Random Thoughts for a Slow Day
Why does the media continue to focus on the DJIA as a measure of market health? Bob Pisani of CNBC breathlessly reported that the Dow is up for the fourth straight day. The Dow is probably the worst constructed of the major indices because it is price weighted. The stock with the highest price, IBM, is given more than 16x the weight of a lower priced component like Bank of America (BAC). That seems very illogical since IBM's (IBM) market cap isn't quite double that that of BAC's. The Nasdaq has a similar problem with the heavy weighting of Apple (AAPL), but at least that has more logic as it really does represent a great proportion of the market. If you really want to measure market health, use the S&P 500 and consider the small-cap indices, which give insight into speculative action in secondary stocks.
Herbalife (HLF) has completely recovered the losses after Bill Ackman's short call received so much press coverage. I don't recall ever seeing a short attack receive so much coverage. What was most surprising was that the primary thesis was multilevel marketing is a pyramid scheme. This argument has been out there for more than 30 years and companies like Amway and Prepaid Legal have not only survived but flourished. It is interesting that the view of a hedge fund manager that so badly misjudged JC Penney (JCP) was given so much weight when the pyramid argument has never mattered before. Apparently, he had sufficient ego to believe that he could influence the government to act as he thought was appropriate. It just goes to show that it is never as easy as you think it will be, no matter how much research you do.
Earnings begin in earnest this week and, as always, the big question is whether expectations are too high or too low. The bulls say they are too low and point to lots of talk about how the fiscal cliff affected things and how the lousy third quarter reports had already cooled things off. The bears say expectations are too high and point at the indices. They argue that the bulls may say expectations are low but the indices are not acting that way. The way AAPL is acting today gives the bear's views some weight.
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