Tuesday, April 21, 2015

The Value of Royal Blue Chip Stocks

How do you gain the benefits of investing in stocks while minimizing the inherent risk of investing?  Enter Royal Blue chip stocks. 

Royal Blue chip stocks are one of the pillars of our Cornerstone portfolio.  They are the AA and AAA-rated companies that make products the world cannot function without.  Many of them produce billions in cash flow, which they use to consistently grow their dividends year-after-year.

Royal Blue chip stocks are not particularly exciting.  When the overall market is up 15-20% per year, we might expect the average Royal Blue chip stock to be up more like 8-10%.  In other words, owning Royal Blue chip stocks will drag down performance in a bull market like the one we’ve seen over the past 6 years.   

So why own these stocks?

Less Price Volatility

Royal Blue chip stock prices are far less volatile than the average stock.  In a bull market, this low volatility means underperforming the index.  Take Procter & Gamble (PG), for example. Since the beginning of 2013, PG's price is up 23% compared to 50% for the S&P 500.  In a bear market, however, Royal Blue chip stocks act like parachutes.  In the second half of 2008, the S&P 500 was down by over 35%.  PG, on the other hand, was down by less than 7%.

Royal Blue chip stocks are the reason our Cornerstone portfolio was down by far less than the S&P 500 in the 2008-09 financial crisis.  They aren’t exciting in bull markets, but when the inevitable bad spell hits - you are glad that you own them.

Low Business Risk

The chances that a Royal Blue chip company could go out of business is extremely slim.   Not only are they some of the most financially secure companies on Earth, but their products are staple to our lives.  These companies aren’t going away anytime soon.

Steady Dividends

Most Royal Blue chip stocks have paid and grown their dividends every year for decades.  When your portfolio contains Royal Blue chip dividend growth stocks, your portfolio continues to produce a growing stream of dividend income, regardless of what happens in the markets.

Stock prices have always been volatile. Our priorities for our clients’ portfolios are: security, income and growth - in that order.  Royal Blue chips may drag down performance in bull markets, but they will always be a pillar of our Cornerstone portfolio.  History shows us that when the next bear market comes, Royal Blue chips should outperform the broader market.

Monday, April 13, 2015

Downshifting The Industrials

In today’s Investment Policy Committee (IPC) meeting, we focused on the sector weightings in our portfolio.  Industrial stocks were of particular interest.  The industrial sector faces several headwinds at this time.

1. Interest Rates

How can low interest rates be a headwind?  Our research shows that the relative performance of the Industrial sector is positively correlated to interest rates.  The chart below shows this relationship.

As you can see, 10-Year Interest Rate Yield (blue line) and Industrials Index relative to S&P 500 (orange line) move closely together.  This may not be immediately intuitive, but the relationship does make sense. 

When interest rates rise, that generally means the economic outlook is improving.  The Industrial sector is particularly sensitive to economic movements.  Therefore, an increase in interest rates indicates an improving economy, which is positive for industrials.

We believe interest rates will remain muted.  The industrial sector could underperform over the near-term, as a result.

2. Emerging markets

Many industrial companies have made huge investments in foreign economies, particularly emerging markets.  The decline in oil prices has really put a hurt on several foreign nations, particularly Brazil.  China’s economy has also slowed, which has not been favorable for the outlook of many industrials.

3. Energy prices

Low commodity prices represent another headwind.  Oil prices do not directly impact industrials, however, many of them manufacture supplies for the energy producers.  As the investment budgets for energy companies dry up, it means less demand for their suppliers.  If oil prices remain low, the energy divisions of many industrials will also suffer.

4. Competitiveness

Currency issues impact the industrial stocks in two ways:

1. Earnings translated back into U.S. dollars are worth 20% less than they were 6 months ago.  The market can overlook that, as we will explain more in coming weeks.  

2. Industrial companies who sell to foreign nations are much less competitive when the dollar strengthens.  That hurts competitiveness of U.S. suppliers.

What does it mean for you?

We continue to like the industrial sector for the long-term, but these headwinds will not go away in the near-term.  As a result, we have decided that it is prudent to cut back your exposure to the Industrial sector until these headwinds subside.

Wednesday, April 01, 2015

Why Are Stocks So Volatile?

Stock market volatility has increased dramatically over the last six months. Many commentators are saying the increased volatility is a negative sign for stock performance through the remainder of the year and perhaps beyond.  As usual they might be right, and they might be wrong.  Before we give you our view, let’s look at what we believe are the three main drivers of the increased volatility and see how they are trending.

1. Uncertainty about the timing of the Fed rate hike
2. Earnings worries
3. Valuation concerns


The Fed: Don’t fight the Fed, don’t fight the Fed, don’t fight the Fed.  As any seasoned investor knows, these are the first three rules of investing.  The Fed has incredible power to impose its will on the markets.  Back in the days prior to the Tech wreck, commentators were saying that the Fed’s power to rein in the technology stocks was dramatically reduced because most of these companies used very little debt.  The Fed raised its Fed Funds rate seven times before Tech stocks crumbled, but crumble they did.  Again in 2009, the chorus of naysayers was deafening in its assertion that the subprime crisis was too big for the Fed.  Today the S&P 500 is approximately 300% higher than its low in March of 2009.  In our judgement, the Fed can do what it wants.  So the single most important question facing investors is, “What does the Fed want?”


We believe the Fed has no intentions of causing a big sell off in stocks. Indeed, Quantitative Easing was all about pushing investors out of riskless securities and into riskier assets, including stocks.  Why would the Fed have moved heaven and earth over the last six years to avoid a deflationary mindset from setting in with banks and investors, to toss it all away and send stocks into a tailspin?  That is an absolute recipe for recession, and they know it.   


The Fed wants to keep a lid on inflation and stimulate job growth, yet it also wants to avoid both another 1995-1999 stock market melt-up and a 2000-2002 meltdown.  Our Macro Team believes that the lessons of the 1990s are still very much alive in the minds of the Fed.  To accomplish their purposes, they are likely to do a lot of talking but very little acting.  We believe Fed Chair Janet Yellen said as much in her speech last Friday.  The uncertainty about what the Fed will do is not going away, yet we believe the odds of the Fed slamming on the brakes are extremely low.  They will increase rates modestly at some point, but we do not forecast a long string of hikes that would freeze the markets or cause a big sell off.


Earnings: Earnings growth for the S&P 500 over the last 12 months has been a paltry 4.3%.  During this same time, stock prices have risen nearly 13%.  At the beginning of 2014, we said that stocks were about fairly valued, so the returns for the year would likely be about the same as earnings and dividend growth.  A 13% price return on earnings growth of about one-third of that is front and center in the minds of every investment firm we know of.  The market has given the weak earnings a pass so far because of two unusual events:

1. The dollar has risen by as much as 20% versus the currencies of other developed countries.  Since S&P 500 companies generate nearly 50% of their revenues outside the U.S, they have had to absorb currency losses for the last four quarters.  These currency translation losses have significantly reduced reported earnings.  This trend cannot continue indefinitely.

2. The entire Energy sector took a huge earnings hit in the fourth quarter of 2014 and will again in the first quarter of 2015.   Since the Energy sector represents nearly 10% of the S&P 500, it has also produced a drag on corporate earnings.  Once oil prices reach a bottom, this too will cease to be a headwind.


The good news here, which gets almost no attention in the media, is that S&P 500 dividends increased by over 13% during the last 12 months.  We consider that an important signal that corporate America believes the two headwinds hurting earnings are temporary.


Valuation:  If prices rose in 2014 by 13% and earnings grew by only 4.3%, then the price-to-earnings (P/E) multiple expanded.  Indeed, the P/E multiple now stands at nearly 18 times earnings, which is the highest level since 2007. Stocks are not cheap from a P/E perspective, which worries a lot of investors. We have modeled P/Es going back to the 1920s and we find there is no such thing as a “normal” P/E ratio.  


Our research shows that P/Es are inversely correlated with inflation.  In high inflation periods, P/E ratios have almost always been low and high in low inflation eras.  Think of it this way:  If we divide earnings by price, we produce something called Earnings Yield.  Earnings Yield is stated as a percentage.  It is essentially a computation that shows how much a company’s earnings produce as a percentage of it price.  This percentage can then be compared to bonds, inflation, or other stocks to determine how good of a deal you are getting.  This is how an investor like Warren Buffett determines if Heinz or Kraft is a good deal.


As we said before, the S&P 500 is currently selling for about 18 times earnings.  To convert this into an Earnings Yield, we divide 18 into 1 to see that the current level is 5.5%.  That means if Warren Buffet was interested in buying the whole S&P 500, he would earn a 5.5% total annual return based on the current earnings.  5.5% does not seem like a great return, but there are two important considerations.

1. How does that return compare to my other alternatives?


While 5.5% may not seem like much, it is terrific when compared to a short list of alternatives.  A five-year U.S. Treasury bond yields 1.3%, and a ten-year U.S. Treasury bond yields about 1.9%.  Thus, not counting any earnings growth that we may receive in the future, stocks would seem to be a good deal with an earnings yield much higher than bond yields.  


As we said earlier, our work has shown that Earnings Yields or P/Es are most highly correlated with inflation.  Today, the inflation figure that the Fed uses, the Personal Consumption Expenditure Deflator (PCE) stands at 1.1%.  We have found that the spread between Earnings Yield and the PCD over the last 50 years has averaged 3.4%.  By adding the current level of inflation of 1.1% to the average spread of 3.4%, we find that the model would suggest that the right level of Earnings Yield for today’s inflation level is 4.4%.  


So we can get back to how we normally talk about earnings and prices, let’s re-convert the predicted 4.4% Earnings Yield back to a P/E ratio.  A 4.4% Earnings Yield would equate to a P/E ratio of 22.7.  With stocks currently selling at 18 times earnings, our P/E finder model would say they are  cheap.

2. Is that return all we are likely to get?


The current earnings yield of 5.5% does not factor in any future earnings growth.  If the long-term growth of earnings approximates nominal GDP growth of 5% or 6%, the effective earnings yield for today’s investor would double once every 12-14 years.


In addition to P/E, we have another way of looking at market valuations.  As we have discussed over the years, we have a S&P 500 valuation model.  This is a statistical model that calculates the relationship between various factors including dividends, earnings, inflation, and interest rates.  According to that model, we are currently selling about 7% under where year-end 2015 data for the variables are now predicted to be.


Bottom Line


Uncertainties about many different factors have caused stocks to become more volatile.  We believe we will know a lot more about Fed actions and the outlook for future earnings beginning in August once the impact of big changes in currencies and oil prices are better understood.  Furthermore, valuation is not a problem according to both our P/E finder model and statistical S&P 500 model.  

The current market’s volatility will ultimately pass.  Based upon what we see, the path of least resistance for stocks is still up.  However, it will take a few more months before many of investor concerns will subside.  The best course for investors is to ignore market volatility and remain committed to building a stream of growing dividend income.     

Wednesday, November 05, 2014

Dividend Surprise Tracker: 11/5/2014

A few weeks ago, we announced a new tool we have here at DCM that allows us to track up-to-the-second dividend announcements, dividend growth, and actual dividend relative to Wall Street and Bloomberg projections.

In our view, dividends tell us how optimistic corporate America is about future earnings and cash flows.  If companies are pessimistic about either domestic or international economic growth, it is likely they will hold back on paying out cash to shareholders - choosing to hold that back in the company reserves in anticipation of future headwinds.

Dividend Surprise Tracker Update


Below are the dividend declarations over the past 3 months as of November 5th:


Out of the 59 companies expected to raise their dividends, 59 did so. And most importantly, the median dividend increase for companies was 12.5%.  Despite the headwinds in Europe and internationally, U.S. corporations continue to be very confident in the future.


Company Highlight: ABC


One of those companies is AmerisourceBergen Corp. (ABC), which we own in one of our portfolios.  On November 3rd, ABC announced their 3Q earnings results, which beat analyst expectations by 4.6%.  We were more impressed by the announcement that they were raising their dividend by 23.4%.  Even more impressive was that the dividend hike was over 11% more than Wall Street was projecting.  This signals to us that AmerisourceBergen may be more optimistic about their future than Wall Street is anticipating.



The chart above shows ABC's dividend vs. price over the past 7 years.  As you can see, their price has grown dramatically right along with the aggressive dividend raises.  In our view, as long as ABC continues to grow their dividend payments to shareholders - we don't expect price to fall far behind.

Tuesday, October 21, 2014

Is The Economy Slowing Down? Not According to Dividends...

In our most recent blog, we indicated that corporate America’s dividend actions during this time of uncertain global growth will be among the best indicators of the true U.S. and global economic outlook.

Most investors don’t pay too much attention to a company’s dividend policy.  To Wall Street, dividends are just a product of earnings. They don’t mind the dividend payments they get each quarter, but they aren’t really focused on dividends.  Wall Street spends more time chasing earnings predictions and short-term price appreciation.

Despite the recent increase in popularity of dividend investing for income, most people still miss the most important point of all: the dividend is directly linked to the true health of the underlying business and the management’s expectations for the next 12 months and beyond.

Why is this?  For two main reasons:

  1. If you are the CEO of a company and you see a slowdown in future sales and earnings growth, you’re probably not too excited about more cash leaving the company.  Rather than increasing your cash dividend by 10% again this year, you might opt to hold some cash back in reserves and raise the dividend by, say, 5% instead.

  2. Dividends can’t be faked.  Not even the most creative accountant in the world can generate real cash.  Earnings numbers can be misleading, especially at significant turns in the market. Dividends, on the other hand, cannot be faked.  If a company falls into real trouble, it won’t be long before they have to conserve cash and cut their dividend (or at least stop growing it).

We believe that by focusing on dividend history and dividend growth, we can learn a great deal more about a company’s true future prospects.  We’ve seen it time and time again - the companies that slow or cut their dividends have dramatically underperformed the rest of the stock market over the next 12-24 months.

In addition to our numerous valuation models, we have a new model that we’ve built that uses data that is unavailable to the vast majority of investors.  In fact, we might be one of the only investment firms in the U.S. that (a) has this data available and (b) pays any attention to it.

In our view, this tool will be a powerful predictor of when a company starts to take a turn for the worse (or become optimistic about their future).  With this tool, we will be one of the first to be flagged about a company’s dividend behavior and be able to quickly make a decision based upon what we see - well in advance of the rest of the market.

We now have the ability to track not only the dividend announcements on a day-by-day basis, but what Wall Street and Bloomberg were estimating that the most recent dividend action would be.  Based upon statistical backtesting, these dividend estimates have an 88% accuracy rating.  Below is a summary of what the dividend tracker is currently telling us:


Using this tool, we will be able to see:

  1. What the companies believe economic growth will look like.  Are companies starting to slow their dividends as a whole?  Or accelerate them?  The median dividend increase for companies who have announced a dividend increase over the past 3 months is 12.5%.  That is even higher than the year-to-date number of 11%.  Based upon this number, companies are actually accelerating their dividends at a faster pace than they were earlier in the year.

    Perhaps the most encouraging news of all is that over the past 2 weeks, when the stock market was concerned about global growth, dividend announcements were actually a positive surprise of 2.1%.

  2. Are companies expecting to perform better or worse than expected?  By comparing actual dividend announcements vs. dividend growth expectations, we will be able to see red flags on the day they arise.  Of the companies who made announcements, 35 beat expectations while 9 missed.  If any of our companies were among the misses, we would probably give them a call to see what was going on.

  3. Have there been any companies that were supposed to raise their dividend that did not?  In our mind, this is the worst sin a company can commit.  Unless there is a good reason for it (like better investment in projects or a special dividend upcoming), a dividend cut is a bad sign for the future.  Over the last 3 months, there were 67 companies expected to raise their dividends. Every single one of them raised the dividend.  No cuts.  No flat lines.  On average, those companies beat expectations by 1.7% overall. That’s a very good sign.

So far, there is absolutely no evidence that U.S. or multinational companies are pulling back on their dividend increases.  That is very good news in the face of bad headlines across the world.  Companies are still very confident in their futures.  Despite the near “correction” (10% down) from top to bottom, dividends and dividend growth is still intact.  Until that changes, we believe the outlook for the companies in our portfolios is still very good.

Thursday, October 16, 2014

Upcoming Dividend Hikes May Reveal What Corporate America Really Thinks

Europe’s economy is in a funk and may be heading for recession.  Terrorists in the Middle East have burst onto the scene straight out of some B movie horror show.  The Ebola crisis threatens to reap vengeance near and far.  In the midst of these threats and the unfathomable questions they pose, smart-guy politicians in the U.S. and Europe seem to have a strong resemblance to the Wizard of Oz after the curtain was pulled away.   


As an investor, where do we look for a glimpse of how these questions and issues will be resolved?  I have been in the investment business for nearly 40 years, and I have endured at least a dozen of these episodes when the vultures hanging in the sky were so numerous they left me stumbling around in the dark trying to find a light -- any light.  Indeed, the Rising Dividend Strategy that we use today was born during the crash of 1987, when the stock market fell by nearly 23% in a single day.  I went into that day believing that the daily stock price movements were the best indicator of where the stock was going in the near term.  I ended that day exhausted and humbled, but with a strange sense of hope.  Black Monday was such an egregious assault on my sense of how the markets worked that I realized such a selloff could not be driven by the fundamental soundness of the economy or of corporate America.  When all stocks go down, it is a signal that emotions have replaced reason in the driver’s seat because the prospects for all companies do not rise or fall in unison on a single day, week, or month.  


Our Investment Policy Committee has been studying and discussing the current sell off for several weeks.  What does it mean?  Is it for real?  How far will it go?  How will it end?  This past Monday we realized these were not questions that could be answered until after the selloff has ended.  We turned our attention to variables that our research has proved over the years to be the best predictors of stocks prices:  earnings, dividends, inflation, and interest rates.  We came away from that exercise very hopeful.  If the U.S. economy is headed for recession like Europe, corporate earnings should be soft.  The are not.  In fact, so far in this earnings reporting season they look better than last quarter. Inflation is anchored near 1.5%, and the ten-year Treasury bond yield has fallen to a multi-year low at near 2 percent.  Dividends are the real stars of the show.  They have already risen by over 10 percent for the year with nearly three months to go.  


None of these important variables of the U.S. economy and corporate America is signaling imminent bad news.  In fact, all of the data are headed in the right direction.  We concluded the current selloff must be looking over the hill at the aforementioned vultures and projecting that one or more of them will come home to roost, and the current good news will turn bad.    


After the crash of 1987, we gradually became dividend investors because we found that dividends were the best predictors of the true trend of stock market performance.  Dividends tell four powerful stories about the future trend of the stock market.:


  1. Dividends are cash money.  They represent a real transfer of wealth from a corporation to the shareholder, unlike earnings which can be engineered and may be here today and gone tomorrow.


  1. Dividends have represented over 40% of total stock returns over the last 80 years. Thus, not only are they real money, but they are also really important to total return for shareholders.


  1. Dividend cuts by corporations in the U.S. are almost always punished by the market. Corporate executives know this. Because of this, S&P 500 dividends have fallen, on an annual basis, only about half as often as have earnings. In addition, the annual volatility of dividends is only about one-third that of earnings.    


  1. The S&P 500’s long-term dividend growth of 5.5% is very close to long-term stock market price growth of 5.9%.  Dividend growth and stock market growth are not identical twins that move in lockstep, but they do shadow each other closely.    


In looking again at this list, we realized we had a tool that could give us a glimpse of what was going on in the economy over the hill beyond our sight.  That tool was the daily dividend announcements of corporate America.  In the long-run, the growth of stocks prices will look a lot like dividend growth.  Since corporate America is world renowned for its ability to rightsize costs with revenues, if top management sees trouble coming they will not only cut costs, but they will also cut back on dividend hikes.  We have many resources, including Bloomberg Professional Markets, that make dividend estimates.  By watching dividend actions versus Bloomberg’s estimates for all stocks, we should be able to see if companies are downshifting their internal growth estimates.


Why are dividend actions so important to our way of thinking?  American CEO’s live and die by their cash flow projections.  They do not want to spend an extra dollar on a project that is going nowhere or losing money.  Thus, they recommend dividend hikes to their boards of directors that reflect the company’s free cash flows that are not needed somewhere else. 


At present, Bloomberg and Wall Street analysts are predicting that dividends will grow at about 9 percent in 2015.  If that comes to pass, the recent selloff is a mistake and a great buying opportunity just like all the big sell offs in history have been.  If dividends remain flat or fall over the remainder of the year, then there may be more trouble coming than we are now projecting. Dividends only have to reach 5.5 percent growth to be in the normal range.  


So far in our study of dividend hikes the news is good.  Over the past month, dividends have grown 1.8 percent more on average than they were projected.  We will report our findings regarding dividend hikes on a regular basis throughout the end of the year.          

Tuesday, October 07, 2014

The 4 Drivers of Stock Market Prices

We have found that very few investors understand what really drives the stock market.  In our view, the four primary drivers of market valuations are earnings, dividends, interest rates and inflation.  If you can quantify what is going on with those four variables, our models indicate that you can predict about 90% of the annual movement of stock prices.
Last time, we talked about the Barnyard Forecast which is a model that signals the probable direction of the market.  While the Barnyard Forecast does correctly predict the market’s direction 6 to 18 months from now with about 80% accuracy, it is not a short-term predictor nor does it have any valuation component.  Therefore, we use select valuation models to ascertain the relative attractiveness of stocks.

Almost all of these models use some component of the above mentioned variables.  Within those four variables, there are two that stand out above the others as being the most important drivers.  We’ll take a look at each factor and then conclude with what it means for stocks.

Earnings

Most investors look to earnings as the primary guide of what a company is worth.  In theory, that makes sense.  If Company A is earning $500 and Company B is earning $1,000 - wouldn’t you rather own Company B?
The problem with earnings is that they can be engineered by creative corporate executives.  In times of recession, earnings are particularly volatile. Earnings can be calculated in a variety of different ways, which adds additional complexity.  We don’t think earnings should be completely discounted in valuing companies or the stock market as a whole.  However, the unpredictable nature of earnings often gives very bad signals at turning points in the market.
Dividends

We have found dividends to work much better than earnings.  Over the past 50+ years, dividends have had approximately three times more predictive power than earnings.
Let’s say you own two rental properties.  One rents for $100 per month and the other rents for $200.  If both rents are increasing at 3% per year and both will continue to rent for the next 20 years, which rental property would be worth more to you?  The one that will pay you the most in rental income over its useful life… right?  
John Burr Williams was the first to apply this theory to stocks.  He said the value of a stock today is the sum of all future dividend payments discounted back at some required rate of return.  In other words, the more a company pays out to its owners in the future, the more valuable that company is to its owners today.  
Not only does that theory make “real world” sense, but it also holds up statistically.  In our models, we’ve found that dividends are the most important driver of stock prices by a wide margin.
Interest Rates
Interest rates are a primary concern for most stock investors.  The general level of interest rates essentially represents the “opportunity cost” of investing in stocks.
If your bank account were to start offering 10% per year on your savings account, you would probably prefer to “invest” in your savings account rather than in the stock market.  If your bank account is only paying 0.1%, however, the attractiveness of investing in stocks increases.
Many investors would be surprised, however, that interest rates are not the most important factor in determining long-term stock prices.  
Inflation
Inflation is actually a much more significant predictor.  How can that be? There are several reasons for this.
Interest rates can be artificially set by the Federal Reserve.  Inflation can be influenced by Fed policy, however, it is primarily a result of real world economic activity.

Inflation is also one of the primary drivers of interest rates.  If inflation is rising, it has the effect of diminishing the real rate of return for a bond investor.  In that environment, a bond buyer will demand a higher rate of interest to compensate for the loss of purchasing power.

In addition, inflation is impacted to a large degree by economic growth. When the economy is growing at a faster rate, the Federal Reserve will generally tighten monetary policy, which raises interest rates.
The importance of inflation is also reflected in several of our models.  We have a price-to-earnings (or “P/E”) Finder model that we use to determine the appropriate P/E ratio for stocks.  In that model, inflation has been a much better predictor of P/E than interest rates, GDP growth or earnings growth expectations.
Outlook for Stocks
If you can understand these four variables, you can get a fairly accurate gauge of the valuation of the market.  At this moment, all of these variables are very positive for stocks.
  • Dividend growth for the S&P 500 has been over 10% year-to-date.  We believe this will continue to be strong in 2015.  Companies are beginning to understand how valuable their dividend checks are to shareholders and have begun to emphasize dividend growth as a priority.

  • Earnings are expected to grow by over 10% in 2015.  Time will tell whether that will come true or not.  If it does, we anticipate the market will reward the companies for their continued strong performance.
  • Inflation remains very low.  With little capacity pressure from either employment or plant and equipment, we don’t see much of a chance that inflation gets higher than the Fed’s target of 2.5%.  The economy is simply not growing fast enough.
  • With inflation low and the Fed continuing their stimulative monetary policy, interest rates are likely to remain low.  The 10-year Treasury continues to trade at the low end of our 2013 prediction of between 2.5% and 3.0%.  We don’t anticipate that rates will get much higher than that over the near term.
As we talked about last week in our Barnyard Forecast, monetary policy conditions are very favorable.  Aside from a major geopolitical shock, stocks don’t face any major red flags going into 2015.

The most current reading from our S&P 500 valuation model indicates that the fair value of the market is about 1,950.  As this is being written, the S&P 500 is trading at about 1,952.  From both a directional perspective and a valuation perspective, our models are saying that stocks are still the place to be.