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To: Chuzzlewit who wrote (2681)	7/5/1999 8:57:00 PM
From: JZGalt	Read Replies (2) \| Respond to of 4710

OT - I compensate for interest rates in a slightly different manner, but for your analysis, how do you justify a p/e of < 30 for these stocks last year when interest rates were 4.75% and now p/e's > 50 when interest rates are hovering around 6%? Seems like if they are still buys, someone wasn't punching in the correct numbers last October. DCF has the interest rate projection in the denominator as you point out, but it is not moderated in any way and therefore overwhelms the analysis. Slight variations in the assumption of the riskless investment return significantly changes the outcome. Last year when I did this for QCOM I got anywhere from a value of $42 to $75 depending on what number I used. Now if I told you that stock X was selling for $50 and it's true value was somewhere between $42 and $75, what good would that information be? In other words, the outcome of the projection for a stock with interest rates at 1% is almost twice that of interest rates at 2%. Now if you think about it, isn't that just a bit silly? points out that stocks actually out-perform all other investments during periods of inflation I've done studies dating from the early 1960's in the S&P p/e ratio and inflation (or interest rates as a proxy) do impact the p/e ratio as you suggest, but somewhere around 1991, that pattern diverged perhaps as less leveraged companies started to dominate the upper end of the indexes. Mr Siegel may have to re-write that section of the book in the next revision. For example: with inflation running 2%, the majority of investors that have correctly figured out the "bandwidth economy" are experiencing returns near 200% over the past 6 months. That is a serious outlying point on Mr. Siegel's curve. One final point. Stocks in general have outperformed in periods of inflation in the 1970's when they had pricing power and when the make up a significant part of the indexes. If and when you see companies able to pass along significant increases in labor costs, or raw material prices, then we might be reverting back to the "old economy". For right now, I'm happy with the "new economy". <grin> I am a long term investor, but I feel that investing for the long term is more about identifying the major growth engines over the next 5 to 10 years and buying the best companies in that area at a reasonable price. Right now I don't see any area of growth larger than the internet or those companies that can leverage the internet to their advantage. New Rules for the New Economy: 10 Radical Strategies for a Connected World, Kevin Kelly amazon.com This is a book well worth reading IMO as well as The Innovator's Dilemma : When New Technologies Cause Great Firms to Fail (Management of Innovation and Change Series) by Clayton M. Christensen amazon.com Getting back to the impact of interest rates, typically I subtract the real interest rate (interest rate - inflation) from the projected growth number before calculating a PEG based on forward 12 month eps. It is a relatively minor adjustment I do over longer periods of time, but as you can see, in this formulation, the real interest rate change from approximate 2.8% last October to 4% now has very little impact on a stock growing at 30+% per year where I try to concentrate new investments. ---- Dave