DOW 36000 - Glassman and Hassett Message Board

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To: noiserider who wrote (35)	1/13/2000 9:52:00 AM
From: noiserider	Read Replies (1) of 42

I've been thinking about some of the apparent inconsistencies. G&H say the risk premium for stocks is too high and it will decrease. The P/E will permanently increase up to, possibly, 100 for the S&P 500. Sid says if the risk premium disappears then the cost of capital decreases, competition is spawned with the cheap capital and earnings disappear preventing an appreciable permanent increase in P/E. I think the two are actually compatible. The risk premium is in addition to the risk-free lending rate. If the risk-free rate rises a bit and the risk premium fall a bit, the cost of capital (an aggregate of debt and equity) stays the same. I think this is what Siegal was probing in his interview with the question of long term interest rates: knowledge.wharton.upenn.edu If I belive this as an investor I should be buying stocks and selling bonds. A CFO should be using debt rather than equity for financing. Market signals to watch would be an increase in stock buy-backs, an increase in debt financing, an increase in interest rates above inflation and an increasing P/E for the S&P 500.

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