2024 has been a banner year for stocks so far–except if you hold the Dow Jones Industrial index. The numbers as I’m writing this are as follows:

ytd 1yr

NASDAQ Composite (2500+stocks) +14.0% +29.4%

S&P 500 (500 stocks) +10.8% +24.9%

Dow Jones Industrials (30 stocks) +1.2% +15.5%.

Nevertheless, Dow Jones remains a powerful brand name. At least it seems to me, the Dow is the index most frequently cited in the press and the most important measure of the domestic stock market in the minds of most individuals. But every professional investor knows that the Dow indices are a terrible measure of what stocks in general are doing.

One obvious issue is that the Dow Industrials contains only thirty names.

More important, the Dow indices were invented well over a century ago. Back then their value had to be calculated by hand. Charles Dow decided that the best way to proceed, particularly since he wanted daily figures, was the simplest: just add up the per share prices of the index constituents each day and divide by the number of issues, to get the value of the index. (Stock splits eventually made this more complicated, but that was fixable, more or less.)

The problem with this is that it paid no attention to the total market value of a company, just the share price. Take two companies, each with a market cap of $1,000,000. Company A has 1000 shares with a value of $1000 each; Company B has 10,000 shares with a value of $100 each. Using the Dow method of calculation, Company A has 10x the weight in the index of Company B.

So Company B really doesn’t matter very much. And if Company A is a clunker, it has the potential to distort the entire index.

Today’s Dow, which is owned by a consortium of Standard and Poors, News Corp (through ownership of Dow Jones) and the Chicago Mercantile Exchange, keeps the same calculation method today. Through clever manipulation of membership in the index, the group has kept the index from being totally irrelevant in today’s world. Not so far this year, though.

The main value of the index, in my view, is the brand name. No professional equity portfolio management organization uses it to monitor and control the portfolios it manages for others–that’s S&P, FT or maybe MSCI (for global/international). There may be a nostalgia portfolio that uses the Dow, but, if so, it has the relevance of, say, a wood-burning locomotive in today’s transportation world.

In my mind, the only semi-interesting aspect of the Dow is that you know anyone citing the Dow as a performance benchmark is clueless.

Effective today, US stock trades settle one day after they’re made rather than two days after, which had been the earlier rule. Even that is down from t (i.e., trade date) +5, which was the original official SEC rule for settlement, made in 1975.

The overall idea of the rule is to minimize the chances of disruption of the financial system if an important player, say, a major brokerage house, is unable to hold up its side of the bargain. …it goes out of business, for instance, before a trade settles. A generation ago, a business failure could have affected a week’s worth of trading. As of today, it’s a day.

This shouldn’t make much difference to most of us. Two exceptions:

–foreign exchange trades normally settle on t+2. So if I’m a foreign entity and I buy a US stock today, I need to have dollars tomorrow to settle. So I need to have done a forex trade yesterday–before I knew precisely the dollar amount I’d need. I think this is a minor issue and that a workaround is elther already in place or will soon be.

–when a short-seller approaches a broker with a short transaction, the broker must either have the stock that will be sold short already in hand or have the firm belief that he can borrow it in time for the transaction to settle. Before today, that meant having two days to make a stock loan. Now it means only one. This is probably bigger issue than dealing with a non-US investor, but still a minor concern for the overall stock market. Still, this may have a considerable impact on shorting of thinly-traded stocks.

This is an old-time slogan from the London stock market. The idea is that in the European summer industrial activity slows down, everyone takes the month of August off, and stock market professionals shift into low gear until the weather starts to cool. So stocks don’t do much of anything between June and the beginning of September.

Today’s version is more likely just “Go Away.” That’s what a significant number of UK-related London-traded corporations are doing–either relisting abroad (more often than not in the US) or establishing a second listing elsewhere. The result is that while the UK was one of the largest stock markets in the world a generation ago (second only to the US and, for a while in the 1980s, Japan), it’s an afterthought now.

Part of that is that many of the biggest London-based companies are multinationals who rode the global wave of British imperialism of past centuries to empire-wide prominence. So while they have historical and sentimental ties to the UK, most of their business is elsewhere.

Another thing is that UK-based investors, both individual and professional, are at heart deeply fixed income-oriented. So they’re interested in firms that stack up well using some form of dividend discounting, something that tilts the scales toward mature firms and away from tech, in particular. Also, with the possible exception of Scandinavia, there isn’t much of an equity culture elsewhere in Europe, either.

Finally, as far as I’m concerned the domestic UK economy is a train wreck. A large part of this is due to Brexit. Severing ties with the rest of the EU did staunch the flow of migrant workers, who were seen to be socially undesirable. At the same time, though, the loss of these workers slowed overall economic growth in the UK. And all the non-EU firms that had flocked to the UK because of the level playing field its legal system provided plus the fact of English as the official language–which together made it the ideal point of entry into the EU–packed up and left. What were the pro-Brexit politicians thinking? My guess is they were so busy performing they had no time for thought. In addition, of course, there’s the legacy of the Thatcher revolution, which, like the Reagan revolution here, was great for a decade or so but has retarded growth since.

One plus for the UK, though, might be that it is the cautionary ghost of Christmas future for the US to learn from.

Yesterday after the close, NVDA reported 1Q24 (ending in April) earnings that exceeded the analysts’ consensus by about 20%. The 10Q is not yet available, but my quick view of the data released yesterday says to me that almost all the growth came from AI, and that gross margins and operating leverage to date from this business segment are huge.

The company says it anticipates sales in the second fiscal quarter that my back-of-the-envelope numbers say imply that 2Q eps will be about 20% higher than the current Wall Street consensus.

(I should mention that I’ve sold about 10% of my position this morning, partly because I have a very large position in semiconductor-related stocks and partly because my NVDA position itself has gotten to be larger than I’m comfortable with.)

a 10/1 stock split

As part of the earnings announcement, NVDA also said it will split its stock 10/1. This means that if you hold 10 shares each worth $1100 pre-split, post-split you’ll have 100 shares worth $110 each.

Why do this?

In today’s world, it’s more a psychological thing, I think, than anything else. Yes, especially in NVDA’s case, it’s less likely that potential owners will opt for fractional shares (I’ve never bought or sold fractional shares, although I have received them as dividends. My understanding is that order execution can be clunky at times.). And I do think that there’s still some satisfaction in holding a round lot.

A generation or more ago, when commissions were nose-bleed high, and discount brokerage was in its infancy, buying a round lot (almost always 100 shares; IBM, where a round lot was 1, being the most important exception) was significantly less expensive than buying an odd lot (anything less than 100). It was also a sign of a certain level of affluence.

The only academic research I’m aware of about stock splits is pretty loony. There seems to be a consensus view that announcing a split in the US market sparks a period of outperformance. That’s my experience. I find the academic reasoning–that this is a wink and a nod indicating unspecified/secret future good news–odd, though.

There is evidence, however–something also in line with my experience–that the typical stock goes through a period of underperformance once the split happens.

The companies I’ve talked with over the years about this all say they want individual investors, who tend to be extremely loyal to the companies whose stock they hold, on the share register. And they believe that a stock price that’s high enough to signal the company is doing well but not so high that individuals find it out of reach, is the ideal.

It will be interesting to see what happens here.

That’s what I heard two CNBC commentators suggesting as I was eating lunch and watching prices the other day. Their second suggestion was that HOOD is a (full-blown) meme stock, meaning that it has no intrinsic value but rather is a plaything for Roaring Kitty and other online day traders.

These ferret out stocks that have little or no intrinsic merit, hopefully heavily shorted, and play a game of pushing them up and down. Their aim is to profit from the resulting panicky, loss-making short-covering by hedge funds.

Meme stock was the case for HOOD, I think, when the company went public at $38/share about three years ago. It broke above $80/share almost immediately …and then began to drop like a stone, bottoming below $8 in mid-2022.

The stock stayed there until late least year. Since then it’s been rising relatively steadily.

my thoughts

–I may be biased here, since I own a small number of shares of HOOD, which I’ve traded in and out of. At this point I’m more a seller than a buyer, but I’m in no hurry, and I may well change my mind

–if we look at trading data, the short interest in HOOD is a bit less than 7% of the float. At current volume, this would take just under two days to cover.

The overall short interest for the S&P 500 is 1.8% of the float, and is about 3.5% for stocks of HOOD’s size. But in a world where short interest of 10% is the first signal to start worrying, I find it hard to understand how one would characterize HOOD as a meme stock

–yes, in its early days HOOD was a mess. Even so, it was immensely popular with younger stock market participants, an audience traditional Wall Street has had virtually no success in attracting.

–The company has hired professional management, which (again, my view) has by now eliminated HOOD’s early shortcomings, while retaining its allure for younger investors

–trying to use asset value to assess valuation, we know there have been a couple of acquisitions of smaller discount brokers in the recent past. The selling price has been about 2.5x book value. If we apply this metric to HOOD’s bv of ~$8/share, we get a first estimate of potential value at $20. Given HOOD’s unique appeal to a desirable clientele, its fast growth and its expansion into credit cards, $20 is more likely, I think, a floor than a ceiling, at least in a sideways-to-up market.

what about CNBC?…

If this were the sports world, a show would have an announcer as the star but also surround that person with a number of former professionals to provide analysis of team strategy and comments on execution. CNBC doesn’t have the second, at least as far as I can see. Historically, I think, it has relied on the big brokerage companies to provide copies of their strategy documents and stock recommendations as the core professional input for their commentators’ use. Brokers would do so in the expectation of getting a mention, what would be called a third-party endorsement, of their firm and/or the analysts who prepared the information used on the show. That source of information appears to me to have dried up,