Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: GST who wrote (80701)	10/15/1999 12:19:00 AM
From: Glenn D. Rudolph	Read Replies (2) \| Respond to of 164684

ntentions -- always impossible to know -- but given the attention his words command -- can't imagine he gives no thought to their timing or impact -- his words matter far too much for casual public conversation. He was not addressing the equity investor but rather was addressing the banks. Greenspan has made it clear int he past that equity valuations concern him. I do not see a change here. Glenn

To: GST who wrote (80701)	10/15/1999 12:26:00 AM
From: Glenn D. Rudolph	Respond to of 164684

Fed's Greenspan Warns High Stock Valuations Could Be Temporary OCT 14,1999 WASHINGTON -(Dow Jones)- Federal Reserve Chairman Alan Greenspan late Thursday warned that the decline in equity premiums that have kept U.S. stock prices rising in recent years could be temporary. He also urged lenders not to rely too much on the market values of assets in their loan decisions. Greenspan waded indirectly into a debate over how long U.S. stock prices can keep rising, although he offered no firm conclusions of his own. But he said the decline in premiums should prompt "careful consideration" by risk managers about their lending assumptions in the event the decline is temporary. "If it proves temporary, portfolio risk managers could find that they are underestimating the credit risk of individual loans based on the market value of assets and overestimating the benefits of portfolio diversification," Greenspan said. The equity premium is the difference between the returns yielded by stocks and the returns yielded by U.S. Treasury bonds. It effectively reflects the reward investors demand in return for taking on various risks. Stock prices rise as the premium drops - and the premium has dropped to about 3 percentage points recently from a historical level of 7 percentage points. Some economists have argued that the decline could continue until the premium is zero. James Glassman, of the American Enterprise Institute, has contended in a new book that U.S. stocks aren't currently overvalued because premiums will continue to decline. The premium should fall to zero in five years, he said, by which time the Dow Jones Industrial Average should have climbed to 36,000. Greenspan, however, said that bankers shouldn't count on it. He said some of the fall in equity premiums is "presumably the result of a permanent technology-driven increase" in the flow of information, which has reduced investors' uncertainty about risks. "But are we really observing in today's low equity premiums a permanent move ... in response to decades of data?," he asked. "What is certain is that the question of the permanence of the decline in equity premiums is of critical importance to risk managers," Greenspan said. "They cannot be agnostic on this question" because any sudden reversal in the direction of stock prices could "produce declines in the values of most private financial obligations." Greenspan has consistently expressed concern about the rise of U.S. stocks in recent years, although he hasn't lately suggested, as he did in 1996, that the rise reflects "irrational exuberance." Thursday, he again said the Fed can't be sure that a "bubble" exists in the U.S. stock market. "Collapsing confidence is generally described as a bursting bubble, an event incontrovertibly evident only in retrospect," Greenspan said. Still, he said, credit-risk managers at U.S. financial institutions must be prepared for a sudden loss of investor confidence. "History tells us that sharp reversals in confidence occur abruptly, most often with little advance notice," he said. Unless risk managers build the possibility of a panic into their lending assumptions, they are likely to underestimate the risks, he said. "The uncertainties inherent in valuations of assets and the potential for abrupt changes in perceptions of those uncertainties clearly must be adjudged by risk managers at banks and other financial intermediaries," he said. "At a minimum, risk managers need to stress-test the assumptions underlying their models and set aside somewhat higher contingency resources - reserves or capital - to cover the losses that will inevitably emerge from time to time when investors suffer a loss of confidence," he said. Separately, Greenspan said he was "very pleased" with a compromise reached between the Treasury Department and the Federal Reserve on a regulatory structure for financial modernization. "The subject of our joint proposal addresses the concerns of both sides and reflects our common goal of modernizing our nation's financial structure," Greenspan said. The Federal Reserve and Treasury Department on Wednesday night reached a compromise on a proposed regulatory framework for the financial-service industry. The two have been at standoff on how to structure and regulate a new financial services landscape that streamlines the process allowing banks, brokerages and insurance companies to merge. Copyright (c) 1999 Dow Jones & Company, Inc. All Rights Reserved.