Is There Such A Thing As A Blue Chip Stock Anymore?

On friday, we saw Citigroup do a recap and dilute the common stockholders significantly and we saw GE cut their dividend by 2/3 to conserve cash. Both stocks are trading at below $10/share and are at fifteen year lows. There's a significant chance that the common stockholders on Citigroup will end up with nothing if the bank is nationalized. And GE is facing a huge debt maturity next year that could cause a similar outcome for its shareholders. And what about GM?  That's another potential bankruptcy looming. The NY Times quoted an automotive consultant today about GM:

“G.M. can’t raise more capital in the private markets, it can’t
influence demand and it can’t adjust its cost structure enough in the
short-term,” Mr. Casesa said. “There is no economic solution, only a
political one.”

What do Citigroup, GE, and GM have in common? They are "blue chip" stocks and members of the elite Dow Jones Industrial Average. There are 30 stocks in DJIA and they are the biggest and, in theory, the strongest companies in America.

But the past six months have taught us that no company is bulletproof and just because a stock is a "blue chip" doesn't mean it is safe.

In fact, we are learning the opposite. Here's the chart of the Dow since Nov 1, 2008:

The Dow is down 25% since Nov 1, 2008 and is ~7% below the November lows.

Here's the chart of the NASDAQ since Nov 1, 2008:

The NASDAQ is down 20% since Nov 1st and is 7% above the November lows.

Six months doesn't mean all that much, but I think its instructive that the "strongest" companies in America have underperformed their smaller brethren and I think this trend will continue as we work our way out of the mess we are in.

I've said this before and I'll say it again. This economic crisis is not limited to banks and housing. We are witnessing a "sea change" as my father in law called it today. Businesses that were built in the 19th and the first half of the 20th century are finding their underlying fundamentals challenged by a new economy that is global and driven by information and technology. Businesses that were built at the tail end of the 20th century and even in the 21st century are faring much better.

So be wary of "blue chips". They aren't such a sure thing anymore.

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