Thursday, September 18, 2008

How to Set New Highs on the Dow

Here's a recipe for success:

Remove AIG from the Dow 30. Add Kraft Foods. Stir.

If the Dow were still composed of its original dozen companies, its average would be hovering around zero - since most of its original companies no longer exist, and those that do are moribund. The only company from the original index still doing any work in the index is General Electric. Ironically, though, the original Dow was composed mainly of companies that produced commodities. Once America stopped producing things, the Dow had to change - and thus the current thirty stocks of the index include roughly a third that are devoted to finance or information technology - industries that don't actually produce anything. The addition of Kraft Foods - and particularly as a replacement for a financial company - is striking as a revealing throwback to the days of yore. What it reveals is a prediction on the part of the Dow Jones company that stuff will matter again - above all, food. While Kraft Foods is a massive producer and packager of industrial foods (once part of Philip Morris), it's still a good bet that its addition will help the Dow index rise in the future - since food is not going out of style in the way that derivatives are, and is only likely to rise in price in the future as we will once again discover that our biggest problem is not the disappearance of money, but the disappearance of the money-creator, petroleum. Thinking about it, including Kraft Foods in the Dow 30 is really like adding another oil company, given the that its "food" is really oil. So, it's a good bet that the index will go up and up.

1 comment:

Grahame Grieve said...

Information Technology is not an industry that produces nothing. However it can be very difficult to determine and value just what it does produce