Dump Citi, Save the Dow
Bank is only a liability to the venerable price-weighted index.
Sound crazy? Let me explain.
The DJIA was started in 1896 by Charles Dow. Back then, all calculations had to be done by hand, so Dow started his index by simply picking 12 stocks, adding the prices together, and dividing by 12. The index eventually grew to 30 stocks, but the divisor didn't stay at 12: It's constantly changed as stocks split, joined or left the DJIA.
For example, if a stock split 2-for-1, its price would be cut in half, which would adversely affect the DJIA. So, for historical continuity, the divisor would be changed to reflect the stock split. The divisor is currently 0.125552709, which means that if a stock price rose $1, the DJIA would go up almost exactly 8 points.
Back to Citigroup. On October 9, 2007 -- the all-time DJIA high -- Citigroup closed at $47.62. Using the divisor in effect back then, Citigroup contributed 387 points to the DJIA's total of 14,164. As of last Friday's close of $2.62, Citigroup only contributed 21 points to the DJIA - meaning that, if Citi goes to zero, the DJIA would only drop 21 points.
Let's assume that Citigroup does the 1-for-10 reverse split. The stock price is now $26.20, and although the divisor would change slightly, Citi would contribute about 210 points to the DJIA. If the stock price dropped to $22 or so, Citigroup's total contribution to the DJIA would now be negative. What a strong testament to the legacy of Sandy Weill and Chuck Prince.
This little exercise demonstrates the problem with price-weighted indices versus market-cap weighted indices such as the S&P 500. The S&P 500 wouldn't be affected by the reverse split, because the market cap of Citgroup wouldn't change.
My personal advice to the Dow Jones committee: Put Citigroup out of its misery. Just dump it. I bet Charles Dow would agree with that.
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