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3Ms effect on the DOW..(CBS)

  1. fortius

    187 Posts.


    SAN FRANCISCO (CBS.MW) - The Dow Jones Industrial Average is headed
    into headline territory: the blazing headlines of single-day,
    1,000-point drops.

    The Dow 30, perhaps the world's best-known equity index, has been
    relatively buffered from the 20-month relentless decline in stocks. Rare
    are the days when the Dow collection of blue chips loses more in a day
    than the broader S&P 500 and Nasdaq Composite indexes.

    It happened earlier this week, when the price-weighted Dow fell 2
    percent, slightly more than the market-cap-weighted Standard & Poor's
    index that day and almost twice what Nasdaq suffered. At the heart of
    the Dow's drop was 3M (MMM), which was falling almost 2 percent.

    Shares of 3M, the highest priced stock in the Dow at $118 or so, wield
    the most influence on the blue-chip Dow. They're down 5.6 percent over
    the past six trading days compared with a 5 percent drop for the Dow.

    Yet 3M shares, just 10 percent from their all-time high this spring and
    selling for 30 times past earnings, are defying gravity. For this
    Minnesota maker of Post-Its and Scotch-Brite sponges, the bear market
    never happened.

    In our Aug. 29 profile
    of investment technician Bernie Schaeffer, we pointed out how a plunge
    in the industrial company's shares to its low point of 1998 would
    eliminate at least 450 points from the Dow. Of course, a 3M drop of that
    magnitude almost certainly would sink other Dow shares, including the
    other high-priced prop for the index, shares of Procter & Gamble (PG).

    ((Indeed, shares of 3m and Procter & Gamble are both beating the Dow by
    more than 60 percentage points since September 2000. See chart below.)

    Most investors don't realize that as a price-weighted index, a
    high-priced stock such as 3M or Procter & Gamble can have three or four
    times the influence of other Dow components that are far larger
    companies. Because shares of 3M are almost $120 (before the open
    Thursday), their influence is 4 times greater than shares of General
    Electric, a $28 stock.

    Such influence in the "stupid index," as Schaeffer of Schaeffer's
    Investment Research (http://www.schaeffersresearch.com/) puts it, comes
    even with 3M's stock-market worth at $46 billion compared with GE's $272
    billion. In S&P land, a market-weighting approach essentially reverses
    that advantage - or disadvantage in the sliding stock market, to GE.

    Schaeffer tells me Thursday he was browsing through some of the company
    descriptions on the Zack's Web site, looking for the wrap on 3M. "MMM's
    business appears to be mystery meat," Schaeffer says. "A good strategy
    in this economy for keeping the stock of an industrial company propped
    up and the P/E so ridiculous."

    Schaeffer compares these two descriptions, the first for Honeywell,
    which suffered its own earnings-projection blow earlier this month, the
    next one for 3M.

    Honeywell International is a diversified technology and manufacturing
    company, serving customers worldwide with aerospace products and
    services, control technologies for buildings, homes and industry,
    automotive products, power generation systems, specialty chemicals,
    fibers, plastics and electronic and advanced materials. Its operations
    are conducted by strategic business units, which have been aggregated
    under four reportable segments: Aerospace Solutions, Automation & Asset
    Management, Performance Materials and Power & Transportation Products.

    3M Co., formerly known as Minnesota Mining and Manufacturing Co., is an
    integrated enterprise characterized by substantial intercompany
    cooperation in research, manufacturing and marketing of products. Their
    businesses have developed from their research and technology in coating
    and bonding for coated abrasives.

    Why not just mention the Post-Its and sponges?


    The Dow usually represents between 15 percent and 20 percent of the
    market value of all New York Stock Exchange stocks. With other Dow
    components - Honeywell (HON), J.P. Morgan Chase (JPM), IBM (IBM), Intel
    (INTC) and so on -- getting picked off one by one, it is likely that one
    day, most of the index's members will trade well below $50.

    By that time, the Dow already will have suffered a wrenching day, and
    probably days, that approach the all-time percentage loss for the index:
    22.6 percent in the red on Oct. 19, 1987. On that day 15 years ago, the
    point drop for the 2,246-point Dow (at the previous Friday's close), was
    508 points.


    A greater point loss for the Dow came April 14, 2000, when the index
    lost 617 points, or 5.7 percent. This time around, NYSE circuit-breakers
    not withstanding, the Dow's one-day losses will generate red-ink
    headlines around the world, with the phrase Thousand Point Dow Drop
    dripping off the world's newspapers, magazines and cable-TV screens.

    Investment tip: The exchange-traded trust known as the Diamonds (DIA)
    have short-term and long-term "put" and "call" options. So do shares of
    3M. For more, see: How to short the Diamonds.

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