What Are Typical S&P 500 P/E Multiples Under More Normal Interest Rate Environments?

The U.S. stock market has been skittish lately, largely on fears of higher interest rates. As new Fed Chairman Jerome Powell takes over for Janet Yellen, and Congress passes multiple pieces of legislation that will swell the budget deficit, investors are getting more nervous about higher rates.

What is amazing about this dialogue is that a 3% yield on the 10-year bond is scaring some people, whereas throughout history 3% would look like a dream come true for equity investors. The issue, of course, is that a 3% 10-year yield is only problematic when the market’s valuation has been elevated due to such low rates. It does not really matter if 3% is still low, but rather, if 3% is higher than the 1.5-2.5% range we have seen for many years now.

So let’s assume that rates are heading higher and a sub-3% 10-year bond will become a thing of the past over the next year or two (I will not even hazard a guess as to exact timing). The S&P 500 ended 2017 trading at more than 21x trailing 12-month earnings, so that multiple will need to come down as rates rise. But by how much?

Fortunately, we do not have to go back very far in time to find instances of the 10-year bond trading in the 3-5% range. In fact, from 2002 through 2010, it traded in that range most of the time:

During that near-decade long period of time the S&P 500 index traded for between 13 and 20x trailing earnings, with the mean and median both coming out to around 17x. If we use price-to-peak earnings ratios (to smooth out earnings volatility due to the economic cycle (P/E ratios are artificially high during earnings recessions), the mean and medians are around 16x.

So it is fair to say that a more normalized interest rate environment could bring P/E ratios down to around 16.5x, on average, with the 10-year bond yielding 5% or less, but more than it does today. Well, that tells is a lot about where stock prices could trend in coming years. Consider the table below:

The consensus forecast for 2018 S&P 500 earnings is about $155 but that could prove a bit optimistic (companies are always very positive about their go-forward prospects when a new year begins). Above I showed a range of $145-$155, which would still represent strong year-over-year growth of 20% at the midpoint (due largely to the recently enacted tax cuts).

You can see that if P/E ratios were to come back down to the 16-17x range, assuming the 10-year yield moved towards 4% by year-end 2018 on the back of 3-4 Fed rate hikes), the U.S. market could be in for some sideways to slightly down price action. Today the market trades for about 19x the current $155 earnings projection.

The good news is that valuation and interest rate normalization should not, in and of itself, be hugely detrimental to stock prices as long as earnings hold firm. Assuming no recession, my worst case scenario would probably be a 16x multiple on $145 of earnings (S&P 500 at 2,320), which while not a fun path to take, would only represent about 8.5% additional downside relative to the market’s recent low earlier this month.  That is not exactly a super-scary outcome, and it probably is not even the most likely base case scenario. Buyers could easily come in at 17x earnings and if profits reached $150 this year, that would mean we have already seen the low point for the S&P 500 this year.

 

No Bitcoin Bubble Here: Pink Sheet Listed CRCW Market Cap Hits $10 Billion

If you were an active investor back in the late 1990’s you probably remember what the climate was like during the dot-com bubble. All a company needed to do was issue a press release announcing they were going to launch a web site to sell their product online and their stock price would skyrocket. This CNET article on oldies music marketer K-Tel, which saw a 10x jump in share price in just a month back in 1998, offers a good refresher.

The current bubble in cryptocurrencies is worse, in my view, because unlike the Internet (which many will agree was the most important innovation of that generation) it is not clear that we really have any need for virtual coins, which like any collectible will see their value swing wildly based on what someone is willing to pay for them on any given day. Maybe I am just ignorant and will be proven wrong in coming years, but I don’t see why a bitcoin is any different than a piece of art, a baseball card, or a beanie baby. They all have a finite supply and little or no intrinsic value.

If you need evidence of a bubble in bitcoins and the fact that the price has gone from $3 when I first heard about them in January 2012 (Featured on Season 3/Episode 13 of CBS’s “The Good Wife” – streaming available for free on Amazon Prime Video) to $17,000 today is not enough, look no further than shares of The Crypto Company, an unlisted stock trading on the pink sheets under the symbol CRCW.

On November 15th, The Crypto Company announced financial results for the third quarter. There is no business here. Revenue came in at whopping $6,000 (consulting fees). Cash in the bank stood at $2.6 million, plus another $900,000 worth of cryptocurrencies.

How much is a company with a few million dollars of assets and no operating business worth? Well, the stock closed that day at $20, giving it a market value of $415 million (~20.7 million total shares outstanding).

But wait, that’s not the crazy part.

Shares of CRCW have surged nearly 24,000 percent in just 30 days since then, valuing the company at $10 billion. That is a bubble, folks.

 

 

 

 

U.S. Stocks Reach Valuations Rarely Seen, Making Material Earnings Growth A Requirement For Strong Future Returns

In the face of the current highly ebullient stock market, close watchers of valuation metrics are frequently dismissed as ignoring the prospect for accelerating GDP growth and lower corporate tax expense, but I will step onto that turf anyway. It may make me look foolish, as Warren Buffett recently played down concerns about the market’s valuation, even though his often-preferred metric in years past (total stock market value relative to annual GDP) is dangerously high, but that’s okay.

Here is a look at my preferred valuation metric; a variant of the P/E ratio that uses “peak earnings” (the highest level of corporate profits ever produced in a 12 month period) instead of trailing 12 month earnings (impacted solely by the current economic environment) or forward earnings estimates (usually overly optimistic). We’ll go back more than 50 years, not only to get an idea of historical trends, but also because that is the data I have.

When people ask me about my view of the market, I tend to give a tempered response because it is hard to argue that we should really get any earnings multiple expansion. After all, we now sit above 20 times “peak earnings” and that has only happened once in the last 55 years. As you can see, that one time (the dot-com bubble of the late 1990’s) is not exactly a time we probably want to emulate this time around.

It is important to note that high valuations do not guarantee poor future returns. There is a high correlation, but you can map out mathematical scenarios whereby P/E ratios mean-revert and stock prices don’t crater. Simply put, it requires extraordinary earnings growth that can more than offset a decline in P/E ratios (which we should expect if interest rates continue to increase). Right now the U.S. market is banking on this outcome, so earnings and interest rates are probably the most important things to watch in coming quarters and years when trying to gauge where the market might go from here.

Author’s note: The use of “peak earnings” is not common, so it is worth offering a brief explanation for why I prefer that metric. Essentially, it adjusts for recessions, which are temporary events. If investors use depressed earnings figures when they value the market, they might conclude stocks are not undervalued even if prices have declined materially. This is because they inherently assume that earnings will stay low, even though recessions typically last only 6-12 months and end fairly abruptly.

As an example, let’s consider the 2008 recession. The S&P 500 fell 38% that year, from 1468 to 903. S&P earnings fell by 40%, from ~$82 to ~$50. If we simply use trailing 12-month earnings, we see that the P/E multiple on the index was 18x at the beginning of 2008, and was also 18x at the end of the year. So were stocks no more attractively priced after a near 40% fall? Of course they were, but using traditional P/E ratios didn’t make that evident.

If we instead used “peak earnings” (which were attained in 2006 at ~$88), we would have determined that the market was trading at ~17x at the outset of 2008 and had fallen to just 10x by the end of the year. By that metric, investors would have realized that stocks were a screaming buy when the S&P traded below 1,000.

 

Market Volatility Is Back, And That’s Okay

You might be freaking out now that the U.S. stock market has dropped more than 8% during the first two weeks of 2016. With only nine trading days under our belt (including today) it has been a rough start to the new year. It has not helped our mental conditioning that from 2011 to 2015 we had a four-year stretch of no market corrections. Over the last six months we have now seen drops of 10% or more on two separate occasions. It also does not help that the national news typically only covers the stock market on days when the Dow drops 300 or 400 points, rather than giving equal time when it rebounds.

All of this is going to be okay. The shift from human to electronic trading has allowed computers to take over the process, which means much faster transacting. The result is that moves up and down now happen much more quickly. Market shifts that once took week or months can now come and go in a matter of minutes or hours. A 10% market correction might have taken three months a couple decades ago but now can take three days.

The ever-changing global economy also contributes to the volatility. We never heard much about China twenty years ago but now our financial markets can react violently to swift declines in Chinese stocks, even when their impact on American companies is minimal. As the United States matures and other countries grow faster and contribute a higher portion of global economic output, we become less shielded from international markets and therefore we will feel more ripple waves. And that’s okay.

Advances in technology more generally have also had consequences for those of us who are investing for our futures. Information can now be transferred across the globe in a matter of milliseconds. While that is great for a level playing field and means we can research our investments more quickly, easily, and cheaply than ever before, it also means that there is more to react to. More information and quicker dissemination of that information has its drawbacks; namely volatility. Engineers are now even programming computers to automatically place buy and sell trades based on information delivered online. So not only do we get information faster, but we can act on in it much faster too.

And then there are new financial products being created all of the time. More ways to “play” means more money flowing in different directions, which also increases volatility of the underlying prices for assets. As the great new movie “The Big Short” conveys so well, financial derivatives allow more money to be wagered on various outcomes than ever before. As the analogy goes, you used to be the only one who could buy insurance on your own house or car, but now an unlimited number of people can do so. Imagine how volatile the price of insurance will be when it trades daily and anyone can buy it on practically anything.

By now you are probably thinking that I have changed my mind in a few paragraphs and everything will not be okay. Nope. The saving grace is that business profitability does not swing nearly as much as asset prices do. And over the long-term asset prices are going to track the underlying fundamentals of a business. As long as we are willing to not panic and sell when things turn south for a little while, the near-term price gyrations should not matter. And no matter how hard it is to accept this fact and not panic, that is what investing requires. I try to do the best job I can reinforcing this with my clients, but it is a tough job. Emotional reactions are natural and difficult to ignore.

My focus right now is on fourth quarter earnings reports and 2016 commentaries which are getting under way. Doing so will allow investors to separate what is going on daily in terms of asset prices and how the underlying fundamentals of companies look. After all, five years from now stock prices will reflect underlying earnings more than anything else. Five days or five weeks from now they can reflect anything at all.

PS: Some people may argue with that last point. After all, if markets get wacky five years from today what is to say that the underlying profits of the company will matter? That is a fair statement, to some extent. I think it is important to point out that history has shown that stock prices, while volatile, do not have an unlimited range of outcomes. The S&P 500 has traded as low as 7-8 times earnings during periods of double-digit interest rates and as high as 25-30 times earnings during bubbles. But it has never traded for 3 times earnings or 100 times earnings.

Why is this important? Let’s say you buy a $100 stock today that trades for 10 times earnings and pays a 5% annual dividend. Your underlying investment thesis is that it will grow earnings per share by 10% annually for the next five years and continue to pay the dividend, which will be increased at the same rate as the underlying earnings grow.

If your fundamental analysis of the company turns out to be accurate, and you do not sell the stock (even during times of market panic), five years from now you will have collected more than $30 per share in dividends and the company’s earnings will have grown from $10 to $16 per share. Assuming this plays out, what is the worst case scenario in terms of investment return? Even if the stock trades at only 7 times earnings, the stock will still trade at $112 per share. Add in the $30 of dividends you collected and your total return would be more than 40% over a five-year period, or about 8% annually.

Simply put, you are not going to lose money on that investment, as long as your thesis about earnings and dividends is right. This is important because we could not say the same thing if we only look out five weeks or five months into the future. If the stock drops to 7 times earnings in the short-term you would lose 30% on paper even if the company’s fundamentals were on track. As long as you do not overpay for something, being right on the fundamentals and holding for the long-term becomes a winning proposition. That is why I spend the bulk of my time researching companies and hammering home the long-term nature of my investments.

This Market Correction In Perspective

One of my jobs as a financial manager for individuals and families is to put things into perspective, especially during times of short-term market distress, which can be quite stressful for the average person. In recent years I have tried to regularly remind my clients that normal stock market corrections of 10% or more occur about every year or so over the long term. Since we had not seen one since 2011, it had been four years since investors felt a near-term shock to their portfolios, which made being prepared for the next one especially helpful.

Given how much day-to-day stock market activity is computerized these days, one thing that is different now is that market moves happen more faster than they used to. What previously had taken weeks and months to take shape now can come and go in a matter of days. As I write this, the S&P 500 index is trading at 1,912, which is 10.4% below the all-time high made back in May. Amazingly, 8.8% of that decline has come in the last 4 trading days.

So what is important to keep in mind as computers send the market into a new world of volatility? Keep things in perspective. This  can often most easily be accomplished with graphics, so below I present three charts of the S&P 500 index:

Here is a year-to-date chart for 2015 which shows the current, sharp 10% decline:

SPX-YTD

 

Granted, that might look and feel kind of scary on its own.

Now, to see how far we have come and how much we have declined on relative terms, here is a 5-year chart:

SPX-5yr

I would guess that this second chart is far less scary to most people. It shows the market having more than doubled over a five-year period, includes the last major correction in the market (August 2011), and the most recent period appears to be no more than a standard, run-of-the-mill correction in stocks.

The last chart might be the most interesting, as it goes back 10 years. I included this one because it includes the last market peak before the “Great Recession” decline of 2008:

SPX-10yr

 

Even after the last week of declines, the U.S. stock market is still considerably above the peak it reached in 2007, just before the second largest economic collapse in United States history.

None of these charts can predict how the market will fare over the coming days, weeks, or months. Hopefully it does put the last decade in perspective and show that what we are experiencing right now, while not fun, is neither out of the ordinary, nor overly disconcerting. If you are retired, the plan you have in place with your financial manager is likely unchanged, as it should have incorporated the likelihood (or certainty, more precisely) of normal, periodic market declines. If you are still in the “work and save” phase of your career, times like these are a great time to add to your investment portfolio, as great companies are on sale.

Bargains Are Everywhere For Long-Term Investors, Even With S&P 500 Losses Contained Thus Far

Based solely on the number of new stocks I am finding to be priced at bargain levels, one would think the U.S. stock market has broken its years-long streak of avoiding a 10% correction. My potential buy list of stocks has not been this full in a long time, even though the S&P 500 (trading at 2,050 right now) has only dropped 4% from its all-time high. The reason is that as the current bull market continues to age, it is being led by fewer and fewer companies. Take out some high fliers like Amazon (AMZN) and Netflix (NFLX) and the underlying performance of the market overall has been pretty weak this year, and this is causing individual stock pickers to have ample choices when allocating fresh investment capital.

Take Disney (DIS), as an example. Down $6 today alone, the stock now fetches $100 per share, versus the $122 new high it reached on August 4th, just 16 days ago. For a blue chip company like Disney, which was a market darling just weeks ago, to be down 18% from its high is pretty remarkable. These are the kinds of moves we typically see when the market indices are really taking it on the chin.

It is impossible to know if the high-fliers are going to keep the S&P 500 fairly buoyant, or if we really will see a normal correction in the market (which would have to take stock prices materially lower from here), but as a long-term investor I do not especially care either way. I tell my clients that I invest in companies with every intention of holding them for at least five years. There are certainly times when I sell before that, but when you are searching for contrarian bargain opportunities you want to have time on your side since investors’ daily emotions are so unpredictable and oftentimes irrational. So when I find great investment opportunities, as I am more and more these days, I do not hesitate to start accumulating shares, even though the market is overdue for a correction and only down 4% from its high. If my investment thesis is correct, and I am willing to hold the stock for five years, the short-term noise becomes irrelevant.

As you consider whether to add fresh money to your investment accounts (and when), keep that in mind. Buying a good company at a great price usually pays off very well for long-term investors, in any market environment. Assuming that environment is similar to today when I write my next quarterly client letter in early October, I am likely to encourage my long-term investor clients who are still regularly adding cash to their accounts to prepare a plan of attack. That might mean putting some money to work now and leaving some on the sidelines in case we get a bigger market drop, but at the very least I think we should be shaping our plans around what we are seeing out there right now. And I would characterize the market today as getting very interesting on a stock specific level, provided one has patience and is focused on company fundamentals and not day-to-day market noise.

Full Disclosure: Long AMZN, DIS, and NFLX at the time of writing, but positions may change at any time.

U.S. Stock Market Approaching Attractive Levels

The U.S. stock market has finally rolled over, after going 3 years without so much as a single 10% decline. We are not quite there yet (at today’s S&P 500 low of 1,837 the index is down 9% from its peak reached last month), but for all practical purposes this is what a correction looks and feels like. So does it matter? Are stocks down to a point where investors should consider adding to their stock holdings? Let me share some thoughts as to how I am viewing the market’s current position.

Entering 2014, the S&P 500 sported a price-earnings ratio of about 17 based on trailing 12-month earnings (1,848/107). While this was justifiable given how low interest rates were, it was at the high end of historical norms and did not provide a lot of room for multiple expansion. The best that bulls could hope for was that earnings would continue to grow and rates would stay low, allowing for stable P/E ratios. And up until a few weeks ago, that is exactly how things played out. Earnings for 2014 are slated to come in around $119 (+11% year-over-year) and the S&P 500 index reached a high of 2,019 in September, up about 9% for the year excluding dividends of 1.5%.

While everybody has been worried about when interest rates will rise, and by how much, I think it is far more important to look at P/E ratios relative to those rates. If the average P/E ratio over the long term has been 14-15x, in a low rate environment a 17-18x P/E ratio would be fair but not compelling, assuming you expected rates to trend upward in the intermediate term. However, if stocks were trading at 15x earnings with low rates, it changes things.

Let’s assume the 10-year bond normalizes to a 4% yield (vs 2% today) over the next 3-5 years, which is the consensus view. If U.S. stocks would be likely to fetch a 15 P/E in that scenario (average rates, average P/E’s), then stocks would be attractive if I could pay 15x earnings when yields are just 2%. Essentially, even if rates doubled, there would not be any P/E multiple compression. If, however, I pay 17-18x earnings and rates rise/multiples fall, then I should expect that P/E compression will offset corporate earnings gains, and my stock returns will be muted.

Why is this important? If the S&P 500 index were to drop to 1,800 (about 2% below current levels) and earnings for the index are $119 for 2014, the trailing P/E ratio for the S&P 500 would be 15x at year-end and interest rates would be near record lows. That would make me want to add fresh capital to my stock market investments. If rates stay low for longer than people expect, then multiples could go back to 17x and equity gains will result. If rates rise and we only see average P/E ratios of 15, then stock returns will largely track corporate profit growth, which continues to be strong.

Paying above-average prices in a low rate environment is justifiable but offers minimal upside. Paying average prices for stocks in a low rate environment offers you some downside protection if rates rise and solid upside potential if they are steady. As a result, I think U.S. stocks look attractive at around 1,800 on the S&P 500. And many people would suggest starting to buy even with the index at 1,840 because it’s “close enough.” Bottom line: it’s time to make a shopping list because stocks are on sale.

 

Why the January Barometer Drives Me Crazy

You can find the “January Barometer” mentioned in dozens of media articles and it has been referenced a ton on CNBC so far this year, as it is every January. Here’s a recap from the Financial Post in case you have been lucky enough not to hear about it:

“Stock performance in January can say a lot about where the markets are headed for the rest of the year. At least, that’s the premise behind the January Barometer, a theory that the performance of the S&P 500 during the first month will set the tone for the rest of the year… The Stock Trader’s Almanac points out that since 1950, the Barometer has been right 76% of the time.”

Sounds harmless enough; If January is up, then the market will finish up for the year three times out of four. Good odds, right? So why does this so-called barometer drive me crazy every time I hear it? Because you need context to really determine if this indicator has any value.

Forget January entirely for a second. Would it not be helpful to know how often the market goes up in a given year regardless of any particular month? I certainly think so. In fact, since 1957 (the year the S&P 500 index was created — don’t ask me how they claim to have data from 1950-1956) there have been 56 calendar years and the S&P 500 index has risen 44 times and fallen 12 times. Why is that important? Because 44 divided by 56 equals 78%. The market goes up 78% of the time no matter what!

But if January is up then the market goes up 76% of the time. So what? Actually, that tells me that January has essentially no influence at all. In fact, we could go a step further and say that if January is up, the odds the market will rise for the full year actually go down slightly compared with the historical average. So really, January is irrelevant. It tells us nothing on its own.

It’s sort of like saying if you play blackjack in Vegas in January then the house edge is only 1%. That might sound like great odds, until you do some digging and realize that the house edge in blackjack, assuming you follow perfect basic strategy, is actually less than 1% regardless of when you play.

 

Dow Jones Industrial Index: Worst Financial Services Stock Picker Ever?

This week we learned that the components of Dow Jones Industrial Average (DJIA) will be changing again later this month. As former blue chip companies become less relevant over time, those who oversee the index seek to modernize it by replacing former darlings with new age companies that are more dominant in the current economy. Not surprisingly, such actions offer an interesting lesson on contrarian investing. To get booted from the Dow 30 a company must really be struggling. Conversely, if you are chosen as a replacement, chances are good that things have been going well lately.

Back in 2005 I talked about this and showed that the stocks that are removed from the Dow have actually outperformed their replacements after the changes were made. So yes, making these changes to the index has actually hurt its long-term performance, even though the motivation is exactly the opposite. While my piece is nearly a decade old, it remains relevant as the trend has not abated in any way. Here is the link: Examining Changes to the Dow 30 Components.

Looking back over the last 15 years shows that the Dow 30 index has been an especially bad timer of financial stocks. Bank of America (BAC) is one of three stocks that is being removed from the index this time around (Alcoa and Hewlett Packard are the others). Amazingly, BAC has only been part of the Dow 30 for five years. Since it was added in February 2008, the stock has collapsed from $42.70 all the way down to its current quote of around $14.50 per share. That 66% decline is quite astounding, as the chart below shows.

bac-2008-2013

Now you might think that Bank of America is an isolated case, because it was added to the index at the peak of the last banking cycle, right before the financial crisis began (great timing Dow Jones!). In fact, mistiming financial stocks is a trick the index keepers have been perfecting for a long time!

Prior to Bank of America, the last large banking-related stock added to the Dow 30 index was…. drumroll please….. AIG! American International Group (AIG) was added to the Dow in April 2004 when it was trading at $76.25 per share. If you thought BAC made a quick exit after five and a half years, AIG lasted only four and a half years. It was removed from the index in September 2008 at the plump price of $3.85 per share, for a loss of about 95%.

I won’t belabor the point much longer, other than to mention that before AIG, Citigroup (C) was added to the Dow in 1997 and was then removed in June 2009 at $3.46 per share (you can guess how brilliant of a move that was).

Not only has the timing of financial stock removals from the Dow 30 been so lousy, but they also epitomize the contrarian investment strategy inherent in these psychologically-motivated index changes. AIG and Citigroup shares have been roaring higher over the last two years. If you had to buy just one of the three stocks being removed from the Dow this time around, Bank of America looks like the obvious choice.

Full Disclosure: Clients of Peridot Capital Management were long shares of BAC  and AIG at the time of writing, but positions may change at any time.

Time To Make A Shopping List

It’s one thing to say that interest rates will eventually go up, and it’s something entirely different to see them actually start to rise. Over the last couple of weeks the stock and bond markets have been spooked as the benchmark 10-year treasury has seen its yield spike. Since May 1st, the 10-year yield is up 100 basis points, from 1.6% to 2.6%. In percentage terms, that is a huge move, which is why the markets have been rattled.

It is also a fairly uncommon situation to find the stock and bond markets falling at the same time, as equity outflows typically are redirected into bonds as a safe haven. However, the rise in stocks in recent memory has largely been helped by falling bond yields (which make equities more attractive on a relative basis), so it makes sense that when bonds start to sell-off, causing rates to rise, that it would also cause a retracement in recent equity gains. So, we have bonds and stocks dropping simultaneously, and in many cases, bonds actually falling more than stocks, which hardly ever happens.

So what do we do as long-term investors? First, let’s keep things in perspective. Rather than simply focus on your stock and bond returns in May and June, consider them in the context of the last several years. While we are finally having a market correction, it should have been expected (though the exact timing is always hard to gauge). Healthy markets need to pull back every once in a while to avoid overheating. This time is no different. In fact, it had been a record number of trading days since we last had a 5% correction, so we should not fret too much at the market’s recent action.

With yield-sensitive securities leading the way down, should we throw in the towel and pronounce income-investing and the dividend-paying stock bull market dead? I would not be so quick to judge. Does a stock yielding 4% or 5% look a bit less attractive if bonds yield 2-3% instead of 1-2%? Sure. Does that mean the merits of owning high-yielding stocks have simply vanished? Hardly. Many MLPs and REITs are seeing their yields jump to 6-7% again. Even if interest rates rose another percentage point, those securities will remain attractive in the big picture.

I would suggest making a shopping list of your favorite stocks and bonds. At a certain price they become very attractive and are likely ripe for purchase during this correction. Many reached fair value, or even surpassed it a bit, thanks to interest rates hitting record lows. That was bound to stop at some point, and now the market is re-calibrating its expectations that rates will not stay ultra-low forever. We may have already known that, but markets don’t typically react until the move higher begins. And investors can expect that market prices will adjust to even higher rates ahead of time, since the financial markets are discounting mechanisms. In fact, we are likely seeing that process play out right now.