The Upshot: A Cisco-Free Diet Helps the Dow

The Cisco Kid was a friend of mine. Them longs drink cheap whiskey, shorts now drink the fine wine. The stock hit 70, 60, 50, 40, 30, 20, 17 and then them dip buyers finally lost their minds.

You don't hear much of a rallying cry on Wall Street for the editors of the Dow Jones indices to add Cisco (CSCO Quote) to the 30-stock Dow Jones Industrial Average anymore.

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Investors not licking their wounds quietly after watching Cisco drop from a 52-week high of $80.25 to a current $16.25 may be spending their time mocking the once untouchable stock (much like Chicago trader Fane Lozman of ScanShift, who penned the above ditty from War's 1973 hit, The Cisco Kid).

In a way, it's kind of funny that the Dow Jones people displayed such patience; adding Cisco last year would have, in an ironic way, been in keeping with other recent changes made by the editors there. That's because the index, interested in incorporating elements of the information technology economy into the average in recent years, added in chipmaker Intel (INTC Quote) and PC and software maker Microsoft (MSFT Quote) to the average in November 1999, and those two stocks responded by performing worse than most other Dow component stocks over the ensuing 12-month period.

Adding networking-giant Cisco would have been symbolic in terms of its meaning to the economy (and probably would have helped to spell the end of the networking giant's leadership as a stock market play). What seemed like a no-brainer a year ago is more like a head-scratcher now. Cisco benefited mightily from massive expenditures on data networking.

With data and communications infrastructure probably underrepresented in the 30-stock average, there's still a good case for the addition of a company like Cisco. Of course, now it would be laughed at, despite the jackhammerlike mentality of investors last year suggesting the Dow people had lost their heads. Now, they'd be laughed at for their supposed poor timing, and sure to hear the comparisons to IBM (IBM Quote), added to the 30-stock average in 1979, presaging years of underperformance by Big Blue.

"They were kind of darned if they did, darned if they didn't," said Chuck Carlson, co-editor of Dow Theory Forecasts. "People were always bad-mouthing the Dow because it didn't have Microsoft, Intel or Home Depot (HD Quote), and so, lo and behold, they put those in," and they've been lousy performers since.

The Dow people are going to have to make at least one change whenever the proposed General Electric-Honeywell merger is finally completed (the first merger between Dow components since 1907, when J.P. Morgan purchased Tennessee Coal & Iron).

The greater consideration for the Dow people, of course, remains their use of the average as a gauge of the economy. In the past three years, the Nasdaq Composite Index replaced the Dow when using that catch-all phrase, "the market," mostly because you could get 60% returns in the Nasdaq and 20% in Dow stocks.

The Nasdaq's dropped 60% from its peak, and its panicked spiral downward resulted in a screeching cry every morning and evening for interest rate cuts and the feverish insistence among television anchors that the economy had fallen into a pit.

Meanwhile, the Dow calmly declined by about 15% over a one-year period. Economic reports display a significant weakening in the economy but not a recession yet, about what the Cisco-free Dow has been suggesting.

Patience ain't always a bad thing.