In his op-ed column "Giddy About Stocks" [Sept. 7] Robert Kuttner criticizes our book, "Dow 36,000," which makes the argument that the old model for valuing stocks -- based on ceilings for price-to-earnings ratios and floors for dividend yields -- has clearly been repudiated by the facts of the past two decades. We offer a new model -- one based on the cash flow from stocks, that is, how much they put in your pockets.

In our research, we conclude that stocks are significantly undervalued today and that the Dow Jones industrial average, which is now around 11,000, could easily reach 36,000 by 2005.

Why does this idea get people like Kuttner so riled up? After all, the Dow has risen by a factor of 14 in the past 17 years. Why is it so far-fetched to imagine that it can rise by a factor of 3 in the next five years?

Kuttner writes that a "stock is not a bond," that stocks are risky and bonds are not. For the short term, stocks are certainly more risky, but for the long term, Kuttner is dead wrong. As Jeremy Siegel of the Wharton School of the University of Pennsylvania, writes: "The safest long-term investment for the preservation of purchasing power has been stocks, not bonds."

Yes, the federal government guarantees that if you hold a Treasury bond to maturity you'll get your dollars back, but what will those dollars be worth if inflation has eroded their value? Siegel found that in the worst 20-year period since the past century, a Treasury bond investment lost an annual average of 3 percent in real terms, while the worst such period for stocks saw an average gain of one percent.

The real question is why intelligent people like Kuttner so reflexively resist new ideas like the Dow 36,000 theory. Small investors are far ahead of the experts in understanding the failure of the old model for stock valuation and in accepting a new, more rational model that fits the facts.

-- James K. Glassman

and Kevin A. Hassett