Interest Rates and Rule Breakers
A rise in interest rates can cause stocks to decline because higher rates decrease the current value of all future net income at a company. However, this might not prove accurate with Rule Breaker-type companies that have high amounts of cash. In fact, higher rates might increase the value of future earnings by increasing actual earnings. An upward tick in interest rates could prove a good thing for a company like America Online (NYSE: AOL), with $2 billion in cash and equivalents, or Amazon.com (Nasdaq: AMZN), with over $1 billion.
Many new companies, especially those that recently came public, have large amounts of cash and little debt. Being cash-rich, higher interest rates would mean higher interest income. Analyst Keith Benjamin of BankBoston Robertson Stephens said today in a Reuters interview that higher rates should actually inflate his earnings estimates for certain cash-heavy companies (such as AOL).
Meanwhile, for a cash-flow positive company such as Amazon or eBay (Nasdaq: EBAY), higher rates help in a few ways: by increasing the potential income earned on 1) cash-on-hand (eBay is set to raise another billion, by the way) and by increasing the potential income earned on 2) the positive cash flow generated each month.
Overall, though, the most likely outcome over the next few years in regards to interest rates is a small hike or two (or three) to keep inflation at bay, but not a business killing (or stock killing) hike after hike after hike, and so on. (Hut, hut, hut, hike....)
Regulate or Deregulate?
Hard-hitting ladder climbers (judges, governmental bodies, regulatory commissions) are often confused. They break up perceived monopolies (telecommunications and oil giants), and then they let them remarry. They regulate entire industries (airlines), and then they don't. And then they sort of do again.
Friday's cable-access decision in Oregon might open a new can of regulatory worms. AT&T (NYSE: T) will appeal the decision that it must share its cable with competing companies, but in the meantime important details related to the court's decision are already cloudy at best. First, bandwidth through cable isn't unlimited. There is only so much available bandwidth. So, how can AT&T spread it fairly? Realistically, it can't. And realistically, it will provide the most bandwidth to its -- or @Home's (Nasdaq: ATHM) -- customers. To force AT&T to do otherwise would mean regulation at a level the government wants to avoid.
Second, the ruling allows for AT&T to charge competitors for using its cable. (How generous of the judge.) However, the court didn't name prices. Apparently, AT&T can charge anything.
Already, access technology owners are the winners in high-speed connection partnerships. A month of @Home costs $44 on average, but @Home collects only $14 and the remaining $30 goes to cable partners. AOL charges over $40 per month for high-speed DSL connection, but AOL collects only $10 and the remaining money goes to Bell companies. If AT&T essentially grants @Home $14 per user per month, what will it grant companies in which it doesn't hold a majority stake? My bet: not much. AT&T could even make profitable business through its cable network impossible for competitors, in which case regulation issues of an intense, undesired nature might arise.
All in all, a long war may be ahead. Meanwhile, AOL continues to add 1 million users every six weeks -- on dial-up access, boys and girls. Demand for slow-mo' access isn't waning, and in fact AOL doesn't believe that high bandwidth demand is even near giant, mass market levels yet. Instead, AOL feels that the country needs a brand like AOL to make high bandwidth appealing to the masses, and even then a majority might not be able to get or afford it. Either way, AOL believes that it has time and that it will have the means to serve all markets, and I wouldn't bet against it.
I wouldn't bet against @Home and its teeming pool of cable partners, either, because this needn't be an "either/or" situation. In strong industries, it is usually "both" -- or even "many" to varying degrees. Both Borders and Barnes & Noble. Both McDonald's and Wendy's. Both Yahoo! and Excite. Both Barney the Dinosaur and those British things. (What are they called? Can't remember. I've been brainwashed.)FOOL
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