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Pastimes : DOW 36000 - Glassman and Hassett -- Ignore unavailable to you. Want to Upgrade?

To: noiserider who wrote (26)	12/18/1999 9:42:00 AM
From: noiserider	Read Replies (3) \| Respond to of 42

Read this one instead of the my previous post. I did a bit of editing. Hi Sid, First, I wanted to thank you for your thought provoking comments on the subject. So thought provoking that I dusted off my wife's corporate finance book. And, sure enough, the corporate finance manager's job is two fold; how to raise cash in the capital markets and, then, what revenue generating assets to purchase with the cash. You argument, I believe, is that as the Dow approaches 36,000 and the cost of capital decreases (raising cash) more potential R&D projects (purchasing revenue generating assets) have a positive NPV leading to increased competition and, eventually, lower profits. Lower profits cause lower stock prices which increase the cost of capital. We've got a feedback loop here. G&H do not address this feedback loop in their book. You state the problem in the following way: The problem is that anyone just looking at valuation methods of any kind is forgetting about the REAL connection between the market and the economy. Stock price levels represent the cost of capital to companies. The higher stock prices go, the lower that cost of capital, and the easier it is to raise equity capital - IPOs, and additional offerings from companies already public. On its way to DJIA 36,000 two things would happen: 1)more and more companies would float stock, and the supply of shares (which can expand infinitely - see the internut stocks) would overwhelm the demand and prevent 36,000 and 2)money raised in these offerings would expand capacity and cause business competition to overwhelm demand, reducing or eliminating profit margins in those industries where too much capital has been raised (again, see the internuts, where almost everything is priced at zero these days.) OK, I see the feedback loop which causes the contradiction. Here's my question - if the cost of capital in the bond market is already much lower than that of the stock market, why don't companies use debt exclusively instead of equity? Why haven't they already borrowed out the ying-yang and caused the scenario mentioned above? (I haven't gotten to that section on capital structure where Modigliani and Miller state that any combination of securities is a good as another) My guess is that debt requires a current stream of interest payments, whereas, dividend can be deferred indefinitely. Is this related, somehow, to the comment by Siegel that the risk premium for debt might increase rather than the risk premium for equities decrease? Have you thought of contacting G&H directly at their web site? dow36000.com Best regards, Keith