One on One with Phil Dow, Director of Equity Strategy at RBC Dain Rauscher
Monday, July 02, 2007
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SUSIE GHARIB: Our market guest tonight thinks stocks will go higher from here and he's forecasting that the S&P 500 index will be up 10 to 12 percent for 2007. Joining us now to explain, Phil Dow, director of equity strategy at RBC Dain Rauscher. Hi, Phil.
PHIL DOW, DIRECTOR OF EQUITY STRATEGY, RBC DAIN RAUSCHER: Hi, Susie, nice to be with you.
GHARIB: Nice to have you on our program again. That is a very upbeat forecast. Tell us why you are so bullish.
DOW: Well, I think in general the crowd is kind of negative. There is record short interest right now. The trading community is just on kind of tenterhooks from time to time. Today they are up, tomorrow they could be down, tremendous amount of derivative activity in the market that could lead to further buying. I think the fundamental picture is quite strong. Our economists look for pretty solid economic growth both this year and next with growth accelerating next year. And earnings growth that ought to be pretty good next year, so we think that basically this year earnings are going to improve. The market is fairly valued and could go higher, Susie.
GHARIB: So earnings you think will improve for the second quarter numbers that are coming out, third and fourth quarter, all the way through.
DOW: The consensus is for about 4 percent gain this quarter. We think the number could be six to eight percent higher. Again (INAUDIBLE) the third quarter we think you could see a return to double-digit earnings growth by the fourth quarter this year and throughout next year Susie.
GHARIB: That is pretty upbeat. Let's talk though about some of the risks because we hear from a lot of the other market analysts who come on our program about concerns about the sub-prime mortgage crisis, about the housing down turn, about private equity deals drying up. To what extent could this derail this market rally that you are talking about?
DOW: Well, there are a number of things that could. But remember the last four years the average return on the S&P has been about 14 percent. People here that and say boy, it didn't feel that good. I think we are going to have a continuation of that kind of a trend, Susie. Right now the things that concern me are basically a potential for higher interest rates, a potential for isolationism, and just a general slowdown in the economy. But we've seen a resurgence in the economy and my bet and guess is that things are better than they seem.
GHARIB: We just came off of a Federal Reserve meeting last week. What is your read on the Fed? Do you think that interest rates could go higher sometime this year?
DOW: I've felt for some time that the economy is more resilient than investors give it credit for and that the Fed really probably is not going to have to do anything. I don't look for a cut. I think this economy could prove to be stronger and you could see a hike sometime early next year.
GHARIB: All right, let me ask you about, you know, Blackstone also going back to some of the risks. We see Blackstone trading below its offering price. What does that say about the market outlook? Or is that just a special situation?
DOW: My guess is Blackstone is kind of an isolated situation. These companies are doing the first half of a private equity transaction was the acquisition part. And you can do that on pretty reasonable credit. If interest rates go up, my guess is private equity will remain alive just by putting more equity in rather than debt. I think down the road the more challenging part will be selling these companies. And we'll have to see that the next market cycle in four, five, six years, Susie.
GHARIB: Now you told me earlier that this is a good time for investors to buy stock if someone has some new money that they want to put into the markets. What would you recommend where they put it?
DOW: Well, every stock I recommend I own personally. But I think the best place for serious investors and their serious money is dividend growth. You can buy ETFs and mutual funds that specialize in that. I think three stocks epitomize that kind of an investment: Citi, which we have an investment banking relationship, Citigroup, General Electric we have an investment banking relationship with and Johnson & Johnson. We do not have a banking relationship but if you bought equal amounts of those three, Susie, you would have a current yield of about 3.25, very enlightened dividend policy. I think the dividend will double every five years with these stocks. So I think for investors they are very attractive at this point in time.
GHARIB: OK. Thank you so much, Phil for coming on the program. Really appreciate it.
DOW: My pleasure, Susie.
GHARIB: My guest tonight, Phil Dow, director of equity strategy at RBC Dain Rauscher.
