Transcript of Interview:
Louis Basenese: We’re fortunate to have Howard Silverblatt with us today. He’s the senior index analyst for S&P Dow Jones Indices, and no doubt you’re familiar with his market research and commentary as he’s literally quoted in almost every major news publication in the world. Welcome, Mr. Silverblatt.
Howard Silverblatt: Thanks for having me.
LB: Our readers have become accustomed to a no-nonsense approach to the markets and economy, and I’m excited to have you as a guest because you stick to the data and the story it’s telling, not the emotions or the sentiments of the day. So, tell us – we just wrapped up second quarter earnings season not long ago. What are some important trends that you noticed?
HS: Well, the second quarter was a good quarter. Putting aside all the complaints that we had about it, because we expected so much more, and that sales were slow. The bottom line is that both operating and as-reported earnings set a new all-time record. Were we satisfied? No. We want a lot more growth. But, the second quarter set a new record. Third quarter, which we’re already starting to complain about that the growth is gonna be slow, looks like it’s going to set another record. This has been the pattern that we’ve had over the last year or so where’ we’re getting small and slow growth, but it’s steady. And it appears that slow and steady beats fast and unstable.
LB: There’s a lot of talk about the earnings and sales growth accelerating in the second half of the year and into 2014. Do you see that as wishful thinking, or a distinct possibility?
HS: Well, when I look at the 2014 estimates, they appear rather high at this point. They’re correct if everything goes the right way. Unemployment drops, inflation doesn’t go up, the fed is nice and smooth, there is no pullback, no impact from higher interest. So, everything has to happen right to these 2014 numbers to go. So, at this point, most analysts, including myself, are discounting the numbers. They haven’t started to come down that much yet, but it’s still a long time. We usually see a big drop in the 2014 around Thanksgiving to Christmas time. The 2013 second half is a different scenario. They deteriorated a little, but are still holding their level, which means that at this point they’re showing another record for the third and fourth quarter going in. Not by, again, a lot of growth. Again, the third quarter scenario is exactly the same as the second. Slow growth and a new record. But, 2013 seems a lot more optimistic in reality. 2014 seems very high at this point. Of course, the fourth quarter is always under stress because we don’t know what the retail situation’s going to be.
LB: Right. And, I think you bring up something that’s important to focus on here. Those 2014 numbers – I mean, it’s basically a best-case scenario. And, we all know that the best-case scenario never happens in the market.
HS: It is. That’s totally correct. And, again, traditionally after Thanksgiving, the analysts have to sit down, make new target prices, new “Buy” and “Sell” and “Hold” recommendations, and really go over those numbers. Right now looking at them, everything would be fantastic. We’d be buying cases of champagne.
LB: Now listen, you’re so numbers driven, have you taken a less rosy outlook and seen what that means for valuations? So, if we took a more conservative numbers for 2014, where does that put us for a valuation level for the S&P 500?
HS: Yes. We’ve taken them and put them through several scenarios to discounting, both overall and then if you get a slowdown in retail or concern or higher interest rates. There are so many different scenarios at this point. That’s part of the problem with the market is that there is so much uncertainty still in here. If I told you that between now and the end of the year the market was gonna move 10%, the first question would be, “Up or down?” But, yes, so we’ve tested going forward. We do see these amounts in different scenarios. You still get a decent PE that’s supportable, but more importantly, the underlying fundamentals for the issues remain good. Record cash. We already have record cash. Second quarter set another number. Right now the cash flow is very good and the earnings are good. Debt is manageable. Some companies may be taking on additional debt because the interest rates are going up. They’re up over 100 points this year to date already. And M&A may come in there, but the underlying fundamentals of the company – the balance sheet and the income statements – are decent. So, it looks like we’re gonna be in good shape for that. So, if we do get a storm, one of these potential scenarios, we should be able to – at least on the big cap issues – to ride it out a lot more than the small caps will.
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LB: Let’s pivot for a moment and talk about what’s right in front of us – right outside the windshield. A lot of talk about September and it being the worst month in the market for stocks. What does your analysis show? I mean, is this truly the worst month for stocks? Is there some exceptions to that rule?
HS: Well, there’s always issue. And, then October, of course, is the crash month – being the major ones on there. The summer was not too bad. So, let’s look at the scenario first. We went into the summer – you know, Memorial Day to the end – and we’ve lost about one percentage point on there, which means that the market during that time period came to grips with the fact that the Fed was going to slow down the stimulus and the buying. The expectation now is the September 17th and 18th meeting, and maybe a reduction of $20 billion on each shot. But, going into September, we’ve kind of created some more of a base. So, it’s gonna be event driven. One of the positive items on this September compared to the other one is that money is still coming into the market. Obviously a lot of money is going out of the fixed income bonds. Some of that, but not all, has made its way back into the equity inflows, and that’s what’s really helping the market a lot. Money coming back in. Again, not all of it because investors are still showing that they have a concern.
LB: If everyone was pouring back into the markets, that would be a contrary indicator that we might be near a top.
HS: Then we would worry about a bubble item. With holding back, at least that we believe, the investors is the same thing that is holding back a lot of institutions, as well as some corporate buying. And, that is uncertainty over what’s going to happen. Again, I’ll go back to the market’s gonna move 10% between now and the end of the year. We don’t even know which direction.
LB: Now, you brought up the Fed and their upcoming meeting, and the possibility of a taper. Do you see that as a real possibility?
HS: I think the employment report’s gonna have a major item on there. But, they signaled that they’re willing to do some pull back, and mostly over the last two months the market’s come to grips and accepted it. Yes, we all knew it was coming. But, accepting it is different. So, we’ve accepted that interest rates have already gone up over 100 basis points on here. Obviously, they’ve got more to go on there. But we think that they will be starting to pull back. And, if it’s not at the September meeting, it will be afterwards. Don’t forget you have two big changes coming to the Fed. One is that the chairmanship comes up and the president will name a new one, whether it’s Bernanke, Summers, or Yellen. And, that happens on January 31 – a new fed chairman. A lot of people think that sometime this month or early October is when the president is gonna make the nomination. And the other thing that happened in the Fed is that you get a normal annual rotation. Some come in, some come out. Well, you’re gonna get Philly is coming in. You’re getting Dallas’ Fisher is coming in. And, these are a bit more hawks. So, even if we don’t get to start tightening right now, we’re gonna get it. The only thing that can stop it would be that the economy starts to take a tail dive.
LB: Our interview with Mr. Silverblatt was so information packed, we decided to split it into two parts. So be on the look out for an email with a link to the second half of our conversation.