Thursday, April 26, 2007

The Short View By John Authers 4-26-07

The Short View By John Authers
Copyright The Financial Times Limited 2007
Published: April 26 2007 03:00 | Last updated: April 26 2007 03:00

Needed: one bucket of cold water. The Dow Jones Industrial Average, the world's best-known stock market benchmark, passed 13,000 for the first time early yesterday. It was a symptom of the air of optimism in Wall Street. But ultimately a landmark for the Dow signifies little or nothing.

This column has addressed the Dow's technical limitations before. It is weighted by share price, not market value, so the biggest companies do not have the biggest impact. A third of the 1,000 index points by which the Dow has increased since it passed 12,000 last October came from just four companies - Altria, Boeing, Honeywell and ExxonMobil.

It is too heavily weighted towards industrials to be a barometer of corporate America. But with constituents such as Citigroup, Wal-Mart, Microsoft and McDonald's, it is not a true industrial index either.

It is not even a true benchmark for "mega-cap" large companies. These are under-performing but you need the Russell Top 50 index, up only 1.6 per cent this year, compared with a 4.2 per cent rise in the Dow, to tell you this.

Its defenders point out that the Dow continues to be correlated closely with the S&P 500, by far the most important index in terms of the money linked to it. But that acknowledges the importance of the S&P, which needs to grow only 2.7 per cent to set its first record high since 2000 - a much more important event.

Ironically, another Dow Jones benchmark set up at the same time as the Industrials may be more interesting. The 20-stock Transportation Average is also at a record high. It is up 14 per cent for the year - 10 percentage points better than the Industrials.

Transport stocks are highly exposed to the global economy, and a joint high for Industrials and Transportation is traditionally viewed as a very bullish indicator. It at least suggests that if there is a risk at present, it is of overheating, not a slowdown. That, maybe, is of some interest.


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