SAN FRANCISCO (CBS.MW) - The Dow Jones Industrial Average is headed into headline territory: the blazing headlines of single-day, 1,000-point drops.
The Dow 30, perhaps the world's best-known equity index, has been relatively buffered from the 20-month relentless decline in stocks. Rare are the days when the Dow collection of blue chips loses more in a day than the broader S&P 500 and Nasdaq Composite indexes.
It happened earlier this week, when the price-weighted Dow fell 2 percent, slightly more than the market-cap-weighted Standard & Poor's index that day and almost twice what Nasdaq suffered. At the heart of the Dow's drop was 3M (MMM), which was falling almost 2 percent.
Shares of 3M, the highest priced stock in the Dow at $118 or so, wield the most influence on the blue-chip Dow. They're down 5.6 percent over the past six trading days compared with a 5 percent drop for the Dow.
Yet 3M shares, just 10 percent from their all-time high this spring and selling for 30 times past earnings, are defying gravity. For this Minnesota maker of Post-Its and Scotch-Brite sponges, the bear market never happened.
In our Aug. 29 profile http://cbs.marketwatch.com/news/story.asp?siteid=mktw&dist=nwtwatch&guid=%7B35F430EE%2D2099%2D4449%2DB2A7%2D1A7AFBB13D01%7D of investment technician Bernie Schaeffer, we pointed out how a plunge in the industrial company's shares to its low point of 1998 would eliminate at least 450 points from the Dow. Of course, a 3M drop of that magnitude almost certainly would sink other Dow shares, including the other high-priced prop for the index, shares of Procter & Gamble (PG).
((Indeed, shares of 3m and Procter & Gamble are both beating the Dow by more than 60 percentage points since September 2000. See chart below.)
Most investors don't realize that as a price-weighted index, a high-priced stock such as 3M or Procter & Gamble can have three or four times the influence of other Dow components that are far larger companies. Because shares of 3M are almost $120 (before the open Thursday), their influence is 4 times greater than shares of General Electric, a $28 stock.
Such influence in the "stupid index," as Schaeffer of Schaeffer's Investment Research (http://www.schaeffersresearch.com/) puts it, comes even with 3M's stock-market worth at $46 billion compared with GE's $272 billion. In S&P land, a market-weighting approach essentially reverses that advantage - or disadvantage in the sliding stock market, to GE.
Schaeffer tells me Thursday he was browsing through some of the company descriptions on the Zack's Web site, looking for the wrap on 3M. "MMM's business appears to be mystery meat," Schaeffer says. "A good strategy in this economy for keeping the stock of an industrial company propped up and the P/E so ridiculous."
Schaeffer compares these two descriptions, the first for Honeywell, which suffered its own earnings-projection blow earlier this month, the next one for 3M.
Honeywell International is a diversified technology and manufacturing company, serving customers worldwide with aerospace products and services, control technologies for buildings, homes and industry, automotive products, power generation systems, specialty chemicals, fibers, plastics and electronic and advanced materials. Its operations are conducted by strategic business units, which have been aggregated under four reportable segments: Aerospace Solutions, Automation & Asset Management, Performance Materials and Power & Transportation Products.
3M Co., formerly known as Minnesota Mining and Manufacturing Co., is an integrated enterprise characterized by substantial intercompany cooperation in research, manufacturing and marketing of products. Their businesses have developed from their research and technology in coating and bonding for coated abrasives.
The Dow usually represents between 15 percent and 20 percent of the market value of all New York Stock Exchange stocks. With other Dow components - Honeywell (HON), J.P. Morgan Chase (JPM), IBM (IBM), Intel (INTC) and so on -- getting picked off one by one, it is likely that one day, most of the index's members will trade well below $50.
By that time, the Dow already will have suffered a wrenching day, and probably days, that approach the all-time percentage loss for the index: 22.6 percent in the red on Oct. 19, 1987. On that day 15 years ago, the point drop for the 2,246-point Dow (at the previous Friday's close), was 508 points.
A greater point loss for the Dow came April 14, 2000, when the index lost 617 points, or 5.7 percent. This time around, NYSE circuit-breakers not withstanding, the Dow's one-day losses will generate red-ink headlines around the world, with the phrase Thousand Point Dow Drop dripping off the world's newspapers, magazines and cable-TV screens.
Investment tip: The exchange-traded trust known as the Diamonds (DIA) have short-term and long-term "put" and "call" options. So do shares of 3M. For more, see: How to short the Diamonds. http://cbs.marketwatch.com/news/story.asp?siteid=mktw&dist=nwtwatch&guid=%7BF2A21ECB%2DF588%2D4B1C%2DBD90%2D1B77705DA3D0%7D
