks and the way it calculates price changes is nonsensical. Unlike most indexes the DJIA is price weighted... meaning a stock at $80 would have 10x the impact of a stock at $8. So in theory you could have 29 stocks trading at $10 and 1 stock trading at $300 and the $300 stock would be the majority of the daily movement. Hence, Google (GOOG) has no chance of being included in the DJIA! On the flip side when low price stocks go into free fall it doesnt effect the DJIA much... Citigroup going from $8 to $1 didn't do much damage.

Here are the changes to the index - for such a staid index it is remarkable to think that 3 companies have been replaced in just the past 12 mo (10% of the representation) and 5 in under 2 years. But we live in remarkable times don't we? I think at 20% technology is overweighted in the DJIA so adding Cisco Systems (CSCO) doesn't make too much sense in terms of how our economy is reflected. Travelers (TRV) does make sense as its a more conservatively run large insurer, but I thought Visa (V) would of been an excellent choice. To better reflect our society however, either a bubble maker or paper printing operation would of been the best choice ;) Or at minimum yet another retailer - after all consuming is 70% of the economy.

Via Bloomberg

General Motors Corp. and Citigroup Inc., crippled by the first global recession since World War II, were removed from the INDU:IND' ))">Dow Jones Industrial Average and replaced by Cisco Systems Inc. and Travelers Cos. GM, which filed for bankruptcy protection today, and Citigroup, the recipient of $45 billion in taxpayer aid, became the first companies since American International Group Inc. in September to leave the 30-stock average. Their shares have lost more than 90 percent since the start of 2007.
By replacing GM with CSCO:US' ))">Cisco, Dow Jones & Co. has removed automakers from the best-known benchmark for U.S. stocks, saying in an e-mailed statement that computers are as central to the economy as cars were in the previous century.
Citigroup, until last year the world’s biggest financial firm by assets, is being replaced by a company it jettisoned in 2002 and that was once run by its former chairman, Sanford “Sandy” Weill. (isn't that ironic?) Citigroup was formed in 1998 from the merger of Travelers Group Inc. and Citicorp. In 2002, Citigroup gave up control of Hartford, Connecticut-based Travelers Property Casualty Corp. through an initial public offering and subsequent spinoff.
“This announcement brings front and center the challenges facing the U.S. economy as it strives to remain competitive,” said Alan Gayle, director of asset allocation at Ridgeworth Investments, which manages $60 billion in Richmond, Virginia. “The Dow Jones Industrial Average is becoming less of an industrial average. It’s trying to reflect the broader economy.”
Thomson said Citigroup may be considered for the index again after it has “refashioned itself,” according to the statement.
TRV:US' ))">Travelers, the second-biggest U.S. commercial insurer, joins JPMorgan Chase & Co., American Express Co. and Bank of America Corp. among financial companies in the Dow. Its higher price than Citigroup’s will boost the benchmark’s financial weighting from about 7 percent. (that is also ironic in terms of a small weighting considering financial industry profits were the lion's share of US profit growth in the 2000s)
CSCO:US' ))">Cisco, the world’s largest maker of computer-networking equipment, joins Microsoft Corp., International Business Machines Corp., Intel Corp. and Hewlett-Packard Co. in the Dow, boosting its technology weighting from about 17 percent. With the addition of Cisco, computer companies will surpass industrials including 3M Co. as the biggest category in the average. (shouldn't we rename it the Dow Jones Technology Index if that's the case?)
KFT:US' ))">Kraft Foods Inc. was named to replace AIG in the Dow average on Sept. 18, the day after the nation’s biggest insurer was taken over by the U.S. government to avert its collapse.
Three companies INDU:IND' ))">left the Dow last year, including AIG. Altria Group Inc. and Honeywell International Inc. were replaced by Bank of America and Chevron Corp. Those changes were the first since 2004.