GM in the Global Dow - What Gives?

by: Index Universe November 12, 2008 | about stocks: GM    
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By Matthew Hougan

Can someone explain how General Motors (GM) slipped into the new Global Dow?

Dow Jones describes the index on its Web site as "a 150-stock index of the most innovative, vibrant and influential corporations from around the world."

It adds, "Only leading blue-chip stocks are included in the index."

Really? Here's how Merriam-Webster defines blue chip:

Main Entry: blue chip
Function: noun
Date: 1929
1 a: a business or undertaking with an outstanding record or likelihood of profitability b: a stock issue of high investment quality that usually pertains to a substantial well-established company and enjoys public confidence in its worth and stability; also: a company that offers such stocks

Anyone else see the disconnect?

Does GM have an "outstanding record or likelihood of profitability?" Does it "enjoy public confidence in its worth and stability"?

The only reason I can think of that GM was included is because it is still included in the U.S. Dow Jones industrial average. Dow Jones included all 30 components of the DJIA in the new Global Dow, and they probably didn't want to single out GM as unworthy. But as the old saying goes, when you're in a hole, stop digging.

The best solution would have been to boot GM from the DJIA and replace it with a real "blue chip." Barring that, they should have simply left it on the sidelines for the Global Dow.

(For what it's worth, I love that Dow Jones launched the Global Dow. They deserve special credit for launching the product at a market nadir, rather than waiting for the good times to return. But GM's inclusion is a miss.)

Should GM Go Bankrupt?

All that said, I can't let Jim Wiandt's rant about GM go without comment. It's fine to talk about principles and ending corporate socialism, but let's have a dose of reality on GM. What would a GM bankruptcy really mean?

  • It would mean hundreds of thousands of jobs lost, right now, at the point where our economy can least afford job losses.
  • It would mean a crushing blow to U.S. consumer confidence, at the point when consumers are already retreating in a climate of fear.
  • It would place taxpayers on the hook for billions of dollars in unfunded pension mandates ($35 billion according to the PBGC).
  • It would mean permanently reduced income for hundreds of thousands of retirees, and added pressure on our social support networks.

(It would also mean, of course, that, Jim's long-term stock holding in GM would be wiped out completely.)

To an extent, I'm playing devil's advocate here. I think I favor allowing GM to go bankrupt and emerge as a stronger, leaner company. But given the scope of the potential fallout, and the precarious situation of the economy, let's muzzle our inner John Galt and leave a little room for nuance.

BTW: There are plenty of interesting things you could do with a bailout. What if we put in place eco/energy conditions—not minor CAFE standard stuff, but conditions that would create a Manhattan project for improving fuel efficiency in the U.S. auto industry? What if we gave the auto industry cash but required a massive investment in natural gas-powered cars, or required a complete conversion to a hybrid fleet?

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This article has 4 comments:

  •  
    Nov 12 10:58 PM
    Next we'd be bailing out oil companies and refineries here, Russia, Venesuela, and the entire Arab world would then hate us for the opposite reason. They don't want oil to go crazy like it just did again but they don't want it to go away too much either.
    Reply | Link to Comment
  •  
    Nov 13 02:07 AM
    I have a cousin who has all kinds of bad habits so he hardly has any money left. Finally he got a pink slip from the boss and now he is asking every relative for financial help. He still keeps most of the bad habits. So, do you think we should help him without asking him to cut all those bad habits ?
    You see the point ? This cousin can't blame me because I warned him about his bad habits all the time for years. He has no more friends left.
    Reply | Link to Comment
  •  
    Nov 13 02:37 AM
    gm doesn't deserve a bailout but the workers & retirees do. They worked hard did what was asked of them only to watch the company ruined by incompetent management,
    Reply | Link to Comment
  •  
    Nov 13 02:56 PM
    "BTW: There are plenty of interesting things you could do with a bailout. What if we put in place eco/energy conditions—not minor CAFE standard stuff, but conditions that would create a Manhattan project for improving fuel efficiency in the U.S. auto industry? What if we gave the auto industry cash but required a massive investment in natural gas-powered cars, or required a complete conversion to a hybrid fleet?"

    I think that is the way to go. Consider it a New Deal-type project, a long-term investment to help produce a foundation for an industry likely to thrive 10-15 years down the road. The only question is whether GM (and Ford) can last long enough to return to profitability.
    Reply | Link to Comment
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