Tag Archives: djia

Headlines + Dow = artificially generated freakout

In the past, I’ve written about how financial media spread panic, and how handy the Dow Jones Industrial Average is for them. Right now, this very day, I can give you a case in point.

As I type, the DJIA is off by 311, which takes it to 16,680. That is a decline of 1.83%. And Marketwatch is splashing the headline in huge bold letters: It’s getting ugly – Dow nosedives by 350.

Let’s take this one out with a series of quick snapshots, like in urban warfare training.

  • Obviously the index has rebounded by a fair bit, but the frantic headline remains. An alarming percentage of people absorb headlines as gospel, making them prey to the modern art of the misleading headline.
  • 1.83% is not that ugly. It’s a definite down day if that’s where it ends (and as I write, there are two and a half hours left in the trading day), but the sky isn’t falling. Ebola wasn’t found in all our supermarkets. A Kardashian didn’t have a wardrobe malfunctian.
  • Notice the verbiage: ‘ugly.’ Implies there’s blood in the aisles. There isn’t. ‘Nosedives’ emphasizes the deception: ZOMG PANIC DO SOMETHING OMG OMG YOUR ALL GONNA DIE OMG THIS IS THE END! This is the equivalent, in terms of common sense, of recommending someone get an ambulance ride to the ER because he or she woke up with a headache.
  • On the year, the DJIA is slightly down. It began the year at about 17,250. That’s fairly close to a flat year, if it ended today, which is not great, but it hasn’t been very volatile for most of the time. It’s been dull, and the media haven’t had anything to wet themselves over. Anything will do.
  • For the last five years, the index is up from almost exactly 10,000. I’m not doing the arithmetic, but that looks to me like annual gains of about 10%. After five years of that, you’d probably start to anticipate a flat year. No bull market is eternally sustainable. When it hiccups, that’s not a ‘bloodbath,’ another term MW is bandying.
  • People, in obedience to punditry whether they realize it or not, are still reacting to the Dow’s numeric change the way they did when it was at 10,000, or even 5,000, and such a numeric change was greater. When the index was at 10,000, a decline of 350 would be 3.5%, which is a bad day, but not a disaster. If you watch indices long enough, you’ll see those days a few times a year. At nearly 17,000, a decline of 350 is 2%, which is the kind of bad day you’ll see rather more often in a given year.
  • It follows that, after paying any attention to the Dow in the first place, the next dumbest investing blunder is to pay attention to its number rather than its percentage. Show me a day when it’s down by 10%, or 20%, and that’s at least got me looking at valid indices to see if there really is a bloodbath. For 2%, it’s not worth my time.
  • In the meantime, we can use MW’s helpful tools to find out what’s driving the decline. There are thirty stocks in the Dow. Microsoft, Apple, and Nike are taking the biggest hosings, along with Goldman Sachs. The first three are down over 4% each. It’s raining, but the sky isn’t falling. Three of the companies most unlikely to fail, are seeing a lot of selling today. That is all this means.
  • Since the DJIA is compiled according to a formula that was infantile and distortionate at inception (1896), it’s idiotic anyway. On a field of baseball players maneuvering to hit behind the runner, put the curve ball on the outside corner, and shade toward the line to avoid that long hit into the corner that could become a triple, the DJIA is the naked fan who streaks the field while we’re all trying to be observant.
  • Marketwatch is a publication of The Wall Street Journal, which is a publication of Dow Jones & Co., a subsidiary of News Corp. So you’ve got a website owned by the people who maintain this index. And they love this index, because the S&P 500 (a saner large-cap index) is around 2,000. You won’t get many triple-digit days from it, so it’s harder to generate a freakfest with the S&P.

Behold the current state of a venerable name published by a venerable name. Misleading garbage.

Destroying the Dow

The Dow is ‘struggling toward 15,000.’ I don’t care, for many reasons, and you also should not care. You will be a smarter investor if you banish all knowledge of the Dow from your mind. Every time you see it, you get dumber.

Here’s a radical stance: the Dow could be construed as a form of ongoing terrorism, since (much like a bomb threat) it causes panic that need never be, and works to destabilize the economic underpinnings of society. It presents a widely accepted, grossly distorted picture of the market, and unfortunately, most of us are unwise enough to validate it.

I believe that the Dow Jones Industrial Average, commonly called the DJIA or just ‘the Dow,’ needs to be suppressed on the principle that free speech does not include the right to yell “fire!” in a crowded theater, nor make obscene phone calls, nor publicly advocate terrorist acts–if your free speech would cause unnecessary harm or panic, it can be prohibited. (It should also be suppressed because it’s stupid, even though policing the propagation of damaging stupidity has never worked. It would be a blow struck for brains.)

Two objections to this come readily to mind:

  1. “But it’s useful in some ways.”
  2. “You just can’t suppress free speech like that.”

1. No, in fact, it’s worse than useless, for it is misleading. It is based purely on share price (adjusted for splits since entry into the index), which is always an arbitrary number. Don’t believe me? Suppose a company goes public with $45 billion in market cap: $45/share for 1 billion shares. The company could just as easily have gone public at $90/share, issuing only 500 million shares.  Same market capitalization, double the Dow impact. That’s just ridiculous.

In terms of day-to-day movement, imagine that Dow component BS rises from $100 to $101, a very minor 1% change. Another Dow component, FY, rises from $10 to $11–an enormous 10% gain. Dow doesn’t care about how much market value was created or lost. Dow considers both movements to have the same impact.

And this gets even worse. The Dow serves mainly as a useful tool for the financial media to get us stirred up, increasing our consumption of…financial media! This is partly because it is a Big Number. Well, it was not always a big number, but we react just as we did when it was smaller. I was alive, adult (by age if not by maturity), and losing money (buying stupid investments with money I could not afford to lose) when the market wrapped around a tree in 1987. The Dow lost 508 points, a 22.6% decline for the day. That was nearly a quarter of its value. It closed at 1738.7. We’d all agree that over 20% is massive.

If you are paying attention, and picturing the headlines of the day, you can see that a 100-point shift in the 1987 Dow would still have been a large percentage change, and a loss of over 500 would be (and was) a catastrophic decline. I will now take a bullet for you: I will look at the current value of the Dow. As I compose this, it is at 14974. Suppose it had the ‘triple-digit decline’ of which the media are so eager to shriek: a drop of 100 points. That would be a decline of less than 1%; about 0.67%, a very normal daily shift, and nothing for any investor who thinks for him or herself to freak about. Okay, now suppose we had a loss of 500. It would be about 3.3%, certainly a big day, but something that happens now and then. I was reading financial media then, as I read them now. They react to ‘triple digit Dow’ nearly the same way. It is as if your doctor treated every mole on your body as melanoma until proven otherwise, even though most moles are just brown spots. You’d live in constant terror of a horrible death which most people would not actually suffer. You’d overreact. You’d probably have them all removed, traumatizing and scarring your entire body–for nothing. The only people who would benefit would be those helping to spread the panic.

Welcome to the market.

Of course, if our precious financial media focused purely on percentage change, we would be spared this problem. It will not, and why should it? Said media are in the business of getting you worked up, getting you to read and watch and not relax. Fear is their product. Why would they change their practices in the interest of market stability, to their own detriment? Care about society over self? Are you mad? This is Wall Street’s publicity arm. Don’t talk to it about anything but purest avarice that burns with a purple fire. Talking about them caring about anything above self and profit is like talking to Kim Jong Un about caring about freedom for North Koreans to criticize his regime.

2. Let’s break that down. Can you legally suppress it? You sure as hell can. We suppress or restrict free speech all the time, generally for good reasons, from the crowded-theater example to the fact that saying “Go to hell, judge, I don’t have to take your orders” will get you jailed for contempt of court. A person using free speech to disclose national security secrets will soon learn the limits of that free speech–and sensibly so.

But is it practical to suppress the Dow? On the grand scale, surely not. I mean, any fool with a spreadsheet can easily continue the Dow math, rename the index, and post it online. Prosecuting this in full would be impossible, especially since nothing is stopping some dude in Malaysia (for example) from calculating it and posting it on his blog, in defiance of US law–which is not in force in Malaysia, any more than Malaysian law could prohibit me from posting stuff that the Malaysian government might not like. Try and get the Malaysian government to get interested in investigating and extraditing him for something that isn’t even illegal in his country, and let me know how that works out for you.

Well, what could we suppress in practice? We could certainly prohibit major domestic media from publishing it, since they are the most visible. A few examples of reporters and executives thrown in jail would cause a lot of bleating, but you can bet Marketwatch (owner of the index rights) would can it, whining the whole time about the police state. This wouldn’t apply law uniformly, but we don’t do that anyway. Tons of people cheat on taxes; they don’t audit everyone, just the ones they believe cheated big time. Tons of people pirate intellectual property; the RIAA doesn’t sue everyone, just a few people to make the point. Tons of people speed on the freeway; they don’t all get a ticket, just enough to remind of consequences.

The most powerful argument against this, I believe, is the ‘you can’t legislate intelligence’ perspective. Let me make it myself: “So what you’re saying is that this should be banned because ignorant people tend to validate and react to it, thus doing dumb things, flogged onward by media who can benefit from that. Why complain? If you yourself are not ignorant, you have an advantage and should profit from it. Why should dumbness be protected from itself? Shut up and take their money, like I do!” The rejoinder is: “First of all, Dreamboat Aynnie, it’s not all about me or you. Second, the core problem is that the psychological impact of the Dow distorts reality for enough people, helped by our adored media, to create instability which in fact doesn’t exist. The overall harm to the national economy is serious, with potential for panic which need never be. The national interest is more important than yours and my ability to profit.”

I don’t much advocate attempts to nerf Darwinism in action; if you want to ride a motorcycle without a helmet, I’m okay with you risking having your brains bashed out. Here’s the problem: it is likely to leave you in Schiavo mode, slurping up enormous resources and starting a fight over whether to withdraw your feeding tube. Indirectly, I will be billed for your choice. If there were a way for me not to pay for your foolishness, I’d say go for it. In practice, there is not, and I resist paying that bill. Anti-tobacco advocates feel the same way, and one can hardly blame them. One of the most oppressive examples of this is the homeowners’ association, in which people say ‘you can’t do that because it will lower my property value.’ I hate HOAs. And yet…I do have the choice to live somewhere without an HOA. I don’t have much practical choice about not participating in the national economy. The principle may be similar, but the difference in scope matters. Some dumbnesses can be addressed with law, to some degree, and others can’t.

Here is what outlawing it would achieve: greater public awareness of how rotten the Dow is. Instead of passively acceding to the notion that the Dow is useful, the public would hear how worse it is than useless, and might at least begin caring less about it. Sure, the public should educate itself, just as motorcyclists should wear helmets. If this did not cause needless market instability, no action would be necessary–just as if all bomb threats were spurious and false, and we ignored them all, we wouldn’t need to prohibit them. Moot point. We don’t ignore them all, they are accurate just often enough to take them all seriously, and thus anyone making a bomb threat deserves all that the law can throw at him or her. In the same way, the ongoing random bomb threat that is the Dow needs suppression insofar as the law has power to do so, and to be considered as respectable and valuable to society as a bomb threat.