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Technology Stocks : Microsoft Corp. - Moderated (MSFT)
MSFT 486.83-1.1%Dec 1 3:59 PM EST
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To: Dave who wrote (718)10/25/2002 5:17:15 PM
From: David Howe  Read Replies (1) of 19789
 
I disagree due to the fact that interest rates and inflation are so low at this time.

Two options:

1. Buy a 30 year bond yielding 4% with no potential for that yield to improve.

2. Invest in a company with $300bil market cap and cash flow of $12 bil per year (equal to a yield of 4%). Consider that over long periods of time that cash flow has increased and should continue to increase.

The bond is lower risk, but the company's cash flow has proven to be very resilient and the yield is likely to increase, particularly over long periods of time.

With low interest rates you end up with higher PE ratios simply because stocks with higher PE ratios are better values than low yield vehicles available at that time.

Here's proof (bottom right chart). For the past 40 years, this has been tracked. Average PE during low inflation is around 25 to 30. During high inflation (ie. 15%) the average PE is around 8.

pegasusresearch.net
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