US prospects (Jim O'Connor)

Barbara Laurence cns at cats.ucsc.edu
Thu Oct 7 16:32:18 PDT 1999


Right, companies buy their own equity ("retire" is probably the wrong word) with money borrowed to make the purchase. As you say, "theory suggests" that companies would want to sell stock in a rising market and retire debt. Why don't they? Possible answer: Interest payments are tax deductible, that's good. Buying your own stock in sufficient quantities pushes its price up, that's good, too. Trading equity for debt in principle enhances the power of managers, reduces the power of stockholders, that's good for management. More debt, less equity gives the company more room to manuever generally, the kind that Korean and Japanese hugely indebted companies enjoy(ed). Less equity and more debt makes it easier to fight for higher market share without worrying about dividends, that's good, too.

I read somewhere that investors have had enough cost reduction (restructuring of all kinds) and now want growth and more growth. Perhaps the shift from equity to debt is a response to investor greed, for growth? For greater market share? (see above).

Doug, I'm grateful for the net lending and borrowing numbers, thanks. I'm not sure what they mean never having worked with these numbers before. 1. the minuses and the pluses should add up to zero, no? 2. If the US is a net lender, the idea that foreigners are financing our consumer and corporate borrowing spree, hence preventing higher interest rates, makes no sense. Or does it? Or is the US a net lender long-term and net borrower short-term, and if so, how does that make a difference re: interest rates. Thanks for any further clarification, and answer off-list if you think I am the only one interested. Jim O'Connor



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