Rational Investing: Bye-bye GM, Citigroup; hello Cisco, Travelers

The Dow Jones Industrial Average, that venerable 30 company group that is supposed to be an indicator of economic activity in the U.S., just kicked out two of its long-time stalwarts, General Motors and Citigroup. Their replacements: Cisco and The Travelers Cos.

Bye-bye, GM, about which Charlie Wilson was wildly misquoted as having said, "What's good for General Motors is good for the country." (His actual statement was made behind closed doors in a Congressional hearing on his qualifications when he was chosen by President Eisenhower to serve as secretary of Defense. The erroneous quote, picked up gratuitously by the Detroit Free Press, was, for his critics, the equivalent of today's TV sound bites of Joe Biden.)

In the case of Citigroup, perhaps the less said the better. In the opinion of most of Wall Street, it remains the weakest of the large financial institutions and the most likely to not survive in its present form. It was replaced by Travelers, once thought to be on the endangered list itself, and a company that we find unattractive currently.

Cisco, a premier provider of Internet protocol-based networking and related products to the major communications companies, reflects a change in the DJIA to a company manufacturing a higher technology product than is the case of GM (aka Government Motors?).

Time will tell if these changes will have a material impact on the performance of the DJIA. The potential growth of the technology company, Cisco, may be offset by slower growth from The Travelers Cos.

'A billion here, a billion there'

My home state of Illinois has a history of shady political figures. Yes, I know, I'm stating the obvious.

Years ago, however, one honest senator stood out for his (generally) common sense stands, not to mention his sonorous pronouncements.

"A billion here, a billion there, and pretty soon you're talking about real money. ... I have said, with respect to authorization bills, that I do not want the Congress or the country to commit fiscal suicide on the installment plan."

-Everett Dirksen (1896-1969)

What would he, no doubt aghast, say in an era in which profligate government spending is deepening the debt that future generations will be faced with paying?

Because of this fiscal and monetary largesse, now expressed not in billions, but in trillions (next up: quadrillions!), we expect interest rates to increase, making home purchases more costly to finance and likely prolonging the housing slump and auto sales problems. On the positive side, the overall economic condition, sans housing and autos, is slowly improving, with the financial system steadily regaining its footing.

This puts us at an interesting point in the bond and stock markets. Because of our outlook for interest rates, we are not investing in bonds beyond 10-year maturities. We also are employing an inverse correlated exchange traded fund (symbol TBT) that rises in value when treasury prices fall as rates increase.

The stock market remains in a trading range, with the fundamentals (earnings, dividends, price-earnings ratios, et. al.) at relatively full valuations, while the psychology, as measured by a series of time, volume and price technical indicators, remains slightly positive.

Fundamentals change slowly, but psychology can turn on a dime; therefore, we are watching the latter closely for a change in sentiment. If it becomes negative, we are prepared to raise cash reserves; a positive strengthening would call for increasing equity ownership.

An observation on human nature: At market bottoms many investors become less risk tolerant, and at market tops, more risk tolerant. But that's backward for capitalizing on the adage to buy low and sell high.

My advice: Know - really know - your true risk tolerance, and stick with it.[[In-content Ad]]Clark Davis is a 37-year investment veteran and CEO of St. Louis Investment Advisors, a specialized money-management company.