US Equities: The guest highlights substantial near-term stimulus from corporate tax credits (~$190B), individual tax refunds (~$150B), and reduced QT, supporting sales, margins, and market buying into the first half of next year.
Earnings Efficiency: Since 2021, sales are up ~15% while operating earnings rose ~27% and as-reported EPS ~33%, aided by lower effective tax rates and productivity gains.
AI: AI is a key driver of expected productivity, but the guest flags growing capex, financing, and depreciation assumptions tied to AI as both opportunity and risk.
Share Buybacks: About 16% of S&P 500 firms cut share count by at least 4% in Q3, mechanically boosting EPS; buybacks also provide price support but differ from organic growth drivers.
Dividends: Cash dividends will hit a record (up ~4.8% YoY), yet boards are cautious on committing to larger increases due to policy, tariff, and economic uncertainty.
Capital Expenditures: Capex is running at record levels, with accelerated depreciation and credits improving cash flow and incentivizing equipment purchases beyond the AI trade.
Index Concentration: The guest warns that cap-weighted indices are efficient on the way up but amplify downside risk, with the top names driving large portions of the S&P 500 and Nasdaq 100.
Key Companies Discussed: Nvidia (NVDA), Microsoft (MSFT/Azure), Apple (AAPL), IBM (IBM), AT&T (T), Berkshire Hathaway (BRK.B), and Netflix (NFLX) were cited as examples in the context of AI, buybacks, splits, and index methodology.
Transcript
This episode is brought to you by Interactive Brokers. And at Interactive Brokers, you don't have to wait for the markets to open. With aroundthe-clock trading, you could trade over 10,000 USlisted stocks and ETFs. Also, US equity index futures and options, US Treasury bonds, and even more. IBKR overnight trading helps you stay ahead by allowing you to react instantly to market moving news and economic events whenever they happen. [clears throat] Capture more market opportunities and trade on your timetable during local market hours or whenever it's convenient for you. Enjoy bond trading with no markups, no built-in spreads, and low transparent commissions, which can help you improve your returns. Rated a top online broker, Interactive Brokers has won awards from Barons, Investopedia, and Stockbrokers.com and has been benzinga's number one overall online broker for bonds four years in a row. The best informed investors choose Interactive Brokers. Open an interactive brokers account today and discover more trading opportunities around the clock. Learn more at IBKR/aroundtheclock. member SIPC. >> The disciplined investor is all about you, your money, and the markets. Sit back and get ready for this edition of the disciplined investor podcast. This [music] episode of The Disciplined Investor is sponsored by Horowits & Company. If you're [music] looking for a portfolio manager, look no further. Horowits & Company. From seed [music] through harvest, cultivating financial success. >> [music] >> Short week, low volumes, lots of action. The Fed has a change of attitude again. Nvidia scrutiny on the rise. And our guest today, Howard Silverblat, senior industry analyst for S&P Dow Jones Indices. All this and much more on episode number 949 of the Disciplined Investor podcast. >> [music] [music] [music] >> And welcome back. It's uh well it was a great week Thanksgiving this week and we're on the home stretch here. Andrew Horowitz I'm in the hot seat here in the studios of Horowitz and Company downtown Fort Lauderdale, Florida. We have this great office, great studio, all things well great. I guess it's I enjoyed my Thanksgiving. Had a 15PB smoked brisket, three turkey breast that we put on the smoker as well and enjoyed all the other fixins that come with it. A good time with the family. It was a short week. Lots of interesting action, lower volumes, especially as we progressed through the week, but that is to be expected. What was most interesting is that just one week after that was we had that that that collective sigh of concern that oh, you know, a sigh of concern, all of a sudden there's a total change. And what I'm talking about is not necessarily about the market per se right now, but what I'm talking about is what we had with regard to the Fed. We went from a 30% probability of a rate cut in December because of a lot of reasons which we'll talk about to a 70% and now almost an 80% likelihood probability of a Fed funds rate cut by 25 basis points in December without the data. Damn the fact that there's limited data. Who cares? And the data that we have that we do see and have seen sticks to relatively sticky inflation and you know okay why yes Treasury Secretary Bessant he says that it's not the tariffs it's the service economy it's the service economy that's causing prices to increase. Sir, whatever way you need to spin it to make yourself feel better, have at it. Because we know you also said that you're going to be removing tariffs on what? Over 200 food products to reduce cost. So, which is it? And at this point, who cares? I mean, who cares? And I think that's what they really want. They want us just to ignore it and just move along like good little sheep and soldiers. The fact is that when it comes to the data, there is a hole. The reason that the Fed was holding off last week or the week, one and a half weeks ago, was that they didn't have enough data and because of the government shutdown where we had limited data from both inflation issues for the next month and more importantly for the jobs numbers that weren't going to come out to after the Fed rate decision, people got nervous. The Fed was talking time and time again about how, you know, uh, December is not a done deal. That's what Powell said. And then all the other Fed speakers came out and and and echoed that markets got upset. Things got tight. They had to do things like reaffirm and and and restate that don't worry, we're going to start buying bonds again and the QE engine is revved up. However, right now markets didn't about face in in the in light of all the news that we saw whether it was Nvidia uh being uh maybe upseated by Google in the chip area. Some of the earnings that we saw that were a little bit concerning the valuation issue that has been bubbling under the surface. But again, as investors, we need to focus. We need to recognize that the important things are not necessarily the things that happened each and every moment. Every time there is a conversation about a tariff, a war, a you know, pick whatever it is, big or small, we don't have to react. I had a lot of client meetings over the last I would say probably the last two weeks and you know we talked about we talked about the need to understand that what is going on now and we talked about how we need to look at what the real goals are because people are generally concerned. They're they're they're upset. They're confused. So many people are confused like why are the markets going up or down when we have all this good news or bad news, you know, put in whatever you want. But why is it that no matter what seems to happen right now, the markets have a desire to continue moving higher? We get bad news, things sell off, and then they move back. And there's kind of an [clears throat] absence of anything other than a flow of money in because a lot of people get caught up in this this day-to-day this the news the I guess what is it? I guess it's minutia. Why? I'll tell you why. It's because that's the time frame that we all live in. We don't we don't take a breath once a week or once a month. We're not like a whale. We actually breathe four times a minute. Did you know that? 21,600 breaths per day on average. That is our time frame. In and out. In and out. But that's not the proper way to look at our investing. That's not the way you want to look at things in order to make a good future for you, make a good fortune for you, that is not the outcome by looking at every single second of every single day. Unless you want to be a day trader and that has a totally different discussion that's attached to it, 21,600 breaths per day on average. Can you imagine having to focus our time frame on that all the time when we're dealing with our future? You're not thinking about your future when you're breathing in and out. You're thinking about right then and there. Your brain is conditioned right then and there. And that is what happens a lot of times when we get caught up in. That is where many of us fall short in providing for our future selves. That is when you may say things like, "Is now a good time to invest? You know, the market's really high. It's very volatile. Is it a good time to invest?" The fact is, truthfully, it's always a good time to invest when you think out, well, 20 or 30 years from now. That's the way I see it. Now, is it the exact moment of the exact day of the exact week of the exact month that is right right now? So, you're 2% off on your 20-year cycle. You buy a little bit high. The truth of the matter is that you have to think about the future rather than the right now. And maybe it's not a good time 10,000 breaths in the future, but that's not your goal. And if you think it is, and if you can't focus and do what is right for yourself now, maybe you need to do one of these complete makeovers of your understanding of what exactly you're doing listening to this show. Are are you even becoming disciplined? Yes, I'm sure you are. The guests that we've had over the years, the conversations that you and I have had, but sometimes it's tough to pull that trigger. I get it. I understand 100%. Do you know how many times that we have looked at the markets from a dollar cost averaging standpoint and we do a two-part dollar averaging uh approach for people. One is an opportunistic. So for those people that say, you know, I really can't functionally accept the fact that I need to put all my money to work right now. It's been in cash for the last two years. I can't do it. I don't want you to do it. What we do is we get you in slowly but surely. Right? One foot in, one foot out. We've talked about that a hundred times, but what we do is with that is specifically a two-part DCA, dollar cost average. And the opportunistic leads us to when markets take a hit or a sector takes a hit or an area and we believe the valuation is right, we'll push money in. But what happens if that doesn't occur for a few weeks, a few months? If we have committed to a dollar cost averaging program, we have to make sure that if the market continues to move with us and away from us, we are going to grab some of it. So what we do, we have a timebased dollar cost average that goes along with that. We have to force ourselves to get in the market. What's the point of missing 10% in the market because it was lower back here, but we thought it was too high and we didn't put our money to work and therefore at the end of the year it's now 10 percent. We're looking for a 5% pullback to put money in. We're still 5% worse off because we didn't get in the first 5%. So, we do it a tandem approach. Dollar cost averaging with opportunistic and timebased. That's how you control your emotions. So, let's get to it. And if you can't do this, if you functionally can't do this, don't beat yourself up. If you're sitting in cash going, "Oh, I missed out on the last out the last two months, two years, 20 years, you know, 40 years worth of whatever. I wish I could have had this or could have had that." If you have the sense that you can't give it up, but you can't do it either. May I suggest you give it up? If you can't do it, give it to somebody else to do it. Let someone else manage your money. Seriously, this is a great time right now during these holidays. You know how that feeling comes over you? It's Thanksgiving. Now all of a sudden the Christmas trees are going to go up. Now the lights are going to go up. It's going to be Hanukkah soon. It's going to be all the end of the year. It's going to be New Year's. It's a great time just the way we are set up to start to think about how we can change for the better and make ourselves better and make our future selves proud of where we are today. right now for those of you that are kicking yourself that 5 years ago you didn't invest in XYZ that I should have could have why didn't I the fiveyear future you is still going to be even more pissed off than the of of the 10ear past you if the fiveyear past you which is now still hasn't done anything why haven't you learned your lesson do something get off the fence put your big boy pants on your big girl shoes on and let's get going. That doesn't mean you have to be reckless and stupid and just throw it all out there. What it does mean is that you have to be in the game to win. If you're not in the game, you're never going to win. You're never going to lose either, by the way. Unless there's something that behind the scenes is going to eat at your potential. And what is that when it comes to investing? What does that come to when it comes to money? The difference is that if you're in a game and not playing, you can't lose. You can't get hurt. In the investing game, if you're not in it, you can't win, but you can still lose. And you can still lose because you have something. What is it? Inflation. Inflation eats at your money day in and day out. It's kind of like constant. And what happens is sometime in the future your money is worth a lot less and you're losing the game. So make sure you're playing the right game. Make sure you're in it. You don't have to be, you know, crazy about it, but you at least have to give yourself a shot. And by sitting on the sideline, it's not going to do anything for you. That's my words of today. Okay. And I hope you really, you know, take it to heart that I want you to win. I want you to succeed. I want you to be disciplined. I want you to learn. I want you to do what you got to do and give you that motivation to do so. Especially for those that have been sitting on the sidelines for a long time. And again, I'm going to state this point again. If you can't do it, let someone else do it for you. Good time to do it. All right. Let's get into our discussion of our guest because our guest today is Howard Silverblat. He's a senior industry analyst, index investment strategy expert for S&P Dow Jones Indices. In addition to the general market research and commentary, he's responsible he is the guy that's responsible for the statistical analysis of the S&P Dow Jones Industrials family of US indices including the world's most followed stock market, the S&P 500. He's been with Standard Porsche for, get this, since 1977. He's held various analytic, business development, and product positions. He joined S&P Indices in 83 as an editor and has since received numerous corporate and industry awards, most notably for his work um in the the area of um creation, development of Standap's core earnings and global industry classification systems. So, good stuff. Let's get right to it and uh bring him right on the show. Howard Silverblad, how are you? It's been a while. >> It has been uh and it's been a lot to talk about since then. >> So much. I want to start. We're going to dive right in because you sent me a spreadsheet like you always do, you know, uh about what's going on with a variety of things with the various indices and their constituents and you know, the underlying, the totality of it, all that. So, one thing that I found very interesting right off the bat. So, I'm going to start right with the first page that I looked at and I kind of did some calculations was the tax rate trend. And we all know that there was a change in tax rates uh with President Trump the last time around, right? But that really stuck out because this is what I got. Um the average in 2000, the year 2000 was about 35% for S&P 500 companies. In 2015 it was 24%. And the latest is 19%. That's pretty amazing. >> Uh it is but and it's going to get uh lower at that point. Ju just a couple of numbers just so we can know. If we look back uh beforehand it was about a 32 33% before the uh reduction act from Trump 1.0. Now we're dealing 18 19%. The last quarter full quarter Q2 was 1865 as compared to if you go back Q2 2000 okay it was 33.7 so that tax rate has considerably gone down over time and that money has added to the companies remember a dollar saved in taxes is8 $10 in sales if you you have a decent margin more if you don't uh what's happening now and happen for the third quarter which we don't have a final on yet uh but the numbers that we do have show it. First of all, the taxes paid by the companies for their third quarter have significantly declined. Really >> part of most of this is from the one big beautiful bill act which gave $190 billion in tax credits and write offs, depreciation schedules, ammonizations. So it's a write off that you're getting as well as credits. Uh so that $190 billion was saved for 2025. They did part of it in Q3 and reclaimed and they'll do part in Q4. So that is increasing thirdarter earnings significantly. I mean well beyond anybody's projection. Okay. And there's other reasons uh why the earnings are high, but that's a major one. And since they've got all this tax credits, the tax rates going down. So you may be looking at a 17% number effective rate going across. Some companies already have to worry about that 15% minimum rule. Imagine the difficulty in that compared to when you were paying in the 30s uh you know decades ago. So again the tax rates have gone down. I do stick them on that EPS file >> put up weekly and that has going back. Current rates still only shows Q2. Q3 will go after the quarter in January, but that 1865 rate, you know, 18.65% is coming down. >> So, we've already seen it. >> What you said the third quarter numbers are going to start showing this one big beautiful bill act, the OBA. >> Oh, yeah. >> So, but but is that going to be a one time? >> No. Um well, you'll get more in the third quarter because you can do some catch up depreciation and credit, but it goes not to not just Q4, but into next year. It also incentivize and permits companies to buy some short-term capital expenditures equipment. We're not talking about the AI trade now, but regular ranking files uh of companies. So, they're doing it and they can write it off a lot quicker. So, their cash flow is better. Did they did they increase the uh 165 deduction, you know, the the where you can just write it off in one shot? >> Yes. The uh the ammonization, depreciation, uh health care of uh purchase research and development. Okay. Equipment can now be written off a lot quicker. Okay. On there, some of it literally within the year depends on what you have. There's a lot of paperwork there. So I'm saying short term the government's underwriting you. >> Yeah. Yeah. Clearly. >> And and again Q3 was catchup because it was retroactive for the year. So you got the biggest hit in Q3. You're going to feel it in Q4. But depending upon what you wanted to uh the verbiage to be, you could say, well Q4 is going to be less than Q3, but a heck of a lot better than any any other quarter previous to that. which which which explains why there's the constant under uh the the the the um undertone or maybe the overtone I don't know of just bullish buying under any circumstance because the realization is that there is this now whether you some people say well that's artificial artificial bottom line is this you know if you make uh if you you have gross sales of a million dollars and you have a million dollars of expenses you have no profits that's a problem for a company of course you have a million dollars of sales and all of a sudden there's something that goes on with the books and records and how uh there is this you want to call it artificial something or other and now you have $500,000 of net profit that drops right down and that's good for everybody. It it it is good for investors. Obviously government gets a little bit less money but they're hoping to make it up as uh companies do better than is more sales. But but you're exactly right on there and it's not just a short-term situation. Again uh what we're seeing right now with the tax credits are corporations. You and I as individuals, okay, will get it starting February, March, and April. That's when the tax cuts hit for the individuals. The holding schedule is not changed for 2025. So when you go and file, you know, in general for 2025 taxes, your refund starting in February is about $150 billion for individuals. >> I'll take 15 billion. >> Was the year before. So we >> Well, that that's not going to help the highest highest earners, are they? >> No, it's not. But it's going to help the majority of people. It's $150 billion stimulus going in there, which people typically spend. They don't do not uh reduce their debt. They do not put it in the savings. They usually spend that money. uh higherend people if they're getting something or what we call middle class you know upper middle class they'll use it for their uh Q1 estimate or something but still they have more cash so this money is expected to stimulate the economy the same way that $190 billion again same bill from the same bill uh stimulated for Q3 and Q4 that reason plus Fed reducing the end of QT uh you know quantitative uh tightening that starts December one that uh which is the equivalent of another quarter point cut. For those reasons, we're getting a lot of stimulus coming into the market between now and the first half of next year. That has a lot of people buying saying even if we have headwinds such as tariff or supreme court decision, whatever might come in there, all this stimulus is going to help sales and the economy. uh and that's adding to a lot of the uh uh buying in the market, >> right? >> You know, you follow the money and if it's there's a stimulated economy, there's a stimulated market, I'm in it. I may not be in long term, but I'm in it for short term. >> You know, it's interesting. uh the one big beautiful bill act. One of the things that uh was talked about during this was you know um you know back in the Biden days it was like oh that you know the the inflation reduction act which we know was a terrible name [laughter] on that you know because it was spending every time a bill is done by the congress there is spending everybody should really I think recognize that there there there I don't recall a bill maybe back when but any bill that has come through and that is you know whatever is always stimulative there's always money coming through and that's why when these things pass, you know, people get very excited. We're talking about just between the corporate numbers of 190 billion of tax credits and 150 billion of credits coming down. We're talking about, you know, close to $350 billion worth of just right there, by the way, of credit. We're not talking about the stuff that's given to the farmers, given to this, the we're not talking about any of that. It's pretty amazing. >> It is an enormous amount. And again that stimulus you know slides down and investors are going into the market. In addition to that we've got sales. Sales were pro most analysts I mean I looked back to the third quarter. Second and third second quarter most analysts missed sales. They underestimated third quarter everybody missed it. Third quarter sales are enormous. They are a record. people are spending whether the demographics is higher end, upper middle class, however you want to do it. Okay, third quarter sales were fantastic. Okay, that helped the earnings that helped the margins and they're expected to increase. Again, if people are spending, the economy is stimulated, the market is going to react at some point though, you're looking beyond that and saying beyond six months time. What about the second half of 2026? Okay. When the bill supposedly comes out uh you know for those things when it starts reversing you don't have the stimulus but you have the uh the cost factors coming in there >> that's the concern and that's when you'll see either policy and mon monetary and fiscal having to change or you're going to see the market have to change. >> It's going to be interesting. I want to talk about I want to dig down into something that I plucked out of your data. Uh, in particular, I want to talk about the comparison of sales and operating earnings. We're going to do that in a second. Going to take a quick break. We'll be right back. Let's talk about Interactive Brokers because they have key competitive advantages for sophisticated investors like you. IBKR's margin loan rates are from just 4.37% to 5.37%. In fact, IBKR was rated one of the lowest margin fees by stockbrokers.com. Compare IBKR clients low margin borrowing cost to other brokers like Schwab, Erade, Fidelity, and Vanguard who charge hundreds of basis points above IBKR's low rates. The best informed investors choose Interactive Brokers. Margin is only for experienced investors with high risk tolerance. You may lose more than your initial investment. Interactive Brokers is a member of SIPC. Rates are subject to change. Get started today at ibkr.com/compare. So, Howard Silverblad, I said I want to talk about uh this this this something I pulled out of your very well done spreadsheet that you do because you're the keeper of the of the numbers since forever uh with um you know S&P well it was S&P and now it's S&P Dow Jones and all that since 2021 for the S&P 500. I looked at this and I said well let me look at the sales. Sales have increased by your numbers 15%. Raw number raw numbers from from 2021 to now the gross sales for the S&P 500 constituents is up 15%. But operating earnings have increased 27% and as reported earnings per share have increased 37 uh 33%. Again, raw numbers, right? I'm just doing the I'm not doing the compounding. I'm just doing the from then to then >> is that efficiency or or or or andor and andor is that lower share count. >> Okay. Uh it's not as much lower share count because within the index we go back and adjust. I'm adding up when we say it it's 30 something% higher that's in actual aggregates billions of dollars how much it is not per share. You can theoretically take your shares down to one. So whatever your sales your net is, that's your EPS. Yeah. So this is actual dollars. Uh a lot some of that is productivity. Not as much as is hoped to be going forward. There's a lot of productivity increase via AI built in going forward, but going backwards again up to the third quarter. There are some efficiencies. There is lower taxes, better margins, especially postco. Uh people are just spending it. Companies had remember in the third quarter numbers here, second and third quarter, even though they it's a record amount, companies still absorb part of that tariff, >> right? >> Uh countries did, government did, but individuals got p some of that passed on, not full amounts, uh but some of it. Yet, we got that $72 number uh for earnings for the S&P 500. Right now, we're looking at 7231 >> for the quarter. For the quarter just >> That's right. Thank you. And and the the the previous high was $64. Think if that's a company. >> But what I'm saying is you if you have sales increasing only by not only but 15% since 2021, operating earnings increasing 27%. That is huge. That is enormous. That's a 13%, right? >> It's an effic it's a additional efficiencies on there. It's automation. Okay. even before AI and now you're seeing some of the AI come in and again it's not thinking but it's a better system that can pick out a better algorithm that the on the production scale uh on on the on on on the line that you can increase efficiency so much more we're seeing it in different industries it [clears throat] really is remarkable if you think about this I think it is a very simplistic look that I'm I'm h I'm putting on here you know, and and again looking at the the both operating earnings and average as reported, but those numbers, even if they're a little bit off in terms of the the the the totality versus one versus earnings per share on the other, it's still pretty amazing and and respectable that uh in the totality of this and and some of that's also because you get better margins on some of the big companies, right? The big tech companies have better margins than let's say >> restaurants as an example, right? >> Yeah. But so so they're making a lot more money. So that's kind of feeding through. But still in totality where the investment is the S&P 500 right there. But you also talk about um and you calculated that about I think you estimated 4% tailwind for EPS earnings per share due to diluted share count right in in other words the continuation of these buybacks that are giving a yeah >> a push. >> Yeah. Two components there. First on the index level there's no impact from the EPS because we adjust for that we back into millions but on an individual issue pointy AT&T IBM Apple okay you look at these issues and about 16% of the companies okay just for the third quarter alone decreased their shares by at least 4%. That means they increased their EPS by 4%. They made the same million dollars, but instead of dividing by a million shares, they divided by 960,000. So their EPS go from a dollar to a$14. They made the same amount of money in their pocket but they reduced their share count by and therefore theoretically you have increased your ownership of the company obviously but yeah 16% of the companies uh that's a lot and you need to know in your company >> because you do not want to pay the same multiple for share count reduction as you do for higher efficiencies or higher sales. But I think most of the market is is unless you're sophisticated, you know, people are just looking at the number, right? The the the the growth of that I I agree with you and obviously the institutions will pick that up, but I think most people are like, "Oh, they beat and is they don't share count doesn't come into the play. They don't care." >> That's correct. And and the market to some degree, you know, goes into what the company's doing. Remember that buybacks and stuff support stock. It's going into the market. It's doing a bid. Even if your your stock is not good, okay, is more buying. You have three people bidding on your house instead of two. You're getting more money. It's not changing your house, but you're getting more money. So buybacks when you announce them, it used to be like when we used to uh uh have a stock split. >> Oh god. you know, it would it just goes up on. >> Well, it's interesting because that broke that that was for a little while that was really important, but that broke with the I I think at least with the Netflix buyback that happened this year >> and Netflix split, by the way. >> Yeah, I'm saying the 10 10 for one split. Everybody's like, ho ho, >> you know, for a minute it was doing well, but you know, it wasn't like some of these other ones that went berserk and and crazy. the just to go back into the expense discussion and some of the things that are happening with regard to the ability to expense some things. There was uh earlier this week there was a um well there's been a bit of a kurfuffle with uh you know Michael Bur and all that with this whole Nvidia the chips. >> Nvidia came out earlier this week. They said we are not aware of any claims that Nvidia has improperly capitalized operating expenses. Several commentators alleged that customers have overstated earnings by extending GPU depreciation schedules beyond economic useful life. Um, that's not something you probably get into because you're just looking at the numbers, but there is sometimes um in especially in the world right now with the amount of money capex is is is capex at a historic high. >> Yes, it's got to be, right? It's got to be. We we do not have a final on that yet, but we've already of the companies we know, which about 93%. They've already set a new record. >> Yeah. Absurd amounts. Then we get into the issue about vendor financing, circular financing that I've been like, >> that's a major issue. >> I've been a lunatic about by the way. I've been like, >> that's good. You're getting ahead of the curve there. >> It's funny because I'll tell you something, Howard. Um, we go back a long time, but there was a time back in 20 I don't know if we knew, we probably didn't know each other back in 2006 because I started the podcast in 2007. In 2006, I had this moment of clarity. I remember I I have it in my head right now. I remember exactly what happened. I was standing on a lawn of a second home I owned up in Lake Placid, Florida. And my sister, I was on the phone with her. My sister said she uh mortgaged her house again, you know, reorggaged it. And uh for like another 100,000, she took out after she took out 100,000. I'm like, what? How is that possible? Like they didn't have the money to pay for it. And I had this moment of clarity back then and I became a looney tune, you know, back, you know, slamming the desk, getting crazy that the housing market's in big trouble. Um, you know, saying we're going to have a big calamity going on. I went into it and I kind of got out of the markets. That's why I won this big tournament, this this competition back then. All this, I'm starting to have a moment of clarity right now with this whole uh vendor financing is interesting to me. It's not the end of things, but it's bad. Circular financing is even a bigger problem. Um, and the big boys don't seem to really care because the idea is they'll just let this go for a number of years. But you're seeing the same thing, right? >> Not just on the street. There's a lot of concern about that. Uh, and remember, we're equity people, but now we have to go back into the bond side of it, the fixed parts. Uh, but all the ones that you named are ones that there's concerns about. It's great. Well, it's great, but how when a bill starts coming due, if you don't match that revenue, you've got a lot of pressure coming in. Remember, uh an interest payment is not like uh stock going down, you hold on to it, it goes back up. You need to make that payment. And if you have to liquidate something or or cut back somewhere else, that's what you have to do. uh and there's a lot of of uh uh debt coming out especially in in connected to AI that's backed by fixed incomes and while the cash flow is there today >> what happens if it's not tomorrow just just a little twinkle on there could disrupt everything remember the housing with all the different tiers on the housing market how quickly that escalated it's geometric almost so that's That's a big concern on the risk side especially on large institutions who have to put everything through a risk model and then go to compliance even beforehand. So so there's uh there's worry about that. >> So the concern I have is in the circular financing or or you know basically or I'll say this is vendor financing in a way you take Microsoft takes a billion dollars and gives it to company ABC. ABC says hey we're going to buy back space over the next five years on the Azour. You basically essentially you just did is you took money off your balance sheet and turned it into income >> as I see it >> and there but if you look in the contingencies on the 10 Q and 10K they're spelling that out. So it's there but the problem is as you said most people you've seen that top line my sales are going to go up. I've got more uh uh commitments going forward my back orders are going to increase all this. Uh but again, you're partially buying that and is the circular reasoning in there is circular financing. It's good when it's good, but you've got to >> of course, like I said, you know, I always say this, it's like, you know, you're out in the wilderness and you're you have you're you're million miles away from anything. You know, maybe you can eat your arm for a little while for nutrition, but after a while, it's probably not going to, you know, you can eat too much and that ends the whole game. >> Yeah. Uh, real quick, I know you're on a we we have a short schedule today. Um, and >> I need to talk to you. Uh, >> being at, you know, S&P Dow Jones, the top 10 stocks in the NASDAQ 100 are 70% 70% of the market weight. The S&P 500 about 38% give or take. When do we start thinking that market cap weighted indices are not really diversification and are you as a firm talking about that as a concern? >> Okay, let me talk from an investment point first on this as compared to a corporate position on there. Uh [clears throat] first of all, the market is the one that says it. We've thought about this decades ago. There are indices out there S&P other companies uh private companies public companies that you can go that invest differently and cap so they'll go in that no issue could be more than so much percent or most sector could be more than so much you'll see that a lot in the dividends you know so you don't end up with all utilities and financials uh so those alternative types of investments have been around for decades again up and down the low the big cap ones like the S&P 500 Their methodology is not to cap those. Okay. And theoretically, yes, company can go all the way up. And the top the mag seven which are 35% are historically high levels. S&P in this index did not set that that 35% for the top 10. Okay? The market did by bidding them up. If all of a sudden, God help us here, three out of the seven go under to zero, that number falls all the way down. Yeah. >> You know, other indices where it doesn't again that we all have where it says you can't have more than let's say pick an arbitrary number of let's say 2%. So the 8% that Nvidia has would be cut down to two and NASDAQ has limited uh Apple historically different different points. Okay, you have the same difficulty in a price index uh in in the Dow Jones Industrial Average 30 companies. Okay, if you put Birkshire Hathaway, the main one there, [laughter] okay, the other 29% >> the other 29 go down to zero one day and Birkshshire goes up 5%, the headline is the Dow is up. So again, it's methodology. I think the heart of your question, which we'll get to now, sorry about that, is is this good or bad? Well, it's good on the way up, it's going to be terrible on the way down. Again, if a couple of this mag seven go under, those are enormous companies that are going to drag it down. But that's the waiting and methodology of that. Similarly, if you bought an index based on earnings or dividends or or or buybacks, all these. So again, you need to know what you're buying and and see if you feel comfortable with it. And if you are in the middle of the road, you can also, you know, buy sectors. You can buy you can buy an index. >> You can buy you can buy an equal, you can buy the equal weighted S&P 500. Just seems to me that the the market cap in an environment like this, especially as you get bigger and bigger, it becomes a snowball that's almost impossible to stop clearly on the way up and down. And I know that is both sides, but it seems to me that is that really I guess the point is and and I'm not going to make any kind of headway into this at all cuz it's just little old me. Um it doesn't seem like the S&P right now, clearly not the NASDAQ, but the S&P 500 is really the benchmark that people should be um more more so now than ever. I is not the one that we should be benchmarking a portfolio against. It just seems it just seems illogical to benchmark it against, you know, 10 companies. Well, not 10, but >> that right they have such a high I totally understand that but you've got to ask yourself uh what you what your benchmark is for the U S&P 500 the intent is to emulate the US common market higher end okay not a certain section but the higher end of that if that's what you're looking to do that's the index and it's efficient okay if you're looking some technology you can go into a technology sector you can go into the NASDAQ similar a small cap the S&P you know 600 the Russell but if you're in the S&P 500 or or the NASDAQ where these companies or certain specific companies are weighted that heavy you need to know that is what you're buying. If you do not believe in that those companies on the short run, then you need to go to a different index, okay, or selfshort on it as and cover something in case they go down because again, if the seven go down, that index is going down. It's going to be hard for the other 65% to make up for a massive loss on the seven. Just as on the equal weighted it has not gone up as much because that's the other 493 companies okay haven't kept up with the magnificent 7 as a group. >> Yeah. No I get it. It's it's a fascinating I keep going round to round with the market cap weighted thing and I know that this is kind of standard operating procedure for a lot of people that hey what you know you know what's the S&P 500 done and all that. Great. And um you know, but I I I just find it to be um clearly one of the reasons that the the larger gets draws in more uh that helps the index and it just is is that really representative of what most people have out there in terms of their investments. Um so that's something to think about obviously. Um last thing I just want to talk about um is is dividends. Um, >> okay. >> You know, dividends are, you know, we talked about this, you mentioned in in a note that you sent to me that companies are kind of shy to commit due to economics costs, labor, tariffs, things of that nature. But >> we're going to have record payments, right? Which makes sense. Um, record payments, by the way, on um with share buybacks, meaning are you talking about payments to uh shares that are out in market or are you talking about the totality of the payment? Uh, I'm talking about actual shares out there that companies have paid in dividends. Not the buyback yield where you figure that I reduced my share count, but physical dividends that are in your pocket sent out each quarter. Okay. Companies this year will set a record up about 4.8% year-over-year. Uh, the estimate was a lot higher back in December. Companies have continued to increase mostly. you know, those that are on a regular schedule or annually, they've increased, but their increase is smaller. They're nervous about making forward commitments. You know, a buyback, which is also looked at when you do dividends, can be changed at a at in a moment. You can literally text or tweet your your trader, stop buying or increase buying. A dividend, you pay me 10 cents, I expect another 10 cents next quarter. And guess what? The quarter after that, maybe 11. Okay? So, and the opposite is true, too. You have a cut in the dividend. People get that angle. >> You better have a good reason. [laughter] You better have a good reason for that. Companies are shy about this. >> But are they shy or are they saying that they want to hold back for more capex because they think the they need to be spending that way? >> When you when you look at the cash flow, which also looks like it's going to be affected the third quarter, by the way. uh when you look at that uh and the free cash flow, you know, what's available, no matter what you start taking out with with or without the higher uh deductions, which is lower taxes, there's enough money there to do it both. The companies are concerned about increasing not necessarily for this quarter or next quarter, but how's this going to hit me at the end of 2026? How's this going to hit me if I have to, you know, be flat on my sales as compared to a double-digit increase? You know, if you go down to 1% increase, you know, your stock's going to get killed today, much less if you have to take a cut. So, companies are concerned about the forward commitment because it's hard to do planning when you don't know what taxes are, you don't know what tariffs are, you don't know what Congress is going to do, the president is going to do. Policy can change pretty quick. So as you start to get more of a possibility of what's going to happen, more less uncertainty, okay? Even if it's bad for you, you can plan as a executive, as a board, you can plan around anything and try to make the best of it. If there's 20 branches on that tree, I cannot make 20 plans. >> Yeah. No, I got you. I got you. Great stuff. Howard Silverblat, Howard, Howard, Howard, thank you so much for joining us. always a wealth of information and um I appreciate you coming aboard and we'll do it again soon. Have a great uh end of year. Have a great holiday. Have a great new year and we'll see you on the other side. >> You too. Let's hope it's all positive. >> Thanks. >> That's going to wrap it up for this episode of the Disciplined Investor podcast. Yep. What do we got coming up? Ed Easterling, Harry Dent, Andrew Wilkinson. Lots of really great things. Don't touch the dial. Don't go anywhere. Lots more for the end of the year and thereafter. So, we're going to get on continuing on the process of ensuring that we are all disciplined. Disciplined investors so that again once again I'll say this again I need to really make sure I hit this home that the future you the future me is happy with the me of today. The present me is doing everything I can to make sure the future me is financially secure, financially independent, and looking back happy with what we did today. Thanks for joining me this week and every week. I'll see you again real soon. This podcast is intended [music] forformational purposes only and does not constitute personalized investment advice. 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TDI Podcast: Hidden Boosts (#949)
Summary
Transcript
This episode is brought to you by Interactive Brokers. And at Interactive Brokers, you don't have to wait for the markets to open. With aroundthe-clock trading, you could trade over 10,000 USlisted stocks and ETFs. Also, US equity index futures and options, US Treasury bonds, and even more. IBKR overnight trading helps you stay ahead by allowing you to react instantly to market moving news and economic events whenever they happen. [clears throat] Capture more market opportunities and trade on your timetable during local market hours or whenever it's convenient for you. Enjoy bond trading with no markups, no built-in spreads, and low transparent commissions, which can help you improve your returns. Rated a top online broker, Interactive Brokers has won awards from Barons, Investopedia, and Stockbrokers.com and has been benzinga's number one overall online broker for bonds four years in a row. The best informed investors choose Interactive Brokers. Open an interactive brokers account today and discover more trading opportunities around the clock. Learn more at IBKR/aroundtheclock. member SIPC. >> The disciplined investor is all about you, your money, and the markets. Sit back and get ready for this edition of the disciplined investor podcast. This [music] episode of The Disciplined Investor is sponsored by Horowits & Company. If you're [music] looking for a portfolio manager, look no further. Horowits & Company. From seed [music] through harvest, cultivating financial success. >> [music] >> Short week, low volumes, lots of action. The Fed has a change of attitude again. Nvidia scrutiny on the rise. And our guest today, Howard Silverblat, senior industry analyst for S&P Dow Jones Indices. All this and much more on episode number 949 of the Disciplined Investor podcast. >> [music] [music] [music] >> And welcome back. It's uh well it was a great week Thanksgiving this week and we're on the home stretch here. Andrew Horowitz I'm in the hot seat here in the studios of Horowitz and Company downtown Fort Lauderdale, Florida. We have this great office, great studio, all things well great. I guess it's I enjoyed my Thanksgiving. Had a 15PB smoked brisket, three turkey breast that we put on the smoker as well and enjoyed all the other fixins that come with it. A good time with the family. It was a short week. Lots of interesting action, lower volumes, especially as we progressed through the week, but that is to be expected. What was most interesting is that just one week after that was we had that that that collective sigh of concern that oh, you know, a sigh of concern, all of a sudden there's a total change. And what I'm talking about is not necessarily about the market per se right now, but what I'm talking about is what we had with regard to the Fed. We went from a 30% probability of a rate cut in December because of a lot of reasons which we'll talk about to a 70% and now almost an 80% likelihood probability of a Fed funds rate cut by 25 basis points in December without the data. Damn the fact that there's limited data. Who cares? And the data that we have that we do see and have seen sticks to relatively sticky inflation and you know okay why yes Treasury Secretary Bessant he says that it's not the tariffs it's the service economy it's the service economy that's causing prices to increase. Sir, whatever way you need to spin it to make yourself feel better, have at it. Because we know you also said that you're going to be removing tariffs on what? Over 200 food products to reduce cost. So, which is it? And at this point, who cares? I mean, who cares? And I think that's what they really want. They want us just to ignore it and just move along like good little sheep and soldiers. The fact is that when it comes to the data, there is a hole. The reason that the Fed was holding off last week or the week, one and a half weeks ago, was that they didn't have enough data and because of the government shutdown where we had limited data from both inflation issues for the next month and more importantly for the jobs numbers that weren't going to come out to after the Fed rate decision, people got nervous. The Fed was talking time and time again about how, you know, uh, December is not a done deal. That's what Powell said. And then all the other Fed speakers came out and and and echoed that markets got upset. Things got tight. They had to do things like reaffirm and and and restate that don't worry, we're going to start buying bonds again and the QE engine is revved up. However, right now markets didn't about face in in the in light of all the news that we saw whether it was Nvidia uh being uh maybe upseated by Google in the chip area. Some of the earnings that we saw that were a little bit concerning the valuation issue that has been bubbling under the surface. But again, as investors, we need to focus. We need to recognize that the important things are not necessarily the things that happened each and every moment. Every time there is a conversation about a tariff, a war, a you know, pick whatever it is, big or small, we don't have to react. I had a lot of client meetings over the last I would say probably the last two weeks and you know we talked about we talked about the need to understand that what is going on now and we talked about how we need to look at what the real goals are because people are generally concerned. They're they're they're upset. They're confused. So many people are confused like why are the markets going up or down when we have all this good news or bad news, you know, put in whatever you want. But why is it that no matter what seems to happen right now, the markets have a desire to continue moving higher? We get bad news, things sell off, and then they move back. And there's kind of an [clears throat] absence of anything other than a flow of money in because a lot of people get caught up in this this day-to-day this the news the I guess what is it? I guess it's minutia. Why? I'll tell you why. It's because that's the time frame that we all live in. We don't we don't take a breath once a week or once a month. We're not like a whale. We actually breathe four times a minute. Did you know that? 21,600 breaths per day on average. That is our time frame. In and out. In and out. But that's not the proper way to look at our investing. That's not the way you want to look at things in order to make a good future for you, make a good fortune for you, that is not the outcome by looking at every single second of every single day. Unless you want to be a day trader and that has a totally different discussion that's attached to it, 21,600 breaths per day on average. Can you imagine having to focus our time frame on that all the time when we're dealing with our future? You're not thinking about your future when you're breathing in and out. You're thinking about right then and there. Your brain is conditioned right then and there. And that is what happens a lot of times when we get caught up in. That is where many of us fall short in providing for our future selves. That is when you may say things like, "Is now a good time to invest? You know, the market's really high. It's very volatile. Is it a good time to invest?" The fact is, truthfully, it's always a good time to invest when you think out, well, 20 or 30 years from now. That's the way I see it. Now, is it the exact moment of the exact day of the exact week of the exact month that is right right now? So, you're 2% off on your 20-year cycle. You buy a little bit high. The truth of the matter is that you have to think about the future rather than the right now. And maybe it's not a good time 10,000 breaths in the future, but that's not your goal. And if you think it is, and if you can't focus and do what is right for yourself now, maybe you need to do one of these complete makeovers of your understanding of what exactly you're doing listening to this show. Are are you even becoming disciplined? Yes, I'm sure you are. The guests that we've had over the years, the conversations that you and I have had, but sometimes it's tough to pull that trigger. I get it. I understand 100%. Do you know how many times that we have looked at the markets from a dollar cost averaging standpoint and we do a two-part dollar averaging uh approach for people. One is an opportunistic. So for those people that say, you know, I really can't functionally accept the fact that I need to put all my money to work right now. It's been in cash for the last two years. I can't do it. I don't want you to do it. What we do is we get you in slowly but surely. Right? One foot in, one foot out. We've talked about that a hundred times, but what we do is with that is specifically a two-part DCA, dollar cost average. And the opportunistic leads us to when markets take a hit or a sector takes a hit or an area and we believe the valuation is right, we'll push money in. But what happens if that doesn't occur for a few weeks, a few months? If we have committed to a dollar cost averaging program, we have to make sure that if the market continues to move with us and away from us, we are going to grab some of it. So what we do, we have a timebased dollar cost average that goes along with that. We have to force ourselves to get in the market. What's the point of missing 10% in the market because it was lower back here, but we thought it was too high and we didn't put our money to work and therefore at the end of the year it's now 10 percent. We're looking for a 5% pullback to put money in. We're still 5% worse off because we didn't get in the first 5%. So, we do it a tandem approach. Dollar cost averaging with opportunistic and timebased. That's how you control your emotions. So, let's get to it. And if you can't do this, if you functionally can't do this, don't beat yourself up. If you're sitting in cash going, "Oh, I missed out on the last out the last two months, two years, 20 years, you know, 40 years worth of whatever. I wish I could have had this or could have had that." If you have the sense that you can't give it up, but you can't do it either. May I suggest you give it up? If you can't do it, give it to somebody else to do it. Let someone else manage your money. Seriously, this is a great time right now during these holidays. You know how that feeling comes over you? It's Thanksgiving. Now all of a sudden the Christmas trees are going to go up. Now the lights are going to go up. It's going to be Hanukkah soon. It's going to be all the end of the year. It's going to be New Year's. It's a great time just the way we are set up to start to think about how we can change for the better and make ourselves better and make our future selves proud of where we are today. right now for those of you that are kicking yourself that 5 years ago you didn't invest in XYZ that I should have could have why didn't I the fiveyear future you is still going to be even more pissed off than the of of the 10ear past you if the fiveyear past you which is now still hasn't done anything why haven't you learned your lesson do something get off the fence put your big boy pants on your big girl shoes on and let's get going. That doesn't mean you have to be reckless and stupid and just throw it all out there. What it does mean is that you have to be in the game to win. If you're not in the game, you're never going to win. You're never going to lose either, by the way. Unless there's something that behind the scenes is going to eat at your potential. And what is that when it comes to investing? What does that come to when it comes to money? The difference is that if you're in a game and not playing, you can't lose. You can't get hurt. In the investing game, if you're not in it, you can't win, but you can still lose. And you can still lose because you have something. What is it? Inflation. Inflation eats at your money day in and day out. It's kind of like constant. And what happens is sometime in the future your money is worth a lot less and you're losing the game. So make sure you're playing the right game. Make sure you're in it. You don't have to be, you know, crazy about it, but you at least have to give yourself a shot. And by sitting on the sideline, it's not going to do anything for you. That's my words of today. Okay. And I hope you really, you know, take it to heart that I want you to win. I want you to succeed. I want you to be disciplined. I want you to learn. I want you to do what you got to do and give you that motivation to do so. Especially for those that have been sitting on the sidelines for a long time. And again, I'm going to state this point again. If you can't do it, let someone else do it for you. Good time to do it. All right. Let's get into our discussion of our guest because our guest today is Howard Silverblat. He's a senior industry analyst, index investment strategy expert for S&P Dow Jones Indices. In addition to the general market research and commentary, he's responsible he is the guy that's responsible for the statistical analysis of the S&P Dow Jones Industrials family of US indices including the world's most followed stock market, the S&P 500. He's been with Standard Porsche for, get this, since 1977. He's held various analytic, business development, and product positions. He joined S&P Indices in 83 as an editor and has since received numerous corporate and industry awards, most notably for his work um in the the area of um creation, development of Standap's core earnings and global industry classification systems. So, good stuff. Let's get right to it and uh bring him right on the show. Howard Silverblad, how are you? It's been a while. >> It has been uh and it's been a lot to talk about since then. >> So much. I want to start. We're going to dive right in because you sent me a spreadsheet like you always do, you know, uh about what's going on with a variety of things with the various indices and their constituents and you know, the underlying, the totality of it, all that. So, one thing that I found very interesting right off the bat. So, I'm going to start right with the first page that I looked at and I kind of did some calculations was the tax rate trend. And we all know that there was a change in tax rates uh with President Trump the last time around, right? But that really stuck out because this is what I got. Um the average in 2000, the year 2000 was about 35% for S&P 500 companies. In 2015 it was 24%. And the latest is 19%. That's pretty amazing. >> Uh it is but and it's going to get uh lower at that point. Ju just a couple of numbers just so we can know. If we look back uh beforehand it was about a 32 33% before the uh reduction act from Trump 1.0. Now we're dealing 18 19%. The last quarter full quarter Q2 was 1865 as compared to if you go back Q2 2000 okay it was 33.7 so that tax rate has considerably gone down over time and that money has added to the companies remember a dollar saved in taxes is8 $10 in sales if you you have a decent margin more if you don't uh what's happening now and happen for the third quarter which we don't have a final on yet uh but the numbers that we do have show it. First of all, the taxes paid by the companies for their third quarter have significantly declined. Really >> part of most of this is from the one big beautiful bill act which gave $190 billion in tax credits and write offs, depreciation schedules, ammonizations. So it's a write off that you're getting as well as credits. Uh so that $190 billion was saved for 2025. They did part of it in Q3 and reclaimed and they'll do part in Q4. So that is increasing thirdarter earnings significantly. I mean well beyond anybody's projection. Okay. And there's other reasons uh why the earnings are high, but that's a major one. And since they've got all this tax credits, the tax rates going down. So you may be looking at a 17% number effective rate going across. Some companies already have to worry about that 15% minimum rule. Imagine the difficulty in that compared to when you were paying in the 30s uh you know decades ago. So again the tax rates have gone down. I do stick them on that EPS file >> put up weekly and that has going back. Current rates still only shows Q2. Q3 will go after the quarter in January, but that 1865 rate, you know, 18.65% is coming down. >> So, we've already seen it. >> What you said the third quarter numbers are going to start showing this one big beautiful bill act, the OBA. >> Oh, yeah. >> So, but but is that going to be a one time? >> No. Um well, you'll get more in the third quarter because you can do some catch up depreciation and credit, but it goes not to not just Q4, but into next year. It also incentivize and permits companies to buy some short-term capital expenditures equipment. We're not talking about the AI trade now, but regular ranking files uh of companies. So, they're doing it and they can write it off a lot quicker. So, their cash flow is better. Did they did they increase the uh 165 deduction, you know, the the where you can just write it off in one shot? >> Yes. The uh the ammonization, depreciation, uh health care of uh purchase research and development. Okay. Equipment can now be written off a lot quicker. Okay. On there, some of it literally within the year depends on what you have. There's a lot of paperwork there. So I'm saying short term the government's underwriting you. >> Yeah. Yeah. Clearly. >> And and again Q3 was catchup because it was retroactive for the year. So you got the biggest hit in Q3. You're going to feel it in Q4. But depending upon what you wanted to uh the verbiage to be, you could say, well Q4 is going to be less than Q3, but a heck of a lot better than any any other quarter previous to that. which which which explains why there's the constant under uh the the the the um undertone or maybe the overtone I don't know of just bullish buying under any circumstance because the realization is that there is this now whether you some people say well that's artificial artificial bottom line is this you know if you make uh if you you have gross sales of a million dollars and you have a million dollars of expenses you have no profits that's a problem for a company of course you have a million dollars of sales and all of a sudden there's something that goes on with the books and records and how uh there is this you want to call it artificial something or other and now you have $500,000 of net profit that drops right down and that's good for everybody. It it it is good for investors. Obviously government gets a little bit less money but they're hoping to make it up as uh companies do better than is more sales. But but you're exactly right on there and it's not just a short-term situation. Again uh what we're seeing right now with the tax credits are corporations. You and I as individuals, okay, will get it starting February, March, and April. That's when the tax cuts hit for the individuals. The holding schedule is not changed for 2025. So when you go and file, you know, in general for 2025 taxes, your refund starting in February is about $150 billion for individuals. >> I'll take 15 billion. >> Was the year before. So we >> Well, that that's not going to help the highest highest earners, are they? >> No, it's not. But it's going to help the majority of people. It's $150 billion stimulus going in there, which people typically spend. They don't do not uh reduce their debt. They do not put it in the savings. They usually spend that money. uh higherend people if they're getting something or what we call middle class you know upper middle class they'll use it for their uh Q1 estimate or something but still they have more cash so this money is expected to stimulate the economy the same way that $190 billion again same bill from the same bill uh stimulated for Q3 and Q4 that reason plus Fed reducing the end of QT uh you know quantitative uh tightening that starts December one that uh which is the equivalent of another quarter point cut. For those reasons, we're getting a lot of stimulus coming into the market between now and the first half of next year. That has a lot of people buying saying even if we have headwinds such as tariff or supreme court decision, whatever might come in there, all this stimulus is going to help sales and the economy. uh and that's adding to a lot of the uh uh buying in the market, >> right? >> You know, you follow the money and if it's there's a stimulated economy, there's a stimulated market, I'm in it. I may not be in long term, but I'm in it for short term. >> You know, it's interesting. uh the one big beautiful bill act. One of the things that uh was talked about during this was you know um you know back in the Biden days it was like oh that you know the the inflation reduction act which we know was a terrible name [laughter] on that you know because it was spending every time a bill is done by the congress there is spending everybody should really I think recognize that there there there I don't recall a bill maybe back when but any bill that has come through and that is you know whatever is always stimulative there's always money coming through and that's why when these things pass, you know, people get very excited. We're talking about just between the corporate numbers of 190 billion of tax credits and 150 billion of credits coming down. We're talking about, you know, close to $350 billion worth of just right there, by the way, of credit. We're not talking about the stuff that's given to the farmers, given to this, the we're not talking about any of that. It's pretty amazing. >> It is an enormous amount. And again that stimulus you know slides down and investors are going into the market. In addition to that we've got sales. Sales were pro most analysts I mean I looked back to the third quarter. Second and third second quarter most analysts missed sales. They underestimated third quarter everybody missed it. Third quarter sales are enormous. They are a record. people are spending whether the demographics is higher end, upper middle class, however you want to do it. Okay, third quarter sales were fantastic. Okay, that helped the earnings that helped the margins and they're expected to increase. Again, if people are spending, the economy is stimulated, the market is going to react at some point though, you're looking beyond that and saying beyond six months time. What about the second half of 2026? Okay. When the bill supposedly comes out uh you know for those things when it starts reversing you don't have the stimulus but you have the uh the cost factors coming in there >> that's the concern and that's when you'll see either policy and mon monetary and fiscal having to change or you're going to see the market have to change. >> It's going to be interesting. I want to talk about I want to dig down into something that I plucked out of your data. Uh, in particular, I want to talk about the comparison of sales and operating earnings. We're going to do that in a second. Going to take a quick break. We'll be right back. Let's talk about Interactive Brokers because they have key competitive advantages for sophisticated investors like you. IBKR's margin loan rates are from just 4.37% to 5.37%. In fact, IBKR was rated one of the lowest margin fees by stockbrokers.com. Compare IBKR clients low margin borrowing cost to other brokers like Schwab, Erade, Fidelity, and Vanguard who charge hundreds of basis points above IBKR's low rates. The best informed investors choose Interactive Brokers. Margin is only for experienced investors with high risk tolerance. You may lose more than your initial investment. Interactive Brokers is a member of SIPC. Rates are subject to change. Get started today at ibkr.com/compare. So, Howard Silverblad, I said I want to talk about uh this this this something I pulled out of your very well done spreadsheet that you do because you're the keeper of the of the numbers since forever uh with um you know S&P well it was S&P and now it's S&P Dow Jones and all that since 2021 for the S&P 500. I looked at this and I said well let me look at the sales. Sales have increased by your numbers 15%. Raw number raw numbers from from 2021 to now the gross sales for the S&P 500 constituents is up 15%. But operating earnings have increased 27% and as reported earnings per share have increased 37 uh 33%. Again, raw numbers, right? I'm just doing the I'm not doing the compounding. I'm just doing the from then to then >> is that efficiency or or or or andor and andor is that lower share count. >> Okay. Uh it's not as much lower share count because within the index we go back and adjust. I'm adding up when we say it it's 30 something% higher that's in actual aggregates billions of dollars how much it is not per share. You can theoretically take your shares down to one. So whatever your sales your net is, that's your EPS. Yeah. So this is actual dollars. Uh a lot some of that is productivity. Not as much as is hoped to be going forward. There's a lot of productivity increase via AI built in going forward, but going backwards again up to the third quarter. There are some efficiencies. There is lower taxes, better margins, especially postco. Uh people are just spending it. Companies had remember in the third quarter numbers here, second and third quarter, even though they it's a record amount, companies still absorb part of that tariff, >> right? >> Uh countries did, government did, but individuals got p some of that passed on, not full amounts, uh but some of it. Yet, we got that $72 number uh for earnings for the S&P 500. Right now, we're looking at 7231 >> for the quarter. For the quarter just >> That's right. Thank you. And and the the the previous high was $64. Think if that's a company. >> But what I'm saying is you if you have sales increasing only by not only but 15% since 2021, operating earnings increasing 27%. That is huge. That is enormous. That's a 13%, right? >> It's an effic it's a additional efficiencies on there. It's automation. Okay. even before AI and now you're seeing some of the AI come in and again it's not thinking but it's a better system that can pick out a better algorithm that the on the production scale uh on on the on on on the line that you can increase efficiency so much more we're seeing it in different industries it [clears throat] really is remarkable if you think about this I think it is a very simplistic look that I'm I'm h I'm putting on here you know, and and again looking at the the both operating earnings and average as reported, but those numbers, even if they're a little bit off in terms of the the the the totality versus one versus earnings per share on the other, it's still pretty amazing and and respectable that uh in the totality of this and and some of that's also because you get better margins on some of the big companies, right? The big tech companies have better margins than let's say >> restaurants as an example, right? >> Yeah. But so so they're making a lot more money. So that's kind of feeding through. But still in totality where the investment is the S&P 500 right there. But you also talk about um and you calculated that about I think you estimated 4% tailwind for EPS earnings per share due to diluted share count right in in other words the continuation of these buybacks that are giving a yeah >> a push. >> Yeah. Two components there. First on the index level there's no impact from the EPS because we adjust for that we back into millions but on an individual issue pointy AT&T IBM Apple okay you look at these issues and about 16% of the companies okay just for the third quarter alone decreased their shares by at least 4%. That means they increased their EPS by 4%. They made the same million dollars, but instead of dividing by a million shares, they divided by 960,000. So their EPS go from a dollar to a$14. They made the same amount of money in their pocket but they reduced their share count by and therefore theoretically you have increased your ownership of the company obviously but yeah 16% of the companies uh that's a lot and you need to know in your company >> because you do not want to pay the same multiple for share count reduction as you do for higher efficiencies or higher sales. But I think most of the market is is unless you're sophisticated, you know, people are just looking at the number, right? The the the the growth of that I I agree with you and obviously the institutions will pick that up, but I think most people are like, "Oh, they beat and is they don't share count doesn't come into the play. They don't care." >> That's correct. And and the market to some degree, you know, goes into what the company's doing. Remember that buybacks and stuff support stock. It's going into the market. It's doing a bid. Even if your your stock is not good, okay, is more buying. You have three people bidding on your house instead of two. You're getting more money. It's not changing your house, but you're getting more money. So buybacks when you announce them, it used to be like when we used to uh uh have a stock split. >> Oh god. you know, it would it just goes up on. >> Well, it's interesting because that broke that that was for a little while that was really important, but that broke with the I I think at least with the Netflix buyback that happened this year >> and Netflix split, by the way. >> Yeah, I'm saying the 10 10 for one split. Everybody's like, ho ho, >> you know, for a minute it was doing well, but you know, it wasn't like some of these other ones that went berserk and and crazy. the just to go back into the expense discussion and some of the things that are happening with regard to the ability to expense some things. There was uh earlier this week there was a um well there's been a bit of a kurfuffle with uh you know Michael Bur and all that with this whole Nvidia the chips. >> Nvidia came out earlier this week. They said we are not aware of any claims that Nvidia has improperly capitalized operating expenses. Several commentators alleged that customers have overstated earnings by extending GPU depreciation schedules beyond economic useful life. Um, that's not something you probably get into because you're just looking at the numbers, but there is sometimes um in especially in the world right now with the amount of money capex is is is capex at a historic high. >> Yes, it's got to be, right? It's got to be. We we do not have a final on that yet, but we've already of the companies we know, which about 93%. They've already set a new record. >> Yeah. Absurd amounts. Then we get into the issue about vendor financing, circular financing that I've been like, >> that's a major issue. >> I've been a lunatic about by the way. I've been like, >> that's good. You're getting ahead of the curve there. >> It's funny because I'll tell you something, Howard. Um, we go back a long time, but there was a time back in 20 I don't know if we knew, we probably didn't know each other back in 2006 because I started the podcast in 2007. In 2006, I had this moment of clarity. I remember I I have it in my head right now. I remember exactly what happened. I was standing on a lawn of a second home I owned up in Lake Placid, Florida. And my sister, I was on the phone with her. My sister said she uh mortgaged her house again, you know, reorggaged it. And uh for like another 100,000, she took out after she took out 100,000. I'm like, what? How is that possible? Like they didn't have the money to pay for it. And I had this moment of clarity back then and I became a looney tune, you know, back, you know, slamming the desk, getting crazy that the housing market's in big trouble. Um, you know, saying we're going to have a big calamity going on. I went into it and I kind of got out of the markets. That's why I won this big tournament, this this competition back then. All this, I'm starting to have a moment of clarity right now with this whole uh vendor financing is interesting to me. It's not the end of things, but it's bad. Circular financing is even a bigger problem. Um, and the big boys don't seem to really care because the idea is they'll just let this go for a number of years. But you're seeing the same thing, right? >> Not just on the street. There's a lot of concern about that. Uh, and remember, we're equity people, but now we have to go back into the bond side of it, the fixed parts. Uh, but all the ones that you named are ones that there's concerns about. It's great. Well, it's great, but how when a bill starts coming due, if you don't match that revenue, you've got a lot of pressure coming in. Remember, uh an interest payment is not like uh stock going down, you hold on to it, it goes back up. You need to make that payment. And if you have to liquidate something or or cut back somewhere else, that's what you have to do. uh and there's a lot of of uh uh debt coming out especially in in connected to AI that's backed by fixed incomes and while the cash flow is there today >> what happens if it's not tomorrow just just a little twinkle on there could disrupt everything remember the housing with all the different tiers on the housing market how quickly that escalated it's geometric almost so that's That's a big concern on the risk side especially on large institutions who have to put everything through a risk model and then go to compliance even beforehand. So so there's uh there's worry about that. >> So the concern I have is in the circular financing or or you know basically or I'll say this is vendor financing in a way you take Microsoft takes a billion dollars and gives it to company ABC. ABC says hey we're going to buy back space over the next five years on the Azour. You basically essentially you just did is you took money off your balance sheet and turned it into income >> as I see it >> and there but if you look in the contingencies on the 10 Q and 10K they're spelling that out. So it's there but the problem is as you said most people you've seen that top line my sales are going to go up. I've got more uh uh commitments going forward my back orders are going to increase all this. Uh but again, you're partially buying that and is the circular reasoning in there is circular financing. It's good when it's good, but you've got to >> of course, like I said, you know, I always say this, it's like, you know, you're out in the wilderness and you're you have you're you're million miles away from anything. You know, maybe you can eat your arm for a little while for nutrition, but after a while, it's probably not going to, you know, you can eat too much and that ends the whole game. >> Yeah. Uh, real quick, I know you're on a we we have a short schedule today. Um, and >> I need to talk to you. Uh, >> being at, you know, S&P Dow Jones, the top 10 stocks in the NASDAQ 100 are 70% 70% of the market weight. The S&P 500 about 38% give or take. When do we start thinking that market cap weighted indices are not really diversification and are you as a firm talking about that as a concern? >> Okay, let me talk from an investment point first on this as compared to a corporate position on there. Uh [clears throat] first of all, the market is the one that says it. We've thought about this decades ago. There are indices out there S&P other companies uh private companies public companies that you can go that invest differently and cap so they'll go in that no issue could be more than so much percent or most sector could be more than so much you'll see that a lot in the dividends you know so you don't end up with all utilities and financials uh so those alternative types of investments have been around for decades again up and down the low the big cap ones like the S&P 500 Their methodology is not to cap those. Okay. And theoretically, yes, company can go all the way up. And the top the mag seven which are 35% are historically high levels. S&P in this index did not set that that 35% for the top 10. Okay? The market did by bidding them up. If all of a sudden, God help us here, three out of the seven go under to zero, that number falls all the way down. Yeah. >> You know, other indices where it doesn't again that we all have where it says you can't have more than let's say pick an arbitrary number of let's say 2%. So the 8% that Nvidia has would be cut down to two and NASDAQ has limited uh Apple historically different different points. Okay, you have the same difficulty in a price index uh in in the Dow Jones Industrial Average 30 companies. Okay, if you put Birkshire Hathaway, the main one there, [laughter] okay, the other 29% >> the other 29 go down to zero one day and Birkshshire goes up 5%, the headline is the Dow is up. So again, it's methodology. I think the heart of your question, which we'll get to now, sorry about that, is is this good or bad? Well, it's good on the way up, it's going to be terrible on the way down. Again, if a couple of this mag seven go under, those are enormous companies that are going to drag it down. But that's the waiting and methodology of that. Similarly, if you bought an index based on earnings or dividends or or or buybacks, all these. So again, you need to know what you're buying and and see if you feel comfortable with it. And if you are in the middle of the road, you can also, you know, buy sectors. You can buy you can buy an index. >> You can buy you can buy an equal, you can buy the equal weighted S&P 500. Just seems to me that the the market cap in an environment like this, especially as you get bigger and bigger, it becomes a snowball that's almost impossible to stop clearly on the way up and down. And I know that is both sides, but it seems to me that is that really I guess the point is and and I'm not going to make any kind of headway into this at all cuz it's just little old me. Um it doesn't seem like the S&P right now, clearly not the NASDAQ, but the S&P 500 is really the benchmark that people should be um more more so now than ever. I is not the one that we should be benchmarking a portfolio against. It just seems it just seems illogical to benchmark it against, you know, 10 companies. Well, not 10, but >> that right they have such a high I totally understand that but you've got to ask yourself uh what you what your benchmark is for the U S&P 500 the intent is to emulate the US common market higher end okay not a certain section but the higher end of that if that's what you're looking to do that's the index and it's efficient okay if you're looking some technology you can go into a technology sector you can go into the NASDAQ similar a small cap the S&P you know 600 the Russell but if you're in the S&P 500 or or the NASDAQ where these companies or certain specific companies are weighted that heavy you need to know that is what you're buying. If you do not believe in that those companies on the short run, then you need to go to a different index, okay, or selfshort on it as and cover something in case they go down because again, if the seven go down, that index is going down. It's going to be hard for the other 65% to make up for a massive loss on the seven. Just as on the equal weighted it has not gone up as much because that's the other 493 companies okay haven't kept up with the magnificent 7 as a group. >> Yeah. No I get it. It's it's a fascinating I keep going round to round with the market cap weighted thing and I know that this is kind of standard operating procedure for a lot of people that hey what you know you know what's the S&P 500 done and all that. Great. And um you know, but I I I just find it to be um clearly one of the reasons that the the larger gets draws in more uh that helps the index and it just is is that really representative of what most people have out there in terms of their investments. Um so that's something to think about obviously. Um last thing I just want to talk about um is is dividends. Um, >> okay. >> You know, dividends are, you know, we talked about this, you mentioned in in a note that you sent to me that companies are kind of shy to commit due to economics costs, labor, tariffs, things of that nature. But >> we're going to have record payments, right? Which makes sense. Um, record payments, by the way, on um with share buybacks, meaning are you talking about payments to uh shares that are out in market or are you talking about the totality of the payment? Uh, I'm talking about actual shares out there that companies have paid in dividends. Not the buyback yield where you figure that I reduced my share count, but physical dividends that are in your pocket sent out each quarter. Okay. Companies this year will set a record up about 4.8% year-over-year. Uh, the estimate was a lot higher back in December. Companies have continued to increase mostly. you know, those that are on a regular schedule or annually, they've increased, but their increase is smaller. They're nervous about making forward commitments. You know, a buyback, which is also looked at when you do dividends, can be changed at a at in a moment. You can literally text or tweet your your trader, stop buying or increase buying. A dividend, you pay me 10 cents, I expect another 10 cents next quarter. And guess what? The quarter after that, maybe 11. Okay? So, and the opposite is true, too. You have a cut in the dividend. People get that angle. >> You better have a good reason. [laughter] You better have a good reason for that. Companies are shy about this. >> But are they shy or are they saying that they want to hold back for more capex because they think the they need to be spending that way? >> When you when you look at the cash flow, which also looks like it's going to be affected the third quarter, by the way. uh when you look at that uh and the free cash flow, you know, what's available, no matter what you start taking out with with or without the higher uh deductions, which is lower taxes, there's enough money there to do it both. The companies are concerned about increasing not necessarily for this quarter or next quarter, but how's this going to hit me at the end of 2026? How's this going to hit me if I have to, you know, be flat on my sales as compared to a double-digit increase? You know, if you go down to 1% increase, you know, your stock's going to get killed today, much less if you have to take a cut. So, companies are concerned about the forward commitment because it's hard to do planning when you don't know what taxes are, you don't know what tariffs are, you don't know what Congress is going to do, the president is going to do. Policy can change pretty quick. So as you start to get more of a possibility of what's going to happen, more less uncertainty, okay? Even if it's bad for you, you can plan as a executive, as a board, you can plan around anything and try to make the best of it. If there's 20 branches on that tree, I cannot make 20 plans. >> Yeah. No, I got you. I got you. Great stuff. Howard Silverblat, Howard, Howard, Howard, thank you so much for joining us. always a wealth of information and um I appreciate you coming aboard and we'll do it again soon. Have a great uh end of year. Have a great holiday. Have a great new year and we'll see you on the other side. >> You too. Let's hope it's all positive. >> Thanks. >> That's going to wrap it up for this episode of the Disciplined Investor podcast. Yep. What do we got coming up? Ed Easterling, Harry Dent, Andrew Wilkinson. Lots of really great things. Don't touch the dial. Don't go anywhere. Lots more for the end of the year and thereafter. So, we're going to get on continuing on the process of ensuring that we are all disciplined. Disciplined investors so that again once again I'll say this again I need to really make sure I hit this home that the future you the future me is happy with the me of today. The present me is doing everything I can to make sure the future me is financially secure, financially independent, and looking back happy with what we did today. Thanks for joining me this week and every week. I'll see you again real soon. This podcast is intended [music] forformational purposes only and does not constitute personalized investment advice. 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