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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (67559)	9/12/1999 9:23:00 AM
From: Freedom Fighter	Respond to of 132070

Les, There is several major problems with Mr. Glassman's idea that stocks can trade at much higher PE ratios because risk premiums are declining. 1. If the risk premium between treasuries and stocks becomes zero, then the risk premium between between treasuries and corporate bonds would have to be zero also. Otherwise, why invest in stocks and treasuries when you can get higher rates of return on riskless junk bonds and lower rated credit.(vbg) After all, if the equity is riskless so is the bond. But the major problem is this one: 2. As you discount current returns on capital and the resultant free cash flow with lower risk premiums, the stock prices that result (Glassman's 100 PEs) are far in excess of the replacement cost of the underlying businesses. This encourages new investment and stock issuance. As a result, return on invested capital falls, stock prices fall, and the growth rate and dividend paying ability of the businesses fall. (see internuts) In simpler terms, there are leveling effects between capital invested, the cost of capital, the return on capital, and the growth of earnings and dividends that makes his idea virtually impossible. The only way you can get very high PEs (IN AGGREAGATE) that make sense is in a situation similar to Japan. If interest rates are very low, aggregate return on capital is very low, and savings are very high it works. In that case, despite very high PEs, businesses in aggregate may not be selling at significantly above their replacement cost and the real return on capital may be close to acceptable. Wayne

To: Les H who wrote (67559)	9/12/1999 12:17:00 PM
From: Knighty Tin	Read Replies (1) \| Respond to of 132070

Don, Glassman is a joke. Gretchen is right on about the options scam. Nothing like a technique that pads eps reported to shareholders and lowers eps reported to the IRS. And options are only one of the many jokes in current shareholder reporting practices.

To: Les H who wrote (67559)	9/12/1999 5:37:00 PM
From: Skeeter Bug	Read Replies (1) \| Respond to of 132070

>>I guess if we extend out the time horizon for expected future value out to infinity, anything is possible.<< les, competing investments blow that view out of the water. pc asked me to name a better company than one he liked and recommended. it was yielding a very low % return (1-2%). i responded with a t-bill yielding 6+%. he wasn't expecting that answer and it left him speechless so he never replied. why? my guess is that he knew, intellectually, that i was dead on. his company would never return better than a t-bill. however, stocks always go up 30% - to hell with rates of return and fundamentals. buy that toyota corolla for $100k and hope somebody pays you $130k next year. i don't play that game. btw, thanks for the great articles.