Have you ever looked at something and asked yourself, “How in the world did they ever come up with such a stupid system?” You may have asked yourself this while standing in a line at Disney World or perhaps at the local DMV, or maybe while scanning over the teams selected when the latest College Football Playoff has been announced.
I ask myself this when trying to figure out how in the world did they come up with something as stupid as the Dow Jones Industrial Average? Instead of weighting the index by market cap or the relative value of the company in trading dollars, Dow components are weighted by price. It’s absolutely non-sensical in the age of Megacap companies doing stock splits with some companies even doing reverse stock splits.
I’d like to highlight the curious case of United Healthcare. As of the beginning of January the stock had the highest price of any Dow Jones component and so its weighted average was a ridiculous 9.1% in the Dow Jones Industrial Average. As an S&P 500 component it was 1.2%, a proper weighting for a company that was “on down the list” in terms of size in the age of megacap technology stocks. This is despite its market cap at the time being the 8th highest among the Dow components.
Enter the publication of an article this week by The Wall Street Journal saying that United Healthcare was the subject of an investigation by the Department of Justice for Medicare Fraud.1 The stock has crashed this week 38.6% and is now down 56.2% from its 52-week high. This has sent the Dow Jones Industrial Average down by a disproportionate amount versus the S&P 500 due to this monstrous weighting. The new lord of the manor in the Dow Jones is none other than Goldman Sachs, which despite its global influence, is hard to argue that it’s the world’s most influential company, even though its weighting in the Dow would seem to suggest that.
“The Dow is a dinosaur,” industry veteran and former Citi managing director, Dave Weisberger, told Yahoo Finance.
“The Dow is one of those symbols of American finance … but it’s no longer representative of the modern financial system,” he added. “There’s a reason why the S&P 500 is the bellwether by which everybody who is even remotely serious about the market measures the broader stock market.”2
I don’t usually leave such long quotations in our reports but we couldn’t have said it better. The point of this diatribe is to make sure you’re looking at the indices that matter when you are assessing where the market is at. That’s the S&P 500 and to some extent the Nasdaq 100 (for technology).
We remain a bit cautious about the market despite the recent surge in stock prices. There’s a lot to like about some of the trade deals that have been announced as well as the Congressional debate around taxes. Things seem to be headed in a positive direction when it comes to both and for that reason we’re optimistic about the direction of the market – but cautiously so.
After a 22% rally in from the lows on April 7, one investment manager feels very bearish. Michael Burry, the hedge fund manager of “The Big Short” fame, was revealed in the 13F filings of Scion Asset Management that he has gone full “Michael Burry” and sold out of all of his stocks. His top position is Nvidia puts (a bet on a downward direction of the market) followed by puts on Chinese stocks2. To say he’s bearish is likely an understatement. While we place some value on his opinions for getting the mortgage crisis dead right, he’s also been wrong in the last few years. That being said, it IS hard to ignore his opinion completely and so we’ll throw it in the stew and see what we’ve got when it begins to simmer.
In looking at a composite of 13F filings from other super-investors such as Bill Ackman and Warren Buffett, they are also out there buying. That’s the good news. The really good news is that some of the stocks those managers are buying are in either our Growth or Christian Values Growth portfolios3. While we aren’t attempting to copy their strategies, it’s always encouraging to see our choices are shared by some of the best in the business.
We appreciate your trust and enjoy interacting with you all in our meetings. Feel free to pick up the phone and call us anytime. We’re always happy to put our 2 cents in. If you listen to us, we’ll change your financial world …
Source:
1 https://finance.yahoo.com/news/unitedhealth-under-criminal-probe-possible-231729520.html
2 https://whalewisdom.com/filer/scion-asset-management-llc
3YouTube – “7 Super Investors Just Bought These Stocks” – Dividend Talks
