With the majority of CDOs being backed by mortgages, the principal-only tranche has a known future cash flow, but at a variable rate of return, while the interest-only tranche has both an unknown cash flow and an unknown rate of return on that cash flow.

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If a firm can deploy the incremental dollar of cash flow at a rate of return greater than its cost of capital, it should pursue acquisitions or internal capital projects, as these methods will be the fastest way to build shareholder value.

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My assumption is enormous free cash flow accumulation is reinvested at a high rate of return plus aggressive share buybacks.

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Money will flow where it is advantageous, where there is a high rate of return, today this is the natural resource sector.

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