Transcript of Interview:
Louis Basenese: Welcome back to the second half of our interview with Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. If you missed the first half, be sure to check it out by clicking on the link below.
Now, we talked about a lot of uncertains here. So, you got Syria, Egypt, what’s gonna go on with the fed – these things have been circulated in the markets. And, one could argue that they may be priced into the markets a little bit. Are there any uncertainties on the horizon that you think people aren’t taking into consideration that they should be?
Howard Silverblatt: Well, at this point, obviously, taxes. Okay, which is now taking a back door with the debt situation. Depending upon what happens now militarily, or doesn’t, some of the sequester cuts could be changed to add more back into the military, which would help those economies on there. Again, but a lot of that is political beyond my scope. Also, you’ve got the situation with the debt itself coming up. As interest rates go up, that debt is gonna get a lot more expensive, as any homeowner can tell you that has an adjustable. Well, that’s not a short term this year. It’s a 2014 issue, because as debt starts to turn over, it’s gonna be more expensive, and that money has to come from somewhere. Either they start printing it, or they tax it.
LB: I want to talk for a moment about stock splits. They’ve basically just disappeared, if we just look at the historical levels. You know, we’ve got Priceline zooming towards 1,000. Google got close. Why do you think there’s so few stock splits right now?
HS: I started here at S&P in 1977. We used to have stock splits, stock dividends – 2% or 3% ones – they became expensive. And companies started doing splits because they were more expensive. But also if the traditional value that you wanted your stock to trade in, you didn’t want it to be too expensive. Psychologically, a $40, $50, $70, and $80 stock even was acceptable. But, higher than that, people shied away. So, you had a comfort level on there. That comfort level has gone away. We had no difficulties as individuals, and now especially since individuals buy so much more in the market with it paying $100, or $200, or $300 for a stock. So, for a lot of companies, there’s no need to split. When Google came out, remember everyone was having fits about how high the price was.
LB: Yeah, at $85 it was expensive.
HS: Who’s gonna pay $85 for stock? Well, that’s the same stock they sold at a $40. We just get two shares on there. The companies’ comfort zone has changed. They’re now willing to accept a higher stock. Not all, but a lot of them. It used to be that individuals would buy a lot – 100 shares. Now people, because of the differences in trading, buy dollar values. They buy $10,000, $20,000. And the ability to buy a lot of and the cost, the extra cost of buying a broken lot, is not as expensive. So their comfort level is with a higher price. So, splits have gone down a lot.
LB: Right. Now, has any stock in the S&P ever traded above 1,000?
HS: No, it has not at this point in time. We’ve got it on the watch list. You know, we’re waiting for that to happen, but it is not the traded at the price yet. The highest we’ve got is that Priceline that got close to there.
LB: So, that could be a key psychological level in itself if we break over that.
HS: It is, especially for the company. But, again, the average price of stocks, year by year, again, going back 10, 15, 25 years, has increased. And companies seem to be somewhat more comfortable with it now than they were before. If Priceline doesn’t hit the 1,000, somebody will. I mean, it wasn’t long ago that people were talking about Apple there.
LB: No, I remember. So, that’s the good thing you bring it up, historically speaking these average prices are rising. So, people see it in the headlines and they think it’s not consistent with history, but there you have it – it is. Since we’re talking individual stocks, Microsoft can’t seem to keep itself out of the headlines. Steve Ballmer announces his resignation, or he’s stepping down early. And, then he goes out and buys Nokia’s handset business. What’s your take on Microsoft as a member of the S&P and their efforts to stay relevant? What have we seen over history?
HS: Okay, obviously nothing should be taken as a “Buy,” “Sell,” “Hold” indicator. I’m not the analyst on Microsoft. Let me add to this that Microsoft, by the way, was the only Dow issue to go up last month. 29 of 30 went down. Microsoft, when he’s leaving, goes up.
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LB: Talk about a vote of confidence, right?
HS: Well, he held a lot of stock, so he might have felt bad that the stock went up when he’s leaving. But, his pocket is a lot deeper now. The merger is very nice. I mean, if we go back to Microsoft, obviously, to 1999 when it was over $600 billion and was gonna own the world. And, Apple we were just lucky was just maintaining. It was like in the bottom 10 of the S&P 500. So, that obviously is relevant here and the ability and technology to reinvent yourself. And that’s what they’re attempting to do here. To reinvent themselves and to pull another Apple to some degree – that kind of a scenario to get into the business and be innovative. The joke is that every technology issue, every board, every M&A group within tech – instead of going to the corporate offices now goes to everybody’s garage. You know? To see the dropout that’s sitting there and is going to have the next item. We’ve definitely increased the ability of new technology to quickly dominate a market. It’s not the olden days when you had to have manufacturing and massive amounts of capital investment. Literally, somebody in a garage could invent the next item. And Microsoft now is trying to reinvent itself and, to some degree, catch up. Similar to the scenario of Samsung is doing – not in S&P 500 issue, but is attempting with their phones and their watch, obviously, to compete with Apple.
LB: Yeah, Microsoft has been, even if you factor in those dividend payments, I don’t think it’s been a strong performer over the last decade.
HS: It has not. It’s done pretty bad, even if you add that special $3 dividend in there. Back then, again, they were over $600 billion, Microsoft, back at the end of 1999.
LB: Yeah, I just have a hard time betting on Microsoft reinventing itself. But hey, I could be proven wrong.
Well, listen, before I let you go, I did want to give you an opportunity to share any insights you might have from your latest research. So, is there something that you’re working on now that you found particularly interesting?
HS: Yeah, actually a couple of items. We just released a foreign sales reports for the [S&P] 500. But, the small cap one I’m just finishing up now shows the opposite results. Small-cap issues are going more into Europe and less into Asia. That’s compared to 500 companies which are where the European is declining and Asian is going up. Cash has now set another all time record in the S&P Industrials. This is 20 out of 21 quarters they have set all-time records. Buybacks also went up significantly in the second quarter. About an 18% increase. However, Apple helped that. Apple did $16 billion in buybacks and now has set a brand new record for the most buybacks in any quarter. That said, companies still are not doing share count reductions. In other words, whatever they’re buying back in the market, they’re issuing through options and M&A. We’re not seeing a lot of impact in the earnings per share on an index level. Some companies are, but not many. That tells us that companies are not going the extra step to buy additional shares to reduce their count and help EPS. They don’t have that commitment yet.
LB: And, that’s an important distinction, too.
HS: It is. The easiest example is if you’ve got an option that’s $40, and I’m the company, and the stock is at $50 – I go out and spend $50 to get that stock. You give me $40. It costs me $10. If I want to reduce the share, it costs me the full $50. That’s a much different commitment – the $50 – than the $10. And, that’s what we’re not seeing at this point. They’re doing whatever they need to spend to cover the option, but they’re not doing share count reduction yet.
LB: Yeah, and you typically see headlines about buybacks being a bullish indicator. And, I think you have to go to that next level, like you were saying. Where’s that commitment? If they’re actually going into the market and reducing share count, it’s a much bigger commitment and indicator.
HS: It is. And the share – you gotta look at the issuance, not just the amount of buybacks. And, right now the shares for the second quarter were a tip down, but not a lot of share count reduction. Especially if you take out companies that were in what we call situations, which is arbitrary. Ones where you had unfriendly investors out there that you usually wanted to spend against.
LB: Yeah, well, listen – you did not disappoint whatsoever. That’s great. I look forward to reading the full reports on especially the small caps and their foreign sales, as well. So, as I told you in our intro, folks, Mr. Silverblatt sticks to the numbers, which makes his insights all the more valuable. If you don’t follow his work regularly, I encourage you to start doing so. Thank you again for joining us, Mr. Silverblatt.
HS: Thank you for having me.