Friday, August 24, 2007

DJIA Stock Market Math

The DJIA just went up 143 points or did it? Here is an abbreviated re edit of a previous post The Stock Market Game from April 25th. The market at that time was at 13,000 and I am going to use the figures for that date. If you held one share of each stock in the Dow Jones average, you would have had an increase in equity of less than 18 dollars with today’s surge.

The "Dow Jones Industrial Average" sounds impressive. Right now it’s at 13,000. Add up the value of all thirty stocks in the DOW and you get 1,600. Hmmm where does the 13,000 come from?

There is the Dow divisor index which is currently at 0.1248. This is a peculiar animal.

Here is a cut and paste from Wikipedia:

Assume an index comprising on 2 stocks A and B.
A is priced at $100 and B is priced at $200.
Hence the index value in this case is (100+200)/2=150
(where N=2 which is index divisor). So the index value here is 150.

Now assume stock B undergoes 2:1 stock split so its value becomes $100.
Now the index value would become 100 instead of 150.
To correct his irregularity we need to do the index divisor calculation as
(100+100)/N=150 (Since Market Capitalization of the stock is unchanged).
Hence, upon calculation we get the value of N as 1.333.
This shows that a stock split caused the index divisor to be revised
from a value of 2 to 1.33.

Today with the DOW, you would take 1600/.1248=12,820

DOW 30 Stocks---------------Weight %-----Present Value
3M Co.--------------------------4.8746---------77.75
Alcoa Inc-----------------------2.15-------------34.37
Altria Group-------------------4.3605---------69.55
American Express------------3.8245---------61
American International ----4.3593---------69.53
AT&T Inc--------------------- 2.4997---------39.87
Boeing Co. --------------------5.8489---------93.29
Caterpillar Inc. --------------4.5028---------71.82
Citigroup Inc. ----------------3.3492---------53.42
Coca-Cola Co. ----------------3.2659---------52.09
DuPont------------------------ 3.0897---------49.28
Exxon Mobil Corp. ----------5.0007---------79.76
General Electric Co.---------2.2025---------35.13
General Motors Corp.-------1.9862---------31.68
Hewlett-Packard Co.--------2.5937----------41.37
Home Depot Inc.------------2.4583---------39.21
Honeywell-------------------- 3.2226---------51.4
Intel Corp.--------------------1.3894----------22.16
Johnson & Johnson---------4.0828---------65.12
JPMorgan Chase & Co.-----3.2941---------52.54
McDonald's Corp.-----------3.032-----------48.36
Merck & Co. Inc.-------------3.2282---------51.49
Microsoft Corp.--------------1.8194----------29.02
Pfizer Inc.---------------------1.6909---------26.97
Procter & Gamble-----------4-----------------63.8
United Technologies-------4.2307----------67.48
Wal-Mart Stores Inc.------3.1198---------49.76
Walt Disney Co.------------2.2119---------35.28

If you examine the Market Weighted %, this is the actual amount the Dow swings per dollar for each individual stock. Notice that a 5 dollar move in IBM translates into 30 points on the DOW (5 x 5.92). A 5 dollar move in Intel translates into 7 points on the DOW (5 x 1.38).

As boring as all of this is, its rather like doing 20 miles per hour in a car and the Manufacturer decides to add another zero to the speedometer and make it 200. In that scenario, you can go through a hospital zone at 200 mph and not suck the drapes out of the rooms.

DOW 13,000 sounds super, but when you add it up you begin to realize that the perspective is a little misleading. The DJIA 30 stocks are worth $1600. The real validity of the DOW hitting 13,000 has more to do with someone who bought into the market in about the year 1910.

So an $800 dollar drop in value of the 30 Dow stocks drops the Dow down six or seven thousand points.

The $1,600 hundred dollar value for the Dow is a concept I understand. When you start fiddling with graphs and divisors, things take on a look that can be quite misleading. Terms like P/E, Earnings, Book Value, Dividend mean nothing, afterall "It’s a high powered growth stock." It’s kind of like asking you daughter about her new boyfriend and what he does for a living and she says “It doesn’t matter Dad, he’s a STUD.” That's a good indication that Rug Rat “Welfare One” is probably on the way.


Aaron said...

One thing you missed is that in the same day the dollar went down .5%. So there wasn't any gain after all.

Anonymous said...

Exactly aaron,

also, in the time that the DOW went from 8000 to 12000, the dollar index(value of dollar with respect to a basket of ~ 20 other currencies
) fell from 120 to 80.

So, although it is not a perfect correlation in percentage terms, it just shows that you can be a good stock picker but the government can erase your gains by printing more dollars.

Aaron said...

It would appear that the US has been borrowing huge amount of money to just tread water.

Jim in San Marcos said...

Anon 10:54

I agree. The real question the rest of the world hasn't asked yet, is; "Are we good for it?"

That's the real surprise!

Suma said...

Hey, the stock market math is really appreciatable and very interesting...

Suma valluru