DOW 36000 - Glassman and Hassett Message Board

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Pastimes : DOW 36000 - Glassman and Hassett

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To: Sid Turtlman who wrote (7)	9/10/1999 10:15:00 PM
From: Freedom Fighter	Read Replies (1) of 42

Sid, I sent the following e-mail to CNBC a couple of weeks ago when Glassman was on talking about his PE of 100 theory. Sound familiar? Wayne Dear Squawkbox, There is one major problem with Mr. Glassman's idea that stocks can trade at much higher PE ratios because risk premiums are declining. As you discount high returns on capital with lower risk premiums, the stock prices that result are far in excess of the replacement cost of the underlying businesses. This encourages new investment and stock issuance which lowers the return on invested capital, stock prices, and the growth rate and dividend paying ability of the businesses. In simpler terms, there are leveling effects between capital invested, the cost of capital, the return on capital, and the growth of earnings and dividends that has produced the long term relationships we have seen. The mistake is in the assumption that you can change the risk premium between passive capital (stocks) and bonds without changing the relationship between bonds and the active capital of businesses. Wayne Crimi

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