The weird reason that mighty Amazon isn't in the Dow

1. Amazon is too expensive for the Dow: Amazon and Jeff Bezos might be conquering the world, but there's at least one exclusive club they haven't gained entry to: The Dow Jones Industrial Average.

Amazon (AMZN) is one of the most consequential companies on the planet, so it stands to reason that it'd be in the world's most famous stock market index.

Yet Bezos shouldn't be waiting by the phone for an invite to the iconic yet quirky Dow. That's because the 122-year-old index is price-weighted, meaning the influence of each stock is based on its price tag. Cheaper stocks have little sway, and vice versa.

Unless Amazon executed a rare stock split, its share price of $1,700 would give the e-commerce giant too much power in the index. That's 46 times the price of Pfizer (PFE), the cheapest stock in the 30-stock index after General Electric gets the boot on Tuesday. GE's puny stock price of $13 made the storied company nearly irrelevant in an index of which it was a founding member.

The rules that govern the Dow have also made it impossible for other extremely important companies to join the index. That includes Google owner Alphabet (GOOGL) and its stock price of nearly $1,200. And then there's Warren Buffett's Berkshire Hathaway (BRKA), whose Class A shares weigh in at $287,000 apiece.

"If you put in Berkshire Hathaway, everything in the Dow could go to zero and we'd still be up that day," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, which owns the Dow.

Silverblatt conceded that it's possible an adjustment will be made in the future to open the Dow up to Amazon. However, he cautioned against radically changing an index that's been around since 1896.

"This thing has worked for over 120 years. You don't mess with it," Silverblatt said.

The problem is that it used to be commonplace for companies to split their stocks when they got above $100, to make them cheaper for individual investors. That practice mostly stopped a decade ago due to the rise of ETFs, which allow investors to pool their money together to buy stocks. Individual stock prices don't matter as much anymore.

"The pressure on companies to split their stock has gone down dramatically," said Nicholas Colas, co-founder of DataTrek Research.

Still, the fact that Amazon, an $800 billion behemoth that has disrupted bookselling, department stores, cloud computing and groceries, can't be in the Dow speaks to the limitations of the index.

That's why sophisticated investors like hedge fund and mutual fund managers pay way more attention to the broader S&P 500. The 500-stock index is weighted by market capitalization, not stock price.

But don't expect the quirks of the Dow to change its relevance with the average investor.

"The Dow is still the primary measure that Main Street uses to measure Wall Street. I don't see that changing for a long time," said Colas.

2. Goodbye, GE: Walgreens (WBA) will officially replace General Electric (GE) on the Dow on Tuesday before the market opens, ending its 110 year membership.

Last year, GE was the worst-performing stock in the Dow, losing almost half of its value. GE is down by another 26% this year.

S&P DJI said that Walgreens will help the index represent the consumer and health care sectors.

Being ousted from the Dow is the latest indignity for GE, which is dealing with a cash crisis caused by years of bad deals. GE has replaced its CEO, slashed thousands of jobs and cut its coveted stock dividend in half.

3. It's halftime for Corporate America: The second quarter of the year wraps up on Friday.

Overall, companies had a strong first half, boosted by changes to the tax law. But it was a rocky time for the markets, including two 1,000-point plunges in the Dow and increased volatility because of tariff jitters.

Much of the shockwave was set off by Washington, including the Federal Reserve's rate hikes and President Trump's trade crackdown.

4. Chinese investment restriction details: The White House plans to announce proposed restrictions on Chinese investments in the United States by Friday. They will take effect at a later date.

Corporate America could suffer if the restrictions significantly cut off foreign capital. And American companies operating in China are preparing for business conditions to get worse.

Chinese investment in the United States has already fallen significantly. It totaled just $1.8 billion between January and May, a 92% drop compared to the same period last year, according to a report from Rhodium Group, a research firm that tracks Chinese foreign investment.

5. The battle for Fox: The ball is in Comcast's (CCZ) court this week. The NBCUniversal owner tried to usurp Disney's deal for most of 21st Century Fox's (FOXA) TV and movie assets earlier this month, but was bested last week when Disney (DIS) raised its offer to $71 billion.

Comcast hasn't yet said anything publicly, but Wall Street thinks it will still try to counter �� CEO Brian Roberts badly wants Fox, which he thinks will better position the company to take on digital competitors like Netflix (NFLX).

Even so, many observers think Disney has the upper hand, in part because it offered a mix of cash and stock to Fox investors. Comcast has only bid cash so far.

6. Coming this week:

Monday �� Carnival (CCL) earnings

Tuesday �� Consumer Confidence Index for June; Walgreens replaces GE on the Dow

Wednesday �� Bed Bath & Beyond (BBBY), General Mills (GIS), Rite Aid (RAD) earnings

Thursday �� Nike (NKE), Walgreens Boots Alliance earnings; Foxconn (TPE) breaks ground in Wisconsin; Stress test results

Friday �� China investment restrictions deadline; Consumer sentiment

-�� CNN's Julia Horowitz and Donna Borak contributed to this report.

Can Etsy Stock Keep Going After Last Week's 28% Pop?

Etsy (NASDAQ:ETSY) is getting ready to flex its pricing elasticity, and Wall Street's loving it. Shares of the arts and crafts marketplace operator soared 27.9% last week after the company announced it was increasing its seller fees. It's also boosting its guidance as a result of the new pricing that will go into effect next month.

The dot-com darling, which has seen its stock roughly triple over the past year, unveiled a pair of premium-priced subscription models that it will begin to roll out next month. However, the real game changer is that it's lifting the percentage that it charges as a transaction fee from 3.5% to 5%. The higher fee will also now apply to shipping fees tacked on by the sellers to cover fulfillment costs. It may not seem like much, but we're talking about a 43% increase on the fee it charges for sales taking place on its site. If the entrepreneurial artisans that pitch a virtual tent on Etsy accept the change, it will dramatically increase Etsy's business.

Image source: Etsy.

The art of guidance

Etsy's take is naturally going to surge once the new transaction fee kicks in on July 16, and the marketplace operator is boosting its outlook accordingly. It sees revenue rising 32% to 34% for all of 2018, up from the 22% to 24% increase it was targeting last month. It's revising its projection for gross merchandise sales growth from between 16% and 18% to between 16% and 19%, and it makes sense for that metric to hold relatively steady since transaction fees don't factor into that line item. It also sees adjusted EBITDA margin holding steady at 21% to 23% -- as it expects to reinvest a good chunk of the incremental proceeds into improving its seller tools and increasing the direct marketing budget -- but that also means that adjusted EBITDA will follow the revised revenue higher.��

It also bears pointing out that this is a full-year revision to Etsy's top-line guidance for an event that will take place just past the midpoint of 2018. Growth should be explosive for the latter half of this year, and that's should be reflected in the updated guidance when Etsy reports again in early August.�

Analysts are naturally giddy about the move. At least four Wall Street pros are jacking up their price targets: RBC Capital, D.A. Davidson, Roth Capital, and KeyBanc are all lifting their price goals for the sizzling stock. They are encouraged to see Etsy come through with its first fee increase in 13 years, a move that telegraphs confidence in its ability to compete against rival online platforms. Beyond the revised guidance, analysts also feel that the enhanced seller tools and the Etsy Plus subscription plan that will roll out next month, and the Etsy Premium offering that will target its largest sellers next year could boost gross merchandise sales in the years to come.��

Etsy was already on a roll before the new subscription plans and its transaction fee increase. Revenue growth has accelerated for four consecutive quarters, and if it can stretch that streak through the current quarter, it will be a breeze to extend that run to seven quarters with what should be explosive top-line growth in the second half of this year once the new fees kick in. The key, naturally, is getting sellers to accept the increase. They're not happy, as you can imagine. They will be getting a thinner slice of the pie, and that may prompt some to consider other marketplaces. This could also open the door for a rival or potential rival to come in with an aggressive seller acquisition strategy to hit while the merchants are vulnerable. There's rarely such a thing as a smooth rate increase, but if Etsy is able to hold on to most of its sellers, beefs up its marketing efforts, and continues to invest in seller tools to make Etsy storefronts stand out, it's hard to bet against one of the market's hottest stocks over the past year.�