Four Stocks Whose Nationalization Won’t Affect Stock Indexes Too Much

With speculation that the government will either nationalize Bank of America (BAC) and Citigroup (C) or increase its stake in the banks, financial stocks have been hit pretty hard as of lately. With both banks trading in the single digits, investor confidence in their survival is pretty low.

Two other notable companies whose future appears uncertain are General Electric (GE) and General Motors (GM). The common thing between the two is that they are both also members of Dow Industrials and S&P 500 and both are trading in the single digits.

Before we understand why it matters that the four companies mentioned above trade in the single digits, it would be beneficial to understand how Dow Jones Industrials average is calculated.

The Dow Jones Industrial index is price-weighted. This gives relatively higher-priced stocks more influence over the average than their lower-priced counterparts, but takes no account of the relative size or market capitalisation of the components. To compensate for the effects of stock splits and other adjustments, it is currently a scaled average, not the actual average of the prices of its component stocks—the sum of the component prices is divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, to generate the value of the index.

Thus at the current market price of GE, GM, BAC and C, these stocks account for 1.82% of the Dow Jones Index. Thus, if these stocks all went to zero, anyone who owns a Dow Jones Industrials linked ETF or mutual fund won’t care that much. Even if the whole financial system went bankrupt, and all the financial components of Dow Jones Industrials went to zero, the index would lose 4.17% of its value.

In comparison to S&P 500, which is a market cap weighted index, if Bank of America, Citigroup, General Electric and General Motors all went to zero, the effect would not be much different. These stocks account for 2.01% of the weight in the broader US stock market index.

Comments

[ebschor:]

Nationalizing these institutions (damn, I hate that word since it is truly IMPOSSIBLE that it will happen) may not have a direct impact on the indexes but if it did happen the indirect effects would be catastrophic.

Feb 25 10:46 AM

[JC14:]

When governments get involved in anything it retreats. Had they been involved in watching what was going on, none of this would have happened. Who pushed the banks to make risk loans so everyone could have a home? Where and what is the Congressional Oversite Committee for anyway?

Why do you not hear any Senator of Congressperson talk about cutting their salary? Their laws apply only to the people not themselves. OUR DO NOTHING CONGRESS is overpaid.

Feb 25 10:52 AM

[Hopefull:]

Instead of the banks' stock being subject to who are we going to short today, all banks will be subject to who are we going to nationalize today. Under government control won't government figure why not eventually take over all banks so the good can offset the bad and how much simpler for them to mismanage.

Feb 25 11:49 AM

[sr9web:]

Of the 4 companies you list, only GE has huge earning power in multiple divisions chugging along making oodles of cash.

With panic selling GE might even go to $5, but GE is certainly not in the same crappy shape as the others.

BAC is in less worse shape than C.

GM is in the worst shape of all.

Feb 25 11:49 AM

[truthteller:]

If you examine the history of nationalization more closely; you might reach a diffent conclusion. Specifically the nationalization of fannie mae and fredddie mac, which burned preferred shareholders, while bailing-out foreign governments. Sure, the isolated event of removing these companies, may not have a significant impact. However, the loss to investor confidence would be catostrophic. That's why politicians are so careful to avoid using the term nationalizaiton. Sure, there might be a de-facto nationalization or forced receivership of some companies, once the economy recovers, although I doubt GE or BAC will be totally wiped out. Interesting, there are no author or position disclosures on this article. I am not a big fan of financial companies right now; but I dislike opportunistic shorts even more!

Feb 25 12:16 PM

[kevin dempsey:]

THIS AUTHOR IS A MORON HE MUST BE SHORT GE LOL ITS NOT IN THE OTHERS CLASS AT ALLLLLL

Feb 26 08:50 AM

[34CD77:]

There is so much irresponsibility in what is written. For news effects, the word "nationalism " keeps being used. Nationalism means that all stock holders are going to lose all their investment BAC= $25 Billion loss.. When that happens the short sellers will take the next bank to 0 and so on. I wish that "the short sellers" would stop the BS.
This is fraud ...and you as a writer are off my list no matter what you write.

Feb 26 12:04 PM

[HBWOW:]

"Short sellers" are leading the market, taking profits on every turn, of course, at the loss of the general investors. The rich get richer and the middle class keeps sliding downward which is just what the liberals want.
Of course, the nation cannot survive on that basis but the politicians don't believe nor care about that, only their individual greed and power egos.

Feb 26 12:46 PM

[hwood007:]

Things to lessen the presure now. The SEC could defer M2M and the ETFs that short banks for six months. Congress could offer a bill that prevents any private compamy from giving donations to members of congress. Buy assests that banks want to sell to get them off the books and let the gov hold them for a hoped for future profit.

Feb 26 07:02 PM