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How now, cowed

Dow

?

For the first time since the start of the bear market in 2000, the Dow Jones Industrial Average is the worst-performing and most scandalized major market proxy over a calendar-year period.

And its 5% decline so far in 2004 -- capped by a 100-point slide last week when insurance giant

American International Group

(AIG) - Get Report

was accused of bid-rigging -- has left it straggling behind the

S&P 500

, down 0.5%; the Nasdaq 100, down 2.5%; and even the

Nasdaq Composite

, down 3.1%. The Amex Composite, which is loaded with oil companies, is up 10%.

It's not just AIG. This stunning state of affairs has resulted from months of intense attacks on several of the world's largest companies for failures financial, strategic and moral. Where two years ago fans of the very large companies that comprise the Dow Jones Industrials could lord their superiority over the brash upstarts at the S&P and Nasdaq, they have now been forced to face up to a woeful record of long-ignored shortcomings. The Dow is suddenly a lion in winter.

Cut Down in Broad Daylight

The humbling of the mega-cap index is not trivial. It is emblematic of an economy that has lost its leadership. Imagine an army with no generals or a major-league team without a coach.

It was one thing when billions of dollars were lost as overvalued Internet stocks slammed the Nasdaq Composite four years ago; it was easy to say that an unknowledgeable class of retail investors got what was coming to them. But it is quite another when stocks in the mainstream of American life -- brand names all -- are cut down in broad daylight because of their own mistakes.

It's hard to believe that these self-inflicted wounds will heal quickly or well -- a development that sets a worrisome tone as stocks head into the time of year that typically delivers the best returns. Yet some names in related Dow Jones indices may find favor instead, as I'll note in a moment.

The latest blow for the Dow came last Thursday when two executives at AIG pleaded guilty to charges of price-fixing and collusion in the insurance industry. AIG was, ironically, added to the index just a few months ago, in part because of its reputation for probity as the nation's largest insurance company. The revelation whacked AIG's value by 10%, obliterating $18 billion worth of shareholder wealth.

Prior Dow downers in this season of sanction were

Merck

(MRK) - Get Report

, which lost a third of its value after recalling a highly profitable analgesic linked to heart disease;

Coca-Cola

(KO) - Get Report

, which lost one-fifth of its value after warning investors that its worldwide product pricing strategy had failed; and

General Motors

(GM) - Get Report

, which has lost 27% of its value in 2004 amid confessions that it cannot find enough buyers for its cars, even while offering interest-free loans.

Many of the rest of the stocks in the Dow are not much better off. The rogue's gallery includes

Intel

(INTC) - Get Report

and

Hewlett-Packard

(HPQ) - Get Report

, which can't find enough buyers for their semiconductors and computers; cigarette maker

Altria

(MO) - Get Report

, whose future remains a haze of smoker lawsuits; aluminum producer

Alcoa

(AA) - Get Report

, which is so messed up it can't make money even when aluminum prices are at all-time highs; and banker

Citigroup

(C) - Get Report

, which is mixed up in scandals ranging from its role in the Enron debacle to its links to the Saudi terror underworld.

Meanwhile,

Wal-Mart

(WMT) - Get Report

shares are flat as management ponders what comes next after becoming the largest and most disliked retailer in the world.

Opportunity in Transports and Utilities

As the third-quarter earnings season continues in earnest this week, I'd like to propose a strategy for the large-cap segment of your portfolio. Consider leaders among the companies that make up the less-celebrated Dow Jones Transportation Average and the Dow Jones Utilities Average. They've done exceedingly well this year as a group -- both are up more than 12% -- and appear poised for further success after recent pullbacks.

It's interesting to note that many of these had a turn in the stockade a couple of years ago and are now in the middle of recoveries.

Among the utilities,

FirstEnergy

(FE) - Get Report

went from $38 to $25 in a couple of weeks in the summer of 2003 after being implicated in a big East Coast power blackout;

PG&E

(PCG) - Get Report

went from $32 to $6 as it filed for Chapter 11 protection amid California's energy crisis in 2000-01; and

TXU

( TXU) went from $56 to $10 in a matter of weeks in mid-2002 after suffering guilt-by-association in the Enron affair and big losses in its European operations.

Among the transports,

Ryder

(R) - Get Report

shares sank steadily from 1998 to 2001 before bottoming out and going on to triple; the situation was similar for

Norfolk Southern

(NSC) - Get Report

. Most of the others on the list, especially

Yellow Roadway

( YELL) and

Expeditors International

(EXPD) - Get Report

, have done very well for many years through all kinds of market climates.

There's little doubt that Merck, Coke, GM and AIG -- the wounded big-caps of the Dow Jones Industrials -- will experience their own rebounds eventually. But for the next three to 12 months, they are probably under house arrest. Leave them there until they can prove they no longer deserve their punishment -- not just with promises that they'll do better, but with deeds.

Jon D. Markman is publisher of

StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. At the time of publication, he held positions in the following stocks mentioned: Expeditors International, Yellow Roadway, ExxonMobil and Coca-Cola. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at

jon.markman@gmail.com; please write COMMENT in the subject line.