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Technology Stocks : Cisco Systems, Inc. (CSCO)

CSCO 76.13

-0.1%

12:18 PM EST

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To: GVTucker who wrote (36814)	6/4/2000 8:01:00 PM
From: Adam Nash	Read Replies (1) of 77400

Rates do matter to long term holders, particularly for a stock like Cisco. When you pay 100x earnings for a company, you are counting on earnings far out to justify holding the stock today. The higher rates go, the less those far out earnings are worth today. $1 of earnings 10 years out is worth 48½ if you use 7.5% as a discount factor. It is worth 38½ if you use 10%. Looking even further to the future, high rates render earnings 20 years hence close to zero today. Rates do matter. If you don't care about rates personally, it will be to your detriment. All true, but remember that the Fed is manipulating short term rates. When discounting earnings, you use the rate relevant to the cash flow being evaluated. So if you are looking at 20-year flows, you'd use a twenty-year rate. Short term rates are not really relevant for the calculation. Inflation, in fact, is more important, since long term rates will correlate with long term inflation. For this reason, when the Fed ratchets up short term rates it can actually improve the long term prospects for earnings if it is believed that they will control inflation better over the long term.

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