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You can value an equity based on it's discounted future cash flow discounting by a risk-free rate (typically US 10 yr notes). QE is the Fed making large purcha

by 3am 13y ago

You can value an equity based on it's discounted future cash flow discounting by a risk-free rate (typically US 10 yr notes). QE is the Fed making large purchases of t notes on the open market to keep the rate low, in order to keep capital cheap (and ostensibly encourage investment). If they stop these purchases there is a widely held belief that the t note rates will increase, which will hurt the equity premium across all companies. You can play around with any number of free online DCF calculators to see how varying the risk free rate of return effects current valuations. edit: I am addressing the general question, not ipo valuations.

preempalver 13y ago
Anybody who thinks that IPO pricing is done by DCF.....
- timr 13y ago
  It isn't, but it's a convenient model that holds true on average. What people actually do is say: "oh, crap...I can't make money in fixed-income securities. I guess I'll dump my retirement in stocks instead." This flood of money eventually makes its way to the riskiest stocks and props up high valuations.
  - acchow 13y ago
    > This flood of money eventually makes its way to the riskiest stocks Citation needed.
    - timr 13y ago
      The same way it makes it to every other stock. People buy them, looking for returns.
foobarqux 13y ago
Do you happen to understand why QE isn't suppose to increase the money supply? My understanding is the treasuries are bought by increasing the balance of a commercial banks federal reserve account. Can't the banks draw on that account?
- onebaddude 13y ago
  The amount of reserves in the system are fixed by the Fed. Reserves can be moved from bank to bank, but the total amount in the system remains the same.
  - foobarqux 13y ago
    What did the government use to buy back treasuries and where did it come from?
onebaddude 13y ago
>If they stop these purchases there is a widely held belief that the t note rates will increase The only people calling for a crash when rates return from "historically low" to just plain old "low" are those that depend on these low rates. It never ends well when you pile in at historical minima/maxima.

by 3am 13y ago

preempalver 13y ago

Anybody who thinks that IPO pricing is done by DCF.....

timr 13y ago
It isn't, but it's a convenient model that holds true on average. What people actually do is say: "oh, crap...I can't make money in fixed-income securities. I guess I'll dump my retirement in stocks instead." This flood of money eventually makes its way to the riskiest stocks and props up high valuations.
- acchow 13y ago
  > This flood of money eventually makes its way to the riskiest stocks Citation needed.
  - timr 13y ago
    The same way it makes it to every other stock. People buy them, looking for returns.

foobarqux 13y ago

Do you happen to understand why QE isn't suppose to increase the money supply? My understanding is the treasuries are bought by increasing the balance of a commercial banks federal reserve account. Can't the banks draw on that account?

onebaddude 13y ago
The amount of reserves in the system are fixed by the Fed. Reserves can be moved from bank to bank, but the total amount in the system remains the same.
- foobarqux 13y ago
  What did the government use to buy back treasuries and where did it come from?

onebaddude 13y ago

>If they stop these purchases there is a widely held belief that the t note rates will increase The only people calling for a crash when rates return from "historically low" to just plain old "low" are those that depend on these low rates. It never ends well when you pile in at historical minima/maxima.