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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (140)	4/5/1998 1:26:00 PM
From: Freedom Fighter	Respond to of 1722

>For reasons I will soon present on this thread (at some length), I >think >ROE is much lower, and therefore much less out of line with interest >rates, than published figures would indicate. If you admit to that (and I do agree they are lower than they look but higher than the long term average) then we are already substantially overvalued as I have said all along. It is higher ROE than has been used to justify higher prices. Higher ROE = Higher Free Cash!! If some of it doesn't exist (as I have been saying all the long) and the rest will eventually disappear, then these prices are NUTs!s >But, as we have discussed privately, accounting rules not only >inflate >earnings, they also deflate book value. I think ROE numbers are >greatly >inflated, not because the stated earnings are much too high, but >because >the stated book values are much too low. As you know, there are great >tax advantages to writing down assets -- and, btw, these tax >advantages >are to the ultimate benefit of shareholders. I agree that Book Values are understated to some degree. I have never argues against that. But then free cash is still wrong. For example: In order to grow at 6% assuming constant a ROE with a book value of 200 (stated book) would require $12 of capital spending. If the real book value is 300 then it requires $18. Hence $6 less free cash flow. This not from false earnings or cyclical stuff but from capital spending requirements. Free cash is lower. Justifiable values are lower.

To: porcupine --''''> who wrote (140)	4/5/1998 6:19:00 PM
From: Shane M	Read Replies (1) \| Respond to of 1722

One comment on << What if there is an economic relationship between the cost of capital (interest rates) and Return on Equity? >> Here's another possible argument for higher ROE that I find plausible. Normally, using standard economic thinking, we'd expect a company to borrow a marginal dollar as long as it can achieve a return just higher than the cost of that borrowing. So lower interest rates would be expected to permit lower ROEs. However, in an environment of full employment can we expect companies to be _able_ to expand as they would desire? Perhaps there are increasing situations where companies know they can turn profits, but cannot pursue them all because of limited manpower. This would force companies to allocate to higher ROE projects, and cut profitable but lower ROE expansion. Could this be playing a factor? Shane