To: Jenne who wrote (21015 ) 6/9/1999 12:23:00 PM From: Steve Robinett Read Replies (1) | Respond to
Jenne,An upward tick in interest rates could prove a good thing for a company like America Online (NYSE: AOL), with $2 billion in cash Presumably, this comment means that a company with a large chunk of cash gets a higher return on that cash in a higher rate environment. So far, so good. But higher rates--we just punched through a 6% long rate--imply rising inflation. We may not have much actual evidence of inflation yet but treasury yields are suggesting future inflation. A higher inflation environment makes that cash worth less not more. It makes anything earned by that cash horde worth less not more. It makes operating earnings, as opposed to investment earnings on the cash, worth less not more. It makes the perceived values of the future earnings stream worth less not more. If, like many Internet stocks, the share price of a company discounts that earnings stream into the dim, distant future, the impact of higher rates and implied higher inflation on that share price would be more substantial than on a company whose earnings were discounted for a more reasonable period of time. It also costs the company more to borrow money, whether directly from a bank or as a debt issue. In any case, higher interest rate environments make stocks go down--duh--and the benefit of higher interest rates for a large cash horde are more than completely offset by the impact of implied inflation on the rest of the business. The guy who wrote the article needs to take Economics 101 again.
