Dow Jones Blows It

Dow Jones today used the General Motors (GM) bankruptcy as an opportunity to reconfigure the Dow Jones Industrials Average (DJIA), tossing GM out and giving Citigroup (C) the boot as well for good measure. In the place of those two fallen icons, Travelers (TRV) for Citigroup and Cisco Systems (CSCO) for GM were added to the senior index.

If you ask me, Dow Jones blew it. The organization had a huge opportunity to restructure the index but instead decided to maintain the status quo. That is not to say that Travelers, with a market cap of $24 billion, and Cisco, with a market cap of $110 billion, were not worthy. I think they were. They were replacing Citigroup, with a market cap of $20 billion -- though, I think that eventually makes it way much higher -- and GM, which is, for all intents and purposes, worthless. (For you history buffs, Travelers was spun off from Citigroup a few years ago.)

So why were Apple (AAPL), Google (GOOG) and Berkshire Hathaway (BRK.A, BRK.B) left out of contention? Apple has a $122 billion market cap, Google has a market cap of $133 billion, and Berkshire has a market cap of $144 billion. That's not exactly chopped liver.

The problem lies in the fact that the DJIA is a price-weighted index. Thus, Apple at $135.81, Google at $417.23 and Berkshire's class-A shares at $91,800 -- the B-class shares are a pittance at $2,972 -- would dominate the index. Right now, International Business Machines (IBM), priced at $106.28, is the king of the Dow. On the other hand, Travelers was priced at $40.66, and Cisco was $18.50. Using the current methodology for the DJIA, Apple, Google and Berkshire Hathaway are too expensive, but if Apple splits, say, five for one or Google 10 for one, they would make great candidates for the index. Of course, that would be tantamount to index tomfoolery, and Apple, Google and Berkshire Hathaway's management teams are too smart to play those games just for the sake of inclusion in the DJIA.

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At the time of publication, Rothbort was long Apple, Google and Berkshire Hathaway Class B shares, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.