We don't listen to Alan Greenspan because he peruses 18,000 indicators in his bathtub. And we don't listen to him because he's married to Andrea Mitchell. And we certainly don't listen to him because of his oratory skills. We listen to him because he controls short-term interest rates, and ultimately, interest rates do matter.

Many investors have been drinking from the new era punchbowl a bit too freely, and are losing sight of just what and this new era does and does not make possible. At Briefing.com we are optimistic that the economy has entered a new era of faster productivity growth that will permit strong, non-inflationary growth. But that new era is not one in which interest rates become irrelevant to stock prices.

Before we discuss why, let's make one point clear - in arguing that interest rates matter, we are not arguing that stock prices will suddenly fall because interest rates are rising. First, there are always other factors at play in the market; factors that might more than offset the negative impact of rising rates. Second, even if all the fundamentals are working against valuations, stock prices can continue to rise for a prolonged period due to a simple supply/demand equation.

So our point here is not to suggest that stocks are preparing for a correction or crash. Our point is to only argue that, all else equal, when interest rates rise a company is worth less. There are two reasons for this truism.

An obvious way in which higher rates can reduce a company's value is by raising borrowing costs for the company itself and for prospective customers. If a company relies in whole or in part on debt financing, higher rates will directly increase costs and reduce earnings.

Even if a company does not borrow itself, chances are that some of its customers do. Whether the company is selling its products to other companies or to consumers, some customers will almost certainly be less willing buyers due to the higher borrowing costs that will reduce their spending power.

These factors are admittedly less significant for fast-growing, debt-free Internet companies, who are often not affected by higher borrowing costs, but they are still factors - virtually all companies have customers that will be affected by higher rates. But as much as the real world business impact of higher rates is overlooked, many are completely missing the bigger issue of valuation.

To make this point clearly, let's consider an extreme example. Let us imagine an Internet company with no debt or need for debt financing in the future that has only one customer which also has no debt and no need for debt financing; we'll call it whatFed.com. This company's business will not be affected by rising rates. Forecasts for whatFed.com's earnings don't change even after rates are increased.

Even for this enviable company whose business is immune to higher rates, an increase in interest rates will affect its stock price. The value of a company is determined by discounted future cash flow. Put another way, a company is worth the present value of the future stream of cash that its business will produce. Makes sense, right?

The key factor here is that word discounted - future cash flows can be translated into present values only after they are discounted by a discount rate. That discount rate is the cost of capital for the company in question. Though these rates vary for reasons unrelated to Fed policy, the fed funds rate does serve as the basis for the pricing of other rates. If the Fed raises rates, individual companies' discount rates will also rise.

Let's once again use a very simply example for whatFed.com. Our Internet company will be breakeven for the next four years and thereafter will generate free cash flow of $1 bln every year. Not realistic, to be sure, but very illustrative for our purposes.

We will also assume that whatFed.com's cost of capital is 8% (how cost of capital is determined could be a Brief unto itself). The discounted cash flow model is simple in this case - the present value of a $1 bln cash flow in perpetuity beginning after five years, discounted at an 8% rate. Without getting bogged down in the math, the present value of this future cash flow is $8.5 bln, and that's the value of the company as a result.

To illustrate just how important interest rates are, let's consider whatFed.com's valuation with the same cash flow, but a discount rate of 9%. In this scenario, it would be valued at $7.2 bln. Now we see just how much interest rates really matter. Even for an Internet company whose hypothetical business has no interest rate exposure, the value of the company falls 15% with a one percentage point increase in interest rates.

Or consider a third scenario - whatFed.com has its original 8% discount rate but is already producing cash flow of $1 bln per year and will continue to do so in perpetuity. In this case, the company is valued at $12.5 bln now and $11.1 bln if its discount rate rises to 9%. In this case a one percentage point increase in rates only produces an 11% decline in value.

Now it becomes clear why Internet companies are among the most exposed to interest rate risk rather than the least exposed as many mistakenly believe - the more distant the profits, the more impact that the discount rate has on a company's valuation.

Bottom line: it is a mistake to assume that interest rates have no significance. With each hike, the value of every company is reduced. That's not our opinion, it's math.