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I Coulda’ Been A (Dow) Contender!
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Traders are buzzing over which company will replace GM [GM
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] in the Dow, if and when the automaker declares bankruptcy.
Once a company files for bankruptcy protection, it is disqualified from being one of the 30 Dow components, explains John Prestbo, editor and executive director of Dow Jones Indexes.
As for a replacement, that decision rests with the managing editor of The Wall Street Journal, Robert Thomson.
Selecting A Replacement
Contrary to what you might have heard, GM's replacement would not have to be another automaker (aka Ford [GM
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]) or even another manufacturing or industrial company. There are no hard rules as to which companies make up the index.
The main goal is to try and duplicate in the Dow the weights of all market sectors excluding utilities and transportation companies, Prestbo says. (The Dow has separate indexes to track utilities and transportation firms, which is why they are not included in the industrial average.)
In a research note last month, Nicholas Colas, chief market strategist for BNY ConvergEx Group, laid out possible replacements for GM and from that list the Fast Money traders think the following are most likely: Goldman Sachs [GS
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], Cisco Systems [CSCO
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], Wells Fargo [WFC
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], Apple [AAPL
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], Google [GOOG
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], .
What do you think? We want to know!
Impact on Share Price
Despite the switch, Kenneth Froewiss, a professor of finance at New York University's Stern School of Business, said a company's addition to the Dow would likely have little impact on its stock.
Fewer mutual funds track or mimic the Dow than they do broader indexes such as the Standard & Poor's 500. That means there would be little more than some added publicity for the company that replaces GM, he said.
However, GM is also a component of the S&P 500, so a company chosen to replace it in that index could see a blip up in trading when funds that track the S&P 500 buy its shares.
GM would be the second firm to be removed from the Dow amid the ongoing economic crisis. Last September, insurer American International Group Inc. was removed after the government took an 80 percent stake in the firm to help it avoid complete collapse. AIG [AIG
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] was replaced by Kraft [KFT
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]. on Sept. 22.
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Trader disclosure: On May 29TH, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Grasso Owns (AMZN), (CSCO), (RIMM), (V), (KLF); Stuart Frankel Clients Own (SUN), (YHOO), (AAPL), (AMD) ,(BAC) ,(BHI) ,(BP), (C), (COP) ,(CVX) ,(F) ,(GS) ,(HAL) ,(PFE) ,(SLB) ,(SUN) ,(USO) ,(VLO) ,(WFC) ,(USB) ,(PBR), (JPM), (LMT), (GD), (AET), (GM); Finerman's Firm Owns (MRO); Finerman's Firm Is Short (IJR), (MDY), (SPY), (IWM), (USO); Finerman's Firm And Finerman Own (BAC) Preferred Shares And Are Short (BAC); Finerman's Firm And Finerman Own (WFC) Preferred Shares, Finerman's Firm Is Short (WFC); Najarian Owns (PFE); Najarian Owns (BP) Call Spread; Najarian Owns (CLF) Call Spread; Najarian Owns (FCX) Call Spread; Najarian Owns (HIG) Put Spread; Najarian Owns (XHB) Call Spread; Najarian Owns (PCU) Calls; Finerman's Firm Owns (IBB), (XBI), (CSCO), Finerman's Firm And Finerman Own (FLS); Finerman's Firm Owns (BWA) Puts
Terranova Owns (XBI), (ABT), (RIMM), (HES), (TER), (BTU), (MS), (JPM), (MS), (HES); Terranova Is Short (XOM) Call Spreads; Terranova Owns (DIS) Call Spreads: Terranova Works For (VRTS); Terranova Is Chief Alternatives Strategist Of Virtus Investment Partners, Ltd.; Terranova Is Co-Portfolio Manager Of The Virtus Diversifier PHOLIO: Virtus Diversifier PHOLIO Owns (IGE), (DBC), (DBV); Virtus Investment Partners Owns More Than 1% Of (ABD),(ARE),(CAL),(DLR),(EPR),(EXR),(IGE),(MEE),(DBC),(DBV),(DBA),(SKT),(UA),(CLB), (WBMD); Virtus Investment Partners Owns More Than 1% Of St Mary Land & Exploration Co; Virtus Investment Partners Owns More Than 1% Of Seagate Tax Refund Rights
CNBC.com with wires
Data is a real-time snapshot *Data is delayed at least 15 minutes
