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December 1, 2000

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Subject:  Re: QCOM Relative to the Market
Author:  Lokicious

In my view, if we do move into recession, other than oil prices, the main cause will be the stock market itself (much like '29), not the Fed, the election, or even lower corporate earnings (which are still growing, just not as fast.)

I become more and more convinced that the emphasis on trading (especially hedge funds and aggressive growth funds), instead of on investing, is based in unsound economic principles and is dangerous. The next administration, congress, and SEC need to do something. (I know most of you hate taxes and regulation, but history is full of market and banking failures when greed overcomes sound economics, the S&L bailouts being a relatively recent example, and Fed monetary policy cannot do it alone. Making short-term capital gains taxes, even in retirement funds, a more effective deterrent to trading, while lowering long-term capital gains taxes, would be one approach.)

When the market is down, personal spending will go down, especially if the market stays down for a while, even if individuals still have the same income. They feel poor and worried. I know I'm not buying anything unnecessary right now (including a GPS), although I keep cash on hand. This in turn slows earnings, which puts Wall Street in an even more foul mood, creating a vicious cycle.

The same goes for capital expenditure. If companies can rely on investment instead of loans (which has been especially true of NASDAQ companies), they can grow despite higher interest rates. When they can't rely on investment capital, they have to borrow, which hurts their earnings. There are no start-ups, which means fewer sales by existing companies. Eventually we see layoffs, so fewer people have money to spend and invest.

The money that moves in and out of NASDAQ, in particular, has little to do with the actual worth of the companies, only the worth of their stocks. Stock prices are down because people, especially managers of trading funds, are afraid to put money in, which makes the market go down, which makes them even more afraid, which makes the market go down, etc. At some point, and I think we've reached it, real people (investors in mutual funds, owners of individual stocks) panic or need money. Then the losses become more than paper losses. The only ones who win under these conditions are the hedge funds and shorts, and later the trading funds who manipulate market timing so they can re-enter at the bottom (before pulling the rug out again at the top). Hedge funds can make a little money by preying on day-traders, option traders, and those buying on margin, but to make serious money by shorting stocks, they need for long-term investors to sell, including retirees in need of cash from retirement accounts. (I would characterize what is happening as a struggle between aggressive funds and index funds.) Short term traders don't care about overall economic health, although a major recession would leave them with little capital to eat.

At any rate, if individuals and companies have less money available (or at least feel they have less money), the economy goes into a tail-spin. A small decrease in lending rates by the Fed may have a psychological impact, but I believe the real key to a stable growth economy is getting control over market volatility, and that will require changing the current conditions in which short-term traders, especially aggressive fund managers, are trying to get unrealistic returns by trading not investing, leaving everybody else, including companies, strapped for cash.

Look at history. Every time, in capitalist economies, there has been an emphasis on "money makes money," not on wise investment and cautious lending, there has been disaster. Election uncertainty, oil prices, and lowered earning estimates may be what is scaring the short-term traders at the moment, but it is their trading practices that are the real cause of market failure. Changing the rules to bring relative stability to the market would be a safe way of maintaining a growth economy.

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