Kick GM out of the Dow...now!

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General Motors remains in the Dow Jones Industrial average despite a bargain basement stock price and bankruptcy fears.

NEW YORK (CNNMoney.com) -- General Motors has a market capitalization of less than $2 billion. The stock, which now trades for a little under $3 a share, hit a 70-year low of $1.70 on Thursday morning before recovering a bit.

Normally, when a blue-chip company sinks to such depths of despair, it gets tossed from the S&P 500. But not only is GM (GM, Fortune 500) still a member of that index, it remains a component of the granddaddy of market barometers: the venerable Dow Jones Industrial average.

Why? Or in the words of mid-'90s self-help guru Susan Powter, "Stop the insanity!" The editors of The Wall Street Journal and Dow Jones Indexes, who decide who's in and who's out of the Dow, soon have to come to grips with reality and remove GM from the DJIA.

I've been arguing for years that GM was no longer worthy of inclusion in the Dow. And it's not because I think the Dow needs a sexier company in it to boost its value. Heck, in this market, there's no such thing as a hot stock that would send the Dow soaring.

GM just doesn't deserve to be in the Dow anymore. It's no longer a leader in the automotive industry. It's expected to lose billions of dollars next year and is begging Congress for a bailout so it can avoid bankruptcy reorganization...or worse.

John Prestbo, editor and executive director of Dow Jones Indexes, said in an interview Thursday morning that he is watching GM closely and that if the company did file for bankruptcy, there would be "no choice" but to remove GM.

"A company operating under bankruptcy protection is not on a level playing field. What we try to do is make sure every company in the Dow is operating under the same kind of marketplace," he said.

But even if GM avoids bankruptcy, it still doesn't belong in the Dow anymore. To be sure, the editors at the Journal do not take changes in the Dow lightly. Nor should they. Typically, additions and removals are made only when absolutely necessary.

This is how Dow Jones describes the methodology for picking DJIA companies on the Dow Jones Indexes Web site.

"There are no pre-determined criteria except that components should be established U.S. companies that are leaders in their industries," it said.

"For the sake of continuity, composition changes are rare, and generally occur only after corporate acquisitions or other dramatic shifts in a component's core business."

Uh, I think it's safe to say that plunging auto sales and the threat of bankruptcy qualifies as a "dramatic shift" in GM's core business.

Prestbo argued, though, that what's going on with GM right now is not really the type of "dramatic shift" that historically has led to being cut loose from the Dow.

"When Westinghouse became CBS there was a shift in its business from making turbines to becoming a media company," said Prestbo about the long-time Dow component that was removed in 1997 after it decided to split into two firms.

"GM is still making cars. Not many people are buying them but they are still making cars," he added.

Still, there has already been one company booted from the Dow this year due to the financial meltdown: insurer American International Group was rightly tossed after the company's stock plunged and AIG (AIG, Fortune 500) was forced to run to the Federal Reserve for an $85 billion loan that has since ballooned to $152.5 billion.

But Prestbo said the decision to get rid of AIG was not because the stock plunged but because the government took a majority stake in it as a result of the bailout.

Of course, you can't really separate one from the other. AIG wouldn't have needed the Fed's money if the stock price hadn't plummeted.

Along those lines, Prestbo said he and his colleagues are watching the GM bailout drama closely. He said there would be a "problem" keeping GM in the Dow if the government winds up taking a major equity stake in the firm.

So what would happen if GM were to be shown its walking papers? The big problem with removing GM is that there is no logical company to replace it. Getting rid of GM would likely mean that the Dow would no longer have a car maker in it. After all, Ford Motor (F, Fortune 500), with its $3.3 billion market value, is not a viable substitute.

After GM, the next smallest Dow component is Alcoa, with a market value of about $5.5 billion. Every other Dow component is worth at least $20 billion.

But the Dow Jones Indexes group could do something truly innovative and abandon the outdated notion of keeping the Dow 30 as a U.S.-only index. In fact, I specifically suggested back in June that GM should be swapped out and replaced by Japan's Toyota Motor (TM).

That would still make sense. Sure, Toyota's sales are in free-fall too. The whole industry is in shambles right now. But even though GM may not be able to survive, there clearly will still be a need for companies to make horseless carriages.

Toyota has a market value of $94 billion. What's more, Toyota sells more cars in the U.S. than anyone but GM. And according to a Toyota spokesman, the company employs 36,662 people directly in the U.S. and another 177,808 indirectly, i.e. through dealers as well as suppliers. So it's clearly a company that's a leader in the U.S.

Prestbo said, however, that putting a foreign-based company in the Dow is not under consideration. He pointed to the new Global Dow, launched last week, as the company's major barometer for the world's economy.

There are 150 companies in this new index. Toyota is part of the Global Dow and so is fellow Japanese car marker Honda Motor (HMC).

Nonetheless, Prestbo said that if GM is bumped from the Dow then the Dow will simply have no automotive presence anymore.

"We would justify no autos on the basis that the market currently does not offer a viable U.S. auto investment option," he said. "The Dow's main job is to reflect the U.S. markets and the U.S. economy."