Original URL: http://www.theregister.co.uk/2009/03/12/djia_and_moodys/

Wall Street: Google, Apple good - Palm, AMD bad

The Meltdown shuffle

By Rik Myslewski

Posted in Financial News, 12th March 2009 00:28 GMT

The ongoing Meltdown is not only causing turmoil in global finance and manufacturing, it's also transforming how money-men rank and rate market fitness.

Cases in point: There are rumblings on Wall Street about revamping the membership of the 113-year-old Dow Jones industrial average (DJIA), the closely watched barometer of American market strength. Also, Moody's Investor Service, which has rated corporate dept for 100 years, has begun a ratings list of America's most-troubled companies, a service it not-so-subtly calls the Bottom Rung.

The DJIA has been around since 1896. During its long tradition as a market bellwether, it has rejiggered its member-company list a number of times to reflect changes in the US market, most recently last February, when it kicked out Altria and Honeywell and replaced them with Bank of America and Chevron.

And now some analysts are suggesting that it's time for another change. This time, the proposed losers are members of the failing financial and automotive industries, and the proposed new kids on the block include household names in the US tech sector.

Due to the plummeting stock prices of Citigroup and General Motors, the analysts suggest that they be replaced by two more-healthy American companies. Candidates for inclusion in the 30-member DJIA group include tech giants Google, Apple, and Cisco, with Bank of America-spinoff Visa, financial-services firm Northern Trust, and the duck-loving American Family Life Assurance Company of Columbus (Aflac) also named as possible contenders.

The reasoning behind the suggested change is as simple as the politics involved are complex. Both Citigroup and General Motors are not only staggering under the slings and arrows of the outrageous Meltdown, they're also textbook examples of bad management and corporate excess - not the types of companies you'd want to rely upon as predictors of US market success.

And that's what the DJIA is: a predictor. In the stock market, the question is never "What have you done for me lately?" but instead "What are you going to do for me in the future?"

And if the future of the American market is Citigroup and General Motors, we're in deep shit. We'll take Google, Apple, and Cisco as more-accurate predictors of the future than the finance and automotive sectors, thankyouverymuch.

Hanging onto the Bottom Rung

And then there's Moody's Bottom Rung. We were tipped off to this new service by a Bloomberg article, which pointed out that the "deepening recession raises the risk that [corporate] borrowers may miss interest payments."

And that's exactly what the Bottom Rung tracks: companies with debt that Moody's defines as "speculative grade" but which we all know by the oft-repeated ephithet of "sub-prime." The list is compiled based upon, among other things, Moody's debt ratings, which the company defines as their "opinion of the ability and willingness of an issuer to make timely payments on a debt instrument, such as a bond, over the life of that instrument."

Unfortunately for those of us who track the health of the tech sector, there are a lot of familiar names among the 283 companies hanging onto Moody's Bottom Rung. Among them are chip-designer and former chip-maker Advanced Micro Devices (AMD), WiMAX champion Clearwire, betting-its-life-on-the-Pre Palm, IT-backup and archive big-boy Quantum, security and management-systems veteran Unisys, and IP-backbone providers Global Crossing and Level 3 Communications.

To be sure, Moody's is not saying that these companies will default on their corporate debt. It's just saying that their positions are shaky.

And they may be wrong even about that. Bloomberg, for example, quotes a spokesman for another company on the list, Eastman Kodak, as saying "Any speculation, however informed, suggesting that Kodak is less than financially sound is irresponsible. Kodak is financially solid, and we are taking the right actions to ensure that we remain a strong and enduring competitor."

Still, being identified by Moody's as being on the Bottom Rung can't be confidence-inspiring. After all, if you're among the bottom 283, you're sharing that rung with the aforementioned General Motors - hardly company you'd like to keep during a Meltdown.

If the Meldown continues to melt, we'll be forced to lower our culinary standards to eating at Arby's and El Pollo Loco, buying cheap wine at BevMo, and vacationing at Six Flags this summer instead of Paris.

Oops, those companies are all on the Bottom Rung too. ®