Stocks have moved a long way since March and there are many analysts that are calling for a correction of these gains. We are not in that camp. In an August blog, with the Dow at near 9,200, we showed that our valuation model was indicating that the fair value of the Dow was near 10,900. With the Dow now approaching 10,500, we thought it would be interesting to recalculate the model.

The graph shows the valuation model going back to 1960. The red line is the actual annual price of the Dow Jones. The blue bars are the model's output of the predicted values. The ouput is derived from a multiple regression of the DJIA's dividend, earnings, and the yield on 20 year bonds against the price of the DJIA. The way the model works is to mathematically produce what we might call a "normal" price of the Dow based on the historical relationship among the various inputs.

Chuck Carnevale is co-founder and chief investment officer at EDMP Investment Management of Lutz, Florida. Prior to EDMP, he was a partner in a 30-year-old established registered investment advisory in Tampa, Florida. He's also been a partner with a private NYSE member firm, the President of a NASD firm, and a Vice President of a major American Stock Exchange listed company.

Optimism is in short supply among many analysts regarding the Christmas selling season this year. Indeed, economists are predicting that Christmas sales will fall for the second year in a row.

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I have written and spoken about the Hidden Power of Rising Dividends compared to bonds for nearly 20 years. Yet, I find that many people do not grasp and retain the concept. The primary reason for this is that most people think of stocks as investments you trade and bonds as investments that you hold to maturity. If you would think of stocks as more like bonds, however, a new vision of the power of stocks as income producers comes into view. For example, let's compare Johnson and Johnson (JNJ) common stock with a 10-year US Treasury bond.

Today, the dividend yield of JNJ is 3.2% (1.96/62), compared with the yield on a 10-year T-bond of 3.4%. On the surface, from an income perspective, the T-bond would seem to offer a better deal. It is AAA rated, it is an obligation of the full faith and credit of the United States, and it offers a modestly higher yield than does JNJ's common stock. Yet, if a person is looking for safe and secure income, I would argue that JNJ common stock might be a better investment than the US T-bond.

With only few companies left to report earnings for the third quarter, some striking trends are apparent in the data.

1. For four consecutive weeks the percent of positive surprises has held steady at between 80% and 85%. This is the highest quarterly earnings-beat rate that I have ever seen and shows that US businesses are right-sizing their cost structures in a remarkable fashion. Alan Greenspan used to speak glowingly about the flexibility of American business management. This right-sizing of costs is vivid proof of just how flexible the average company in this country is.
2. While the average earnings for all reporting companies are 15% lower than the third quarter of 2008, the results are better than the -20% estimate at the beginning of the earnings season.
3. The positive average surprise has been nearly 15%, again an extremely high figure and higher than last quarter's surprise rate.
4. Overall corporate sales are down approximately 12% from a year ago, right on Wall Street estimates. Wall Street analysts, however, are now estimating that both earnings and sales will be higher, on a year over year basis, for the fourth quarter of 2009.
5. Larger companies are reporting better earnings than smaller companies.
6. Multi-national companies are reporting better earnings than domestic companies, as a result of their greater global sales, as well as the falling dollar.

Revenues and earnings for major US companies are estimated to be higher in 2010 than in 2009. The coming year will likely be the first up year for earnings since 2007.

Third quarter S&P 500 earnings results for the first three weeks of the season continue running far ahead of Street estimates. Importantly, however, recent weakness in some economic data has overshadowed the better-than-expected earnings and caused stock prices to fall sharply.

The pullback in stocks was largely erased Thursday as third quarter US GDP showed growth of 3.5%, the first positive economic growth in four quarters and also beating Wall Street estimates by nearly 10%. Even with some oil stocks reporting disappointing earnings, stocks soared by nearly 200 points on the Dow Jones Industrial Average.

Third quarter S&P 500 earnings results for the first two weeks of the season are running far ahead of Street estimates. Importantly, sales are also faring much better than expected. Here's a short breakdown of the results thus far for the S&P 500 companies:

Earnings Reported through Friday:

John Burr Williams is widely credited as being the father of dividend investing and the creator of the forerunner of today's dividend discount models. Williams was also a first rate economic strategist.

Williams was already a successful Wall Street investor, when in 1937 he went back to Harvard. Williams sought to earn his PhD in Economics with the hopes of learning what had caused the stock market crash of 1929 and the subsequent economic depression of the 1930s. By the end of his time at Harvard, Williams had concluded that the primary causes of the depression were high stock market volatility, which he believed was caused by a lack of an accurate method for valuing stocks; and ill-conceived government actions and inactions in the economy.

Next week 3rd quarter corporate earnings reports will begin in earnest. We project that this quarter's earnings will, again, beat expectations by a wider margin than is now anticipated by most investors. We said the same thing just prior to second quarter releases and the earnings results even outdid our best guesses as 75% of S&P 500 companies beat their Wall Street estimates.

We know all the arguments that last quarter companies beat earnings on "cost saves" and not on truly better business. Indeed, S&P 500 earnings were nearly 25% lower than 2nd quarter 2008 earnings. Our view, however, is that the cost saves were so sharp and accomplished so swiftly that corporate America is to be commended for their flexibility and dexterity in right-sizing their cost structures. This means that as the economy begins to turn higher, which we believe will happen this quarter, that earnings will be highly leveraged to the economic uptick.

I recently completed a simple analysis of the S&P 500 that argues strongly for a shift in leadership in the market. I computed the 6-month total returns of all stocks in the S&P 500 and then compared the top 250 performers with the bottom 250. Here are my findings.

Performance Metrics

I read article after article about dividend investing and, in many cases, I hope that no one is really following the suggestions being made. The reason for my concern is that I have tried about every form of dividend investing known to man, including dividend capture strategies, since I became a dividend investor in the late 1980s, and I have found that there is no single strategy that assures success.

For this reason, in all three of our dividend investing styles we break the portfolios into three smaller portfolios. These three smaller portfolios each follow one of the following stock selection disciplines: (1) High Yield -- companies with much higher than average dividend yield and very low dividend growth; (2) High Growth -- companies with low dividend yield and high dividend growth; and (3) Balanced --companies with slightly above average dividend yield and growth.

By Randy Alsman, Vice-President, Portfolio Manager, and Member of Donaldson Capital Management's Investment Policy Committee. Please read more about Randy here.

Donaldson Capital Management for years has developed our long-term stock market forecast through a set of analyses that we call the"Barnyard Forecast." It is also known by its mnemonic, "E+I+E+I= O.

When we said that the stock market was turning in mid March of this year, cries of "Pollyanna" rang out. When we said that second quarter earnings were going to be better than expected --much better--cries of "you've got to be kidding me" landed all around us.

It is now clear that the naysayers were wrong on both counts. I believe they were wrong because most people in and out of the investment business believe that whatever happens today is destined to happen forever. There are economic principles, however, that tell us that this linear thinking does not and has never worked. Investors simply mistake the power of the Federal Reserve over and over.

We said in an earlier blog that better-than-expected earnings combined with better-than-expected Gross Domestic Product (GDP) could be the catalyst for a new up-leg for stocks.

At the moment, the Dow Jones is stuck in a trading range between about 8,000 and 9,000. The recent uptick in the markets has brought us back to about where we were in mid-June. With earnings season winding down, we don't think the better-than-expected earnings by themselves will be good enough to drive stocks toward the 10,000. In essence the safest call on the market in the near term is for a zig zagging sideways movement for a few months.

In our June 29, blog we said that earnings for the second quarter would be better than expected. Our reason for taking that position is that three of the four portfolio managers at our firm have managed large businesses. In their roles as presidents or general managers of Health-care, Consumer, or Industrial companies they have seen first hand how powerful new management tools, such as Enterprise Resource Management (ERM), were giving them clearer pictures of revenue and expense trends. This increase in clarity enabled them to better calibrate capital and resources, which lead to better control over profits.

Second quarter earnings are now in full swing, and as we had surmised, cost controls are winning the day and producing earnings surprise after earnings surprise. Here's the scorecard so far.

Whatever your political persuasion, the truth is capitalistic principles that have served humanity well, are currently under attack in the halls of Congress. Monday's Wall Street Journal sounded the alarm that the highest tax bracket may soon rise 11%, from 35% to 46%, by the time the Democrats in Congress are done.

"Soak the rich! Soak the rich!" can be heard in stereophonic surround sound if you drive by the Capitol these days. Indeed, the most important allocators of capital are no longer found on Wall Street. They now reside on Capitol Hill.

We said in a recent post that we thought that corporate earnings would lead the next up leg of a new bull market. It may be the height of optimism, and we are sure we will be scolded for it, but we believe that "less bad" earnings growth will be rewarded by Wall Street with an uptick in stock prices. We say less bad because earnings growth for the S&P 500 Index stocks is currently estimated to be down by nearly 30% from the second quarter of 2008.

This past week was the official beginning of the earnings-reporting season. Because we believe that earning results are so important this quarter, we will keep a running scorecard provided by Bloomberg, for our readers . Of the 500 companies in the S&P Index, four front runners made their reports this week. Granted this is a very small sample, but the results are encouraging. Three of the four early-reporters beat estimates by wide margins. Although Alcoa (AA) reported lower earnings, they beat Wall Street's estimates handily. Of particular good news, Family Dollar Stores (FDO), the deep-discount chain, reported earnings 36% higher than a year ago and 5% better than Wall Street estimates.