well, at least the stock markets are happy

[solarbird]

Good evening.

Remember that Mortgage Backed Securities market chart from Wednesday, and how they were calling it Black Wednesday by Thursday, but it recovered a little on Friday? Here's today:



Chart courtesy tf:Zarathustra. If that doesn't correct that'll be another half point to one point added to most mortgage rates.

The Treasury market is acting very strangely, even for recent times, with extremely high - even record-setting - microvolitility. People who follow that market closely are concerned. Also, the yield curve continues to get steeper as foreign interest moves to shorter and shorter Treasuries.

The US dollar tanked hard this morning but recovered most of its losses by EOD and the DX is currently hanging around 79.1. Oil was up again, despite a US dollar ending flat for the day. The Canadian dollar is up to US91.5¢.

The Institute for Supply Management reports US manufacturing contracted for the 16th straight month in May. By contrast, China's expanded for the third month in a row, but remember that they need about 7% just to keep a population-workforce crisis at bay. Mish thinks most of the China boost is in stimulus money.

Meanwhile, U.S. Treasury Secretary Timothy Geithner tried to reassure Chinese students about US dollar assets. They laughed at him. Brad Setzer at the CFR notes that while US government borrowing from foreign capital has soared, private has collapsed, so the total borrow is actually down a bit from peak.

GM was everywhere, so I don't see any need to go on more about it here. Good luck tomorrow!

Comments

[shadesofmauve]

Damn and double damn. Both the house and the mortgage rate I wanted were available a month and a half ago -- while I was still waiting to find out if I still had a job.

[galbinus-caeli.livejournal.com]

Do you have any comment on the change in the constituents of the Dow? I wonder how the tool can be considered consistent when almost 10% of its members are swapped out with new companies.

[cow.livejournal.com]

I would simply note that that happens once or twice a decade (http://en.wikipedia.org/wiki/DJIA#Companies_included_in_the_DJIA).

[galbinus-caeli.livejournal.com]

I know that it happens on a regular basis. I wonder how the tool can be considered constant when the parts of the tool are replaced.

Specifically here the Dow is removing two failing, or at least flailing, companies and replacing them with two companies that are on the upswing. This sounds like the same kind of thing the Texas School system has been doing to improve their "No Child Left Behind" numbers. They encourage failing students to either transfer to "technical" schools (which are not included in NCLB) or to simply drop out.

Terry Pratchett in one of his discworld books talks about the Royal Axe of the Dwarven King. The axe is hundreds of years old, and both the head and the handle have been replaced several times. Yet it is still the same axe.

How can the Dow be compared over time when the definition of "DJI" has changed in that time?

[solarbird]

This is one of the reasons I prefer the S&P 500.

However, in defence of the DIJA, you can't keep companies in it that aren't trading. And just as importantly (in regards to general changes), in general, an individual company collapsing does not necessarily indicate that the sector it represents is collapsing. When the old AT&T was dismantled after anti-trust actions in the 1980s, that did not imply that people were no longer using telephones, for example. So the idea is that companies representative of different sectors of the industrial economy would be included in such a way as to give a rough impression of the overall health of the market.

And back in the pre-computer days, well, it had about as many numbers as you could update continually. (Particularly given that it's a price-weighted index, which you can read about here. The S&P500 is not price-weighted. (That said, most of the time in recent years they do move in relative concert, so arguably it's much ado about nothing really very much.)

[cow.livejournal.com]

It can't, and it's not meant to. It's much more useful as a present-day snapshot of industry -- it is up today, it is down another day -- than a hundred-year view.

That's why we have to apply various things (not just, but including, inflation) to make it make sense over time. Even still, it isn't perfect. But we're comparing tech companies and insurance brokers now to railroads, leather, and cotton producers 113 years ago.

[solarbird]

It can't, and it's not meant to.
Except people do all the time, which is annoying but unavoidable.

[cow.livejournal.com]

And thus why I end up yelling at my monitor a lot. }:D

[galbinus-caeli.livejournal.com]

Yet that is exactly how it is used. This very week the cable news networks are cheerfully reporting that "The Dow Is Up!". How much of that "Up"ness is due to the simple replacement of a failing component with a working one?

[galbinus-caeli.livejournal.com]

This is exactly my complaint/concern/headshaker.

[galbinus-caeli.livejournal.com]

I won't allow fierce_rabbit to throw things at the TV any more. The new LCDs are not as sturdy as the old CRTs.

[cow.livejournal.com]

None; it doesn't take effect until the 8th.

[galbinus-caeli.livejournal.com]

Does the Dow remove companies from the index for overperformance as well as underperformance? I haven't heard of a company being dropped for being too successful, but that my simply be sampling bias.

[galbinus-caeli.livejournal.com]

Of course. Good point. Yet I predict that their will be a jump in the Dow on that day, and that the networks will breathlessly report it with the same excitement that TV Meteorologist report the shocking heat wave that seems to blanket the country every June-August.

[solarbird]

There have been notes made in a couple of cases I can think of offhand in the past, so one can have some justification to hope for better than that.

[solarbird]

I don't know of any such cases, and if they are, they're certainly not recent. However, I try to envision a scenario wherein one company grows massively while its sector as a whole shrinks, and the only cases I can think of are dying and/or niche markets which wouldn't be on the DJIA to start, so.

[lolmike.livejournal.com]

Components of the index are price-weighted and scaled to maintain continuity and keep the result meaningful. GM is only traded off-exchange now; Dow Jones has stated that the price they'll use until the 8th is GMGMQ, from the "Pink Sheets" off-exchange market. Currently the last trade was at 0.691 (http://www.pinksheets.com/pink/quote/quote.jsp?symbol=GMGMQ), and it is weighted as 0.06% of the index, as per this XLS file from Dow Jones (http://www.djindexes.com/mdsidx/?event=components&symbol=DJI). On the 8th, Citigroup, trading at 3.53, weighted as 0.33% of the index, will also be removed.

According to the company, "the math used to calculate the index will be adjusted to reflect the prices of the stocks concerned. The divisor used to calculate The Dow from its components’ prices on their respective home exchanges will be changed prior to the opening on June 8. This procedure prevents any distortion in The Dow’s reflection of the U.S. stock market." There are a lot of eyeballs on the Dow; I actually do believe that they will maintain the same perspective on the market as they have today, after the change, and it will reflect the market just as well as it does now.

It's generally accepted in economic theory that a sufficient large basket of stocks reflects the entire market's performance, and 30 highly liquid stocks seems to be enough. You can compare the performance of the DJI against alternatives, like the S&P 500 or the Wilshire 5000, and it comes out about the same. The latter may be most interesting to you as it's a market-capitalization-weighted index of every tradable equity in the United States. This chart shows how they look together over the past 7 years. (http://finance.yahoo.com/echarts?s=^DJI#chart7:symbol=^dji;range=20020601,20090601;compare=^dwc+^gspc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined).