 Good day fellow investors. Today we're going to discuss how the stock market works. The reality is that the stock market gives you signals way ahead, but nobody listens until they finally start to listen. And this is exactly what is going on. The things I have been blabbering for a year writing about two years now are the following. Higher interest rates will come as the Fed told us. Higher interest rates will squeeze valuations. Higher interest rates will slow down economic growth. Higher interest rates will slow down earnings growth. So let's start discussing what I just said. First thing that happened this week is that the Treasury, 10-year Treasury yield passed 3%. So Treasury, what is a Treasury? Treasury is a bond issued by the U.S. government where you have over 10 years guaranteed coupons 3% per year and the guaranteed payment of principle after 10 years. So practically it is risk-free in case the U.S. government doesn't go bankrupt. So you can either invest in a bond like that or in other stocks that pay dividends. And here you now you say okay this is risk-free with a guaranteed payment of principle or I can invest in a stock that gives me 3% per year and an unsure, uncertain payment of principle let's say after 10 years. And this means that to invest in the stock you need a higher return. Thus dividend yields have to increase, require dividend yields increase. And this is exactly what has been going on. In the last year, two years the Treasury yield went from 1.40% to 3%. That's a huge difference for yield seeking investors, for risk-looking, risk parity investors which means that okay now we need higher returns from stocks and this is what I have been going on about for a long time. Valuations will lower. And this has become a headline the 10-year Treasury above 3% on Tuesday and you can see here how the stock market really dropped on that day. Let me explain what I mean with require dividend yields will go higher. If we have a dividend of $3, a required dividend yield of 3% in case the Treasury is at 1.5 like it was two years ago, the stock price is 100. In case next year the Treasury yield 10-year goes to 3%, then the required dividend yield goes to 5% because stocks are always riskier than bonds, especially Treasuries. And then you see the stock price dropped to 60. So when at stock price at those small yields, those very small yields, everything comes very volatile. And when a stock drops from 100 to 60, that's 40 bucks. That's what 13 years of dividends to cover the difference. And therefore, if interest rates continue to increase, there will be much, much more pain for those blue chips, stable, beamons paying great dividends. But if those dividends go to 7%, to 8%, to 9%, to 10%, then the stock prices will go down, down, down, down and down. So when you are thinking about buying the dip, buying what's going on, understand that dividends, that interest rates are changing and required dividends will also change, which means required dividends, if things continue like this, will go higher, stock prices will go lower. This is how interest rate work like gravity on valuations. There is nothing you can do there. Many of you have been wondering whether Altria is a buy now given the low stock price, but the stock is down 22.5% over the last three months. Apart from the regulatory noise and whatever, one big reason for this are higher interest rates because Altria is a cash cow, higher interest rates seek for a higher dividend yield and that's why you see this drop. Further, there are other negative influences on stocks. Higher interest rates make debt payments higher, make costs higher. We have seen inflation, interest rates are increasing because there is increasing inflation. That's all the costs that the companies have are also increasing, where interest rates, higher interest rates, squeeze their margins. Further, if you have a project you are investing, you are growing and the growth rate, let's say, of the project, the return on investment is 3%. If your cost of capital is 1%, you invest. If your cost of capital has just increased to 3% or 4%, you are not going to invest in the 3% project, which means the economic growth, the Fed will try to balance it, but the economic growth will slow down or will have to depend on other growth instances, not on low interest rates. Similarly, as the Treasury yield has been growing, so we have seen growth in the 30-year fixed mortgage interest rates. They have been 3.5 last year, 3.6 a bargain. I've been telling people to buy houses. Now it's already 1% point higher, which is a big difference when you are going to buy a house with a 30-year fixed mortgage. This means simply that people will or see lower house prices or people will buy less houses and that will have an effect on the economy. I'm not saying it will turn an economy into a recession. Perhaps the Fed and the politicians will manage to deliver a soft lending. So that's a possibility. We are not going to grow at 4%, but we could grow stably at 2%. And that's already excellent. We'll see what happens, but higher interest rates will pull down valuations, house purchases and anything that's related or that has grown immensely over the past thanks to low interest rates. Further companies like 3M just lowered their top profit guidance for 2018 where the earnings were expected to be between 10.20 and 10.70 and now they are expected to be between 10.20 and 10.55. The stock dropped very significantly and then JP Morgan issued a statement that there might be more downside as raw material prices have been going up. So when a company like this 3M you see the drop, you think it's a dip. Look at the long-term chart and look at where was the stock just a few years ago. And then you will see, okay, this dip is nothing in comparison to the long-term chart. And if interest rates increase, if the conditions change, then the stock might drop more, more and more because you have to see how those margins evolve in different economic conditions. Also, Cattle Peeler told us that it doesn't expect higher earnings than what it obtained in the first quarter of 2018 as input costs rise. And I want to show you something else. You all see now forward SAP 500 price-to-earnings ratio is 15-16. These are the revenue estimates for the SAP 500 over the past 10 years. And you can see that revenues in 2009 everybody estimated very, very low revenues and then they revised them upwards only to the revised them downwards later. 2010 also first estimates are always extremely positive and then they are always revised downwards. Revenues are usually revised downwards between 10 and 20%. Look at 2016, 2017 and we have not yet seen downwards revisements for 2018 and 19. But I bet you those will be there. Further, if revenues are revised downwards, then earnings are revised even more. And we can see here how EPS forecasts for the FTSE 100 were revised on average between 40% over the last 7-8 years per year. So always take the forward estimates with a grain of salt because now if we have forward price earnings ratio of 15, if we put the 20-40% 40% earnings revisions downwards on that PE ratio we are again at 22. Plus when you get into the adjusted impairments and everything else you get to a PE ratio of 25, 24, etc. So always be careful with those estimates. We have now increasing interest rates and that's the key to look at anything. Who will be hurt the most? We have already seen REITs being hurt very significantly and then companies for example like Proctor and Gamble that are stable, stable dividend payers, great brands, but it's all a valuation game. And if we see the company, that company didn't actually grow earnings over the last 10 years. 2008 EPS was 3.64, 2017 is 3.77. The book value is lower than it was in 2008 and consequently the five-year stock price change didn't go anywhere. However the stock is down 21% year to date due to higher interest rates, noise, higher input costs and other fears. Now perhaps it will rebound, I don't know, but my point today is you should never have a fixed mindset when looking at the stock market. You have to have a dynamic mindset looking, okay, what happens if this changes? What happens if this changes? What happens if these changes attach probabilities to each scenarios and then invest, invest, balance your portfolio accordingly. When you do that then you know over the long term you will reach amazing results. Thank you for watching, looking forward to your comments and I'll see you in the next video.