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.

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

To: noiserider who wrote (39)	1/14/2000 3:12:00 PM
From: Sid Turtlman	Read Replies (1) \| Respond to of 42

I think Siegel's (and your) point is a reasonable one, that the expectation of very high returns on equities are causing people to sell bonds and buy stocks. That will put upward pressure on interest rates, which will moderate the rise in stock prices, because, as academic theory describes it, the risk premium for equities, whatever number it is, is measured over the risk free interest rate return. As to your point about what a CFO should do, yes, if the trends of the last ten years can be counted on to continue, then the CFO should have his company issue bonds and buy back stock. But what if the upward spiral we have been on is about to turn into a downward one? This would involve lower stock prices, weaker demand, collapsing corporate cash flows because of operating leverage working in reverse, drying up of the IPO market and the failure of all those cash flow negative companies who figured the market would keep giving them more dollars whenever they needed it. In that environment, even lower government bond yields would seem attractive versus minus 20-50% returns in stocks. Just as rising stock prices make it seem rational to sell bonds, declining stock prices will do the opposite, and the trend can become self reinforcing for years, just as the positive trend was. Think about what it would mean to stocks and the economy if an unwinding of the 1990's were to take place. No one knows when this downward process will begin, but it is "perfectly reasonable", to use G&H's phrase, to expect it to happen at some point, perhaps soon, as a consequence of the overinvestment in capacity facilitated by the upward spiral. Remember, the stock market is a communications mechanism by which the economy speaks to investors. When there are thought to be great profit opportunities, stock prices go up to get people to put up the extra capital to create the needed capacity. When there is ample capacity stock prices go down as a message that we don't need any more investment, thank you. The price wars we see despite boom times tells me that that message is the next one we will hear.