EXIT WOUNDS by Tom Heysek Email comments or question to tomheysek@i-ops.com
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Individual investors are witnessing a once-in-a-generation market phenomenon---the relentless readjustment of corporate valuations amidst a shift toward more fundamental barometers of worth. Rather than wait one year from now to publish the analytical significance of today's market processes as they unfold, we've elected to chronicle this readjustment process for Individual Investors on a weekly basis, and to articulate several investment-worthy strategies for individual investors as they emerge.
The first step in this process is LOOKING FOR THE BOTTOM. The market value of the 5000 largest public companies in the USA was almost $11 Trillion ($10,850 Billion to be precise) as of the March 12th close. The country's Gross Domestic Product (GDP) approximates $9.5 Trillion. A valuation of the 5000 largest companies at a multiple of one-times the country's GDP seems a reasonable bottom-level valuation. This implies another 13% decline in the market from these levels.
This is where we distinguish between the Dow Jones Average of 30 blue chip companies and the companies traded on NASDSAQ. Table I attached illustrates that as of the March 12th close, the 30 companies comprising the Dow Index had a collective market cap of over $3.3 Trillion, or about 30% of the market cap of all American public companies…just those 30. That Table contains some nettlesome news, such as three of the components hitting new 52 week lows, and another four threatening to do so.
If the Dow 30 represents 30% of the $10,850 Billion in total market valuation at March 12th (i.e. $3,341.9, see Table's totals), and therefore foreshadows the Dow, then 70%, or $7,508 Billion in market value, serves as a harbinger of the NASDAQ Composite. Using $9.5 Trillion as the market value in total, 30% of this equals $2,850 Billion---interpolating into a Dow Jones Bottom of 8925, + or - 3%. Applying the same arithmetic to the NASDAQ yields a forecast bottom of 1800 + or - 5%.
What this means for the Individual Investor is to not expect any of the same old tech names to suddenly emerge as market leaders anytime soon. Take that opportunity instead to sell into strength (short or otherwise), at least until the above bottom-territories are reached (Dow at 8900; NASDAQ at 1800). Be prepared to look for the new and the unexpected in gathering information to reach actionable investment decisions. You've let mutual fund managers lose your money for you all these years---now's the time to start doing your own research and analysis when it comes to matters of investing your own money.
Exit Wounds versus Exit Strategies primarily deals with companies of two sizes…Large Cap (which for our purposes means the 30-Dow Index components) and Small Caps---the universe of the overlooked and under-followed. We define Small Cap companies as those whose market capitalization (shares outstanding times the stock price) is less than $675 million. Here's how we arrive at that demarcation of our investment universe:
Index Market Cap Divided By
(# of companies) Equals
(Avg Mkt Cap)
Dow Index $3,342 Billion 30 $111 Billion
S & P 500 7,812 Billion (less
3,342 Billion) =
4,470 Billion 470 $10 Billion
4,500 others $10,850 Billion (less
7,812 Billion) =
3,038 Billion 4,500 $675 million
TABLE I
Component Shares Outstanding
(in millions) Price at
March 12th Market
Value
(billions)
AT & T 3,750 $22.67 $85
Alcoa 866 35.99 * 31
American Express 1,330 40.40 * 54
Boeing 834 61.00 51
Caterpiller 344 44.96 16
Citigroup 5,030 47.10 237
Coca-cola 2,490 50.10 125
Disney 2,080 27.51 ** 57
DuPont 1,040 45.48 47
Eastman Kodak 300 44.12 13
ExxonMobil 3,480 83.76 292
General Electric 9,910 39.60 * 392
General Motors 549 56.95 31
Hewlett-Packard 1,940 29.88 ** 58
Home Depot 2,320 42.06 98
Honeywell 798 40.40 32
IBM 1,750 95.49 167
Intel 6,730 27.75 ** 187
International Paper 481 37.89 18
JohnsonJohnson 1,390 94.95 132
JPMorganChase 1,900 45.49 86
McDonald's 1,310 28.06 ** 37
Merck 2,310 74.15 171
Microsoft 5,340 51.94 277
MMM 397 111.80 44
Philip Morris 2,220 49.60 110
Proctor & Gamble 1,300 68.25 89
SBC 3,370 44.89 151
United Technologies 471 78.40 37
Wal*Mart 4,470 48.31 216
Total $3,342
(* = new 52 week low; ** = threatening new 52 week low)
……………………………………………………...……………………………...
Supplemental: The importance of assembling tables such as this is the anticipatory heads-up and perspective it provides individual investors. Looking forward, for example, GE is imminently going to acquire Honeywell…and it is a foregone conclusion that the Dow Jones & Co editorial staff is already working on a replacement.
However, the editorial staff has not shown a disposition toward single substitutions, but, based upon the last two changes in that index (March 1997 and November 1999), the changes were four-at-a-time. When Honeywell is removed from the Dow Index, therefore, we expect the other three new components will be AOL, Cisco and SunMicro---replacing the three smallest Dow components: Caterpillar, Eastman Kodak and International Paper. Details of the prior two changes in the Dow Jones Industrial Average's components follow:
March 1997
IN OUT
Johnson & Johnson Texaco
Travelers Bethlehem Steel
Hewlett-Packard Westinghouse
Wal*Mart Woolworth
November 1999
IN OUT
Microsoft Chevron
Intel Goodyear
SBC Communication Sears
Home Depot Dow Chemical
The significance of these substitutions (including the next one) is that the market value of the new companies entering the Dow Index is 4 to 6 times greater than the market value of the companies exiting this Index.
Email comments or question to tomheysek@i-ops.com
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