Dow Dumps 2 Components, Chavez’s Latest Threat, U.S. Road Crisis, and More!

by Addison Wiggin & Ian Mathias

  • Dow undergoes first lineup change in 4 years… who went where, and why
  • Chris Hancock on the paradigm shift within the S&P 500
  • Chavez threatens “economic war,” promises $200 oil
  • Dollar rally ends, OPEC says oil in euros less than 10 years away
  • Plus, Chris Mayer on the “unavoidable” slow-motion crisis already plaguing the U.S.


We open today with a teeny sign of the times: Directors of the Dow Jones industrial average announced this morning they will change the Dow’s composition for the first time since 2004. Withering corporate giants Altria and Honeywell will be replaced with the swelling Bank of America and Chevron.

“We saw that the financials industry was underrepresented,” said Marcus Brauchli, one of the Dow’s caretakers, “notwithstanding the current turbulence — and that the oil and gas industry’s growing importance to the world economy called for another representative to join Exxon Mobil Corp.”

Altria will be removed because recent and expected spinoffs make it mostly a domestic tobacco manufacturer. Honeywell, despite outperforming the Dow by over 100% over the last five years, will get delisted from the Dow because it is and threatens to remain the smallest component by revenue/earnings of all the companies in the Dow 30.

These changes will take effect on Feb. 19.

Markets closed Friday with small losses. The Dow and S&P fell about 0.5%. For the week, both indexes shed around 4.5%. The Dow is almost 5% above its 15-month lows set in January, but still 14% below a record high set on Oct. 9.

Yahoo, for what it’s worth, scoffed at Microsoft’s takeover bid. Spokesman for Yahoo said Gates’ bid “substantially undervalued” the company, stuck their collective tongue out and wiggled their fingers in the air.

The bid gave a 62% premium on Yahoo’s stock price.

“The companies representing the Standard & Poor’s 500 index now derive 49% of revenue from foreign markets,” comments Chris Hancock on another weighting issue, “up from 30% in 2001. Meaning those with money to burn (Southeast Asian consumers) will keep earnings reports strong. Stronger repatriated currencies should only bolster this trend.

“Many Americans believe strong S&P earnings equal a strong American economy. Unfortunately, we see another American economy. We see an economy riddled with debt. And we see the American consumer eerily close to tapping out.”

“If you end up freezing [Venezuelan assets] and it harms us,” threatened Venezuelan nutcase Hugo Chavez over the weekend, “we’re going to harm you. Do you know how? We aren’t going to send oil to the United States. Take note, Mr. Bush, Mr. Danger.”

Mr. Danger? We don’t get it either.

Chavez is referring to a victory won by Exxon Mobil in British and Dutch courts. The U.S. based oil company has been suing Petroleos de Venezuela, Chavez’s state-owned love child, in international court for the seizure, control and a majority stake in an oil production project in Venezuela worth $12 billion.

The court’s decision blocks Venezuela from selling assets and transferring wealth out of the Netherlands Antilles and the U.K.… if moving the money would reduce available assets below $12 billion.

But Chavez doesn’t have any patience for the rule of law. “I speak to the U.S. empire,” he quipped. “Because that’s the master: continue and you will see that we won’t sent one drop of oil to the empire of the United States. The outlaws of Exxon Mobil will never again rob us.”

“If the economic war continues against Venezuela,” Chavez said, “the price of oil will reach $200 and Venezuela will join the economic war. And more than one country is willing to accompany us in the economic war.”

We presume he means Iran.

The U.S. is Venezuela’s No. 1 oil trading partner. Oil revenues account for 90% of Venezuelan export earnings, 50% of its federal budget and about 30% of its total GDP.

America gets about 14% of its imported oil from Venezuela.

Chavez also announced plans to nationalize milk. “We’re facing an economic conspiracy,” he said yesterday, “and we’re obliged to act.” He claims the Italian and Swiss milk makers Parmalat and Nestle are conspiring and creating shortages ahead of elections in November.

We’re sure this plan will go over well with Venezuelan citizens.

Mr. Crazy Eyes sets his sights on milk

Light sweet crude hopped up about 3 bucks, to $92, in overnight trading, still a mite below the $200 Chavez promises. Gasoline in the U.S. continued its recent pullback over the weekend. The national average at the pump dropped 5 cents last week, to $2.94. Gas began the year at $3.11 per gallon, but has fallen steadily since.

“Maybe we can price the oil in the euros,” suggested OPEC Secretary-General Abdullah al-Badri on Sunday. “It can be done, but it will take time.” Al-Badri told reporters oil could be priced in euros in less than 10 years.

“It took two world wars and more than 50 years for the dollar to become the dominant currency,” he concluded. “Now we are seeing another strong currency coming into the frame, which is the euro.”

You can file that as your “understatement of the weekend.” Since 2000, the dollar is down 44% versus the euro. Look for OPEC to get out of greenbacks as quickly as politics allow.

The dollar backed off recent gains over the weekend. The euro and pound regained a full cent, at $1.45 and $1.95, respectively. The yen is back at 106.

The dollar index — which measures the dollar versus the euro, pound, franc, yen, krona and loonie — climbed just shy of 77 last week, before retreating to about 76.5 this morning.

Looking at the one-month chart of the dollar index, we’re not sure anyone knows how to price the dollar in the current market environment.

What’s a dollar worth these days, anyway?

Gold is recovering nicely from its recent sell-off. From last week’s low of around $890, gold has since recovered to $925 this morning.

“It will take time to work through the current financial turmoil,” said Hank Paulson after meeting with other G-7 finance ministers this weekend. “As the financial markets recover from this period of stress, as of course they will, we should expect continued volatility as risk is repriced.

“I am confident in the long-term health of the United States economy and I expect that it will continue to grow in 2008.”

“When I heard the stimulus plan had passed,” comments a reader, “my first thought was that the newspaper headline should read: ‘Biggest Subprime Loan Ever.’”

“Most of America bleeds away hours of precious life idling in a car,” notes Chris Mayer in the latest Capital & Crisis. “It’s a mean reality and a hidden tax.” Traffic jams cost the U.S. economy some $78 billion annually. They eat away 4.2 billion hours in travel delays and waste 2.9 billion gallons of fuel — every year, according to the Texas Transportation Institute.

“The future doesn’t look much better… unless you’re an investor. In which case, there are ways to cash in on the massive rebuilding of America’s roads.

“But first, you have to know how mangled and screwed up the road systems are. The chart below shows you how few miles of road we’ve added since 1982, percentage-wise. Population is up a much greater percentage. So, too, the number of drivers and vehicles and the miles they travel. The end result is predictable and unavoidable: Mounting hours of delay. The average American spends 40 hours per year in gridlock.

“Currently, the amount of money we invest in our roads is not enough to offset the beating they take. The U.S. Department of Transportation (DOT) estimates that over 160,000 miles of federal highway has pavement deemed ‘unacceptable.’ Over 153,000 bridges are structurally deficient or functionally obsolete, says the DOT. Of this last point, we could hardly have a more dramatic reminder than the bridge collapse in Minnesota.

“Incredibly, the need for miles of highway will double again over the next 30 years. If the demographers are right, the U.S. should add another 100 million people over that time frame. If we add capacity at a rate no faster than what we’ve done in the past, the average American could spend up 160 hours each year in traffic. That’s about four workweeks!

“It’s quite a predicament. I tend to think that the industry will get the money, only because the bridge collapse gives politicians a chance to make that an issue. And there will certainly be more bridge collapses and tragedies if we don’t do something soon. Also, as the economy weakens, a big public road-building project is a way politicians can claim they created jobs. But you never know. Sometimes things have to get really bad before they get better.”

“Yes, I do feel better with China using a private equity fund,” writes a reader in response to our coverage of a Chinese sovereign wealth fund investing in the U.S. via JC Flowers.

“Letting China invest directly in U.S. technology companies would be a giant mistake. Anyone who thinks differently is a fool. Using a private equity fund should be OK while keeping secrets — military and technology — safe. China will try to steal or buy technology, but we can’t be the idiots that allow the selling of our future for some fast profit. More power to Jim Webb!”

The 5 responds: Huh? The Chinese government owns the fund. What’s the difference? Oy.

Enjoy your Monday,

Addison Wiggin
The 5 Min. Forecast

P.S. For the next seven days, we’re offering four free months of our most popular options trading service, Options Hotline. Using options during choppy markets can be a great way to hedge short-term losses within your long-term holdings. We’re certainly not convinced the worst of this “credit crisis” is over. Thus, we’d like to offer you a chance to try out options on the cheap. Learn more about Options Hotline, including our 600%-gains-in-six-months guarantee, here.

P.P.S. Massive winds yesterday blew down a giant maple tree in our front yard. Lying on its side, the trunk stands higher than anyone in the Wiggin family. The root ball is about 10 feet wide and the crater left in the slate sidewalk in front of our house is big enough to swallow a cow. Debris stretches halfway across the neighbor’s yard.

There’s no particular economic reason to mention the tree. Just thought we’d share the awe.


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